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Concept Paper

 

Overview

Chad, one of the world's poorest countries, could enter the 21st century with much improved economic prospects, through the export of oil as early as the year 2004. This is dependent, however, on implementation of the Chad-Cameroon Petroleum Development and Pipeline (PDP) project which promises to contribute to a diversification of the country's export earnings and give an important boost to the economy of Chad. With increased revenues, the government would be in a position to target poverty through increased investment in social services and infrastructure. For neighboring Cameroon, with dwindling off-shore petroleum reserves, the project would generate important revenues for priority expenditures and help to attract more foreign investment. According to current estimates, the project is expected to generate about $2.0 billion in royalties, tax revenues and dividends for Chad over its 25-year life span. Cameroon stands to gain about $500 million in transit fees, taxes and dividends from the transport of oil from Chad.

In determining whether or not to support the project and provide loans to both governments, the Bank takes into account the project's potential to reduce poverty and increase public investments in health, education and basic infrastructure. Approval of funding will depend on whether the Bank receives clear commitments from Chad that resources would be used to improve the lives of the poor (see section on Revenue Management), and on firm plans to mitigate any damage to the environment.

CHAD: Background

Landlocked in central Africa, Chad, with a population of about 7 million, is one of the poorest countries in the world. Its per capita GNP (gross national product) was about $230 in 1998. Agriculture generates about 40 percent of gross domestic product and provides a meager livelihood for over 80 percent of the population. Livestock in the Sahel and cotton in the Sudanian area are the main agricultural activities and Chad's main exports. Food production varies widely with seasonal conditions. Chad is also endowed with important, but to date untapped, natural resources. The industrial sector accounts for nearly 14 percent of GDP and is dominated by Coton-Tchad, the country's largest public sector company, which processes and exports cotton.

The economy suffers from some obvious disadvantages of landlocked countries: the nearest port is about 1000 kilometers away to the south and, with a vast and seasonally flooded territory, transport costs can be extremely high. Nevertheless, economic performance has sharply improved since 1995, when Chad embarked on a structural adjustment program. Growth was 3.5 percent in 1996 and reached 8.1 percent in 1998, driven by a surge in agricultural production, a result of favorable weather and a bumper cotton crop encouraged by a substantial increase in farmers' prices. Inflation, at 10 percent in 1995 and 1996, slowed to less than 1 percent on an end-year basis in 1997. On the fiscal side, improved government revenue collection, while still weak, has allowed the resumption of critical spending, the elimination of all external arrears, and a reduction in the current deficit to about 0.7 percent of GDP in 1997. Spending on priority sectors (education, health, social affairs and transport) has increased sharply, though, still constrained by Chad's current fiscal resources, they fall far short of needs. The economy remains vulnerable to such exogenous factors as changing weather patterns and fluctuations in commodity prices and exchange rates, but private investment is increasing, in part in anticipation of the development and exploitation of the country's oil resources.

Social indicators in Chad are among the lowest in Sub-Saharan Africa. Life expectancy at birth is 49 years, compared to the regional average of 51. Vaccination coverage rates for, for example, measles and DPT were respectively 28 and 19 percent in 1996. Net primary enrollment rates (NPER), though sharply increasing over the last three years, are still very low: the NPER for males and females were respectively 58 and 33 percent in 1997. The literacy rate is among the lowest in the world. Access to safe water is limited to about one fourth of the population, but it is as low as 7 percent in one of Chad's 14 administrative regions. Earnings from petroleum would expand the government's revenue base and could result in significantly higher resource allocation to the social sectors and basic infrastructure to help address these needs.

CAMEROON: Background

Cameroon is a country of striking diversity - in geography, climate, people, culture, religion, language, education and economic structure. It has a population of 14 million and a per capita GNP of about US$610. It is richly endowed with tropical forests, mineral resources (petroleum, natural gas, gold, iron ore, uranium, and bauxite), fertile agricultural land, a largely favorable climate, and a high potential for diversification. The average population density, which is less than 23 persons per square kilometer, is very low by world standards and allows for considerable agricultural expansion. Cameroon also has vast water resources. Hydroelectricity provides 95 percent of generated power. With a coastline of over 400 kilometers and three seaports, the country also has an extensive but deteriorating network of airports, roads and railways and over 2000 kilometers of inland waterways.

Cameroon averaged about 7 percent growth during the first 25 years of independence. Its population is relatively well-educated, with an adult literacy rate of over 60 percent. The country has an active indigenous entrepreneurial class. The development of the oil sector led to rapid economic growth between 1975 and 1985 but this came to an abrupt halt in the mid-eighties, following the decline in world prices of petroleum, coffee and cocoa, the country's major exports. Other contributing factors were the collapse in the terms of trade, unproductive public spending, and a sharp appreciation of the CFA franc. Export earnings were cut by almost one-third and, by 1993, per capita income had fallen by 50 percent. In 1992, the government introduced reforms designed to attract investors, increase efficiency in agriculture, and recapitalize the nation's banks. Recently, the economy has begun to grow again, averaging 5.1 percent in 1997 and 5 percent in 1998.

  The Petroleum Development and Pipeline (PDP) Project

Benefits

The poverty reduction prospects of Chad are closely linked to what the country does with revenue from oil. The development and export of the reserves in the southern part of the country could significantly improve its development prospects in the next century. The area, known as the Doba Basin, is estimated to contain about 900 million barrels of recoverable oil.

