Punj Upstream Phase One

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	26470
Company name	Punj Lloyd Upstream Limited
Country	India
Sector	Oil, Gas and Mining
Environmental category	B
Department	Oil, Gas, Mining And Chemicals
Status	Active

Date SPI disclosed	November 30, 2007
Projected board date	January 2, 2008
Previous Events	Invested: September 30, 2008 Signed: June 6, 2008 Approved: January 16, 2008

View Environmental & Social Review Summary (ESRS), click here

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

The project is to provide early-stage funding to Punj Lloyd Upstream Limited (Punj Upstream or the company), a newly formed Indian oilfield services company established by Punj Lloyd Limited (PLL) to participate in the opportunities afforded by the Indian exploration and production (E&P) sector, which has benefited from the rise in international oil and gas prices and the Government of India’s (GoI) New Exploration Licensing Policy.

The company plans to initially acquire four onshore drilling rigs and cater to private and national oil companies operating in India. Punj Upstream is in the process of assembling a robust technical team and is expected to take delivery of the onshore drilling rigs over the next 6-24 months.

Project sponsor and major shareholders of project company

Punj Lloyd Limited is one of the largest engineering and construction companies in India providing integrated design, engineering, material procurement, field services, construction and project management services for energy industry and infrastructure sector projects. The company provides engineering and construction services for onshore and offshore pipelines, gas gathering systems, oil and gas tanks and terminals including cryogenic LNG and LPG storage terminals, process facilities in the oil and gas industry including refineries and for power plant projects. In the infrastructure sector, PLL has worked on various civil infrastructure projects for highways, flyovers, bridges and elevated railroads. The company has also worked on several projects in the telecommunications sector and provides value added engineering services for energy industry and infrastructure projects as well as comprehensive plant and facility maintenance and management services.

PLL’s operations are spread across the regions of South Asia, Asia Pacific, the Middle East, the Caspian, Africa and the United Kingdom, and the company has carried out more than 250 projects in over 40 countries. The company’s key subsidiaries are Sembawang Engineers & Constructors Private Limited in Singapore and Simon Carves Limited in the United Kingdom. PLL also has over 18 project and marketing offices throughout the world.

The share capital of Punj Upstream is held by PLL (74%) and Vikram Walia (26%).

Total project cost and amount and nature of IFC's investment

The total project cost, including working capital and contingencies, is estimated at $85 million. IFC is proposing to provide an investment of up to $30 million in Punj Upstream.

Location of project and description of site

The onshore drilling rigs are expected to be utilized in India. The project site for these rigs will depend on the location of the oil or gas fields of the E&P company to which Punj Upstream will provide oilfield services.

Anticipated development impact of the project

The proposed IFC investment will facilitate the establishment of a new domestic player in the onshore oilfield services business and is expected to lead to the following development impacts:

- Demonstration effect:

Punj Upstream will be the first Indian oilfield services company to adopt the Performance Standards and would set a new standard for E&S policies and procedures for drilling service companies.

- Increase private sector participation and promote competition:

The emergence of oilfield service companies such as Punj Upstream will help increase the number of attractive options available to private and national oil companies such as ONGC. Currently, private drilling companies only number about 15. As a result, E&P companies operating in India are experiencing delays in the implementation of their exploration and development plans. Further competition will also allow such companies to develop their assets in a timelier manner.

- Employment:

The project will create full-time employment for 440 people by 2011.

- Local purchases of goods and services:

Punj Upstream will seek to procure local goods and services which will be tracked on an annual basis.

- Maximize the use of domestic natural resources:

The project will lead to the further exploration, appraisal and development of domestic natural resources. Such activities are important to India, given that the country already imports about 70% of its oil requirements and faces a large mismatch between potential demand and supply of natural gas.

IFC plans to monitor during supervision, the number of full-time employees, the amount of local purchases and the number of private onshore drilling companies operating in India.

Governance risks assessment

Because the proposed project will support a provider of oilfield services and not directly finance any oil or gas production, no royalties and/or other resource taxes are expected to be paid by the company to the GoI.

IFC's expected development contribution

The World Bank Group’s Country Assistance Strategy (CAS) for the period 2005-08 supports the GoI’s goal of strengthening the enabling environment for private sector-led growth and supporting critical interventions of special benefit to the poor and disadvantaged. In addition, the CAS describes the World Bank Group’s Private Sector Strategy, which seeks to facilitate private sector competitiveness through the direct support of firms and through greater private investment. The proposed IFC investment is consistent with the CAS and IFC’s Strategic Directions for the period 2008-10, as explained below:

Invest equity and debt in labor-intensive, knowledge-based, export-oriented, globally competitive second-tier companies to support continued industrial growth:

While the company will initially focus on the opportunities afforded by the domestic market, Punj Upstream has ambitions to grow both regionally and globally. IFC’s value additions to improve the company’s environmental and social (E&S) sustainability and corporate governance are expected to enhance the profile and competitiveness of Punj Upstream.

Invest in projects constrained by limited risk appetite of other investors