The PDP project could promote Chad's economic growth and substantially increase public revenues. Additional resources would be used to raise living standards through investments in the social sectors. They would also boost private sector activity. Under current projections regarding the price of oil, the project would raise about US$2.0 billion in revenue from royalties, taxes and dividends over an expected 25-year production life span. The project would create new jobs and provide for skills training. Revenue from oil should allow for improvements in the provision of basic health and educational services and for rural development and infrastructure. Local businesses should expand significantly as a result of increased economic activity in the country.

Cameroon stands to earn about US$500 million in direct revenue and additional amounts in expected project-related economic activity over the 25-year life of the project. The 1070km buried pipeline to the marine export terminal off the coast of Kribi, most of which will run through Cameroon, is expected to generate over a thousand short-term construction and operational jobs for the local population.

Project Description and Financing

The project, to be implemented over a five-year period, will take oil from the Doba basin to off-loading facilities off the coast of Cameroon. Construction is expected to last nearly four years and production about 25 years. Drilling would be carried out by Exxon, the operator, on behalf of a 3-member oil consortium including Petronas of Malaysia, and Chevron of the U.S. The export system would be owned and operated by two joint-venture pipeline companies, one for the portion located in Cameroon and the other for the portion located in Chad. The consortium would jointly hold about 80 percent of the shares of the pipeline companies. Chad would hold minority interests in both pipeline companies while Cameroon would hold a minority interest in the Cameroon pipeline company. The governments of both countries would receive revenues from these holdings - to be financed with about US$ 90 million in loans from the World Bank - and through royalties (to Chad), transit fees (to Cameroon) and taxes (to both governments).

The project would involve:

  • the drilling of some three hundred wells in fields in southwestern Chad that hold about 900 million barrels of oil;
  • the construction of an export system that consists of a 1070km (650-mile) buried pipeline to the coast;
  • the installation of an off-shore terminal facility - a "floating storage and off-loading" vessel with associated marine pipelines.

Development of the oil fields would cost about US$1.5 billion while the export system (pipeline and marine facilities) is estimated at US$2.0 billion. The oil companies propose to finance about 60-70 percent of the cost (US$2 - 2.4 billion) from their own resources and seek most of the rest from export credit agencies, commercial banks and the International Finance Corporation.

  Project Considerations

1 - World Bank Group participation

Given the project's potential for improving Chad's development prospects and for generating much-needed revenues for Cameroon, the IBRD is considering providing loans of about US$39.5 million to Chad and US$53.4 million to Cameroon to finance their respective investments in the pipeline companies. If approved by the Board of Directors, the funds would be used to finance the civil works contract for the laying of the pipeline and interest during construction. IDA staff have prepared separate projects that will make loans available to both governments to strengthen their environmental management capacity and also assist Chad to better manage its petroleum sector. The International Finance Corporation (IFC), the private sector arm of the Group, is considering providing loans ($100 million from its own resources and syndicating an additional $300 million) to the pipeline companies.

The governments of Chad and Cameroon see the Bank's intervention as supportive of their efforts to ensure that the project is designed and carried out in a manner that serves and protects their national interests. World Bank involvement will ensure greater public consultation, local participation and attention to environmental and other socio-economic issues. World Bank participation is also needed to provide the political risk mitigation needed to support the huge investments the private sector expects to make and to attract millions of dollars more in debt financing. Catalyzing private investment to benefit the countries is one of the main reasons the Bank may be involved in the project.

In determining whether or not to support the project and provide loans to both governments, the Bank would take into account the project's potential to reduce poverty and increase public investments in health, education and basic infrastructure. Approval of funding would depend on whether the Bank receives clear commitments from Chad that resources will be used to improve the lives of the poor (see section on Revenue Management).

2 - Revenue management

Chad's expected earnings from royalties, taxes and dividends each year would be close to about 50-80 percent of current annual revenues of about $130 million. Chad has been pursuing economic reforms since the 1993 national conference. Bank-funded adjustment operations to strengthen public sector management are currently ongoing: structural adjustment credits were approved in 1996, 1997, and 1999. The Chad government has a revenue management law, passed by Parliament in December 1998, that is designed to ensure that earnings from oil are directed to poverty reduction in the country. The World Bank would assist the government in that effort. The law provides a legal framework and is designed to support the government's commitment to focus expenditure on health, education, infrastructure and rural development. The law is a key component of a broader revenue management program that is designed to:

  • target revenues to poverty alleviation activities;
  • improve local capacity to manage expected revenues;
  • promote transparency regarding size and use of revenue;
  • increase participation of Parliament, civil society and the private sector in revenue management decisions; and
  • increase dissemination of information regarding the oil project.

3 - Protecting the Environment

The oil pipeline will be about 1070 kilometers long, stretching through a variety of ecological landscapes and into the Atlantic ocean. The project is expected to involve the resettlement of a small number of families - between 60 and 150 households - around the oil field in the Doba basin. No resettlement is expected along the pipeline corridor in Chad or in Cameroon. Exxon, together with the governments of Chad and Cameroon submitted their Environmental Assessment Reports (EA) and Environmental Management Plans (EMP) to the Bank in June 1999, including a resettlement plan. These documents are required before the credit can be processed. They have been made available in-country by the Sponsors and Governments. The Sponsors have a website on which they post project information - (http://www.esso.com/eaff/essochad/). The documents are also available in the Bank's Infoshop (Public Information Centers).

A national technical committee in charge of developing, monitoring and supervising the execution of the pipeline-related EA/EMP has been created in Chad, and various international experts have provided advice to the governments of Chad and Cameroon in the process.

Last updated April 21, 2000




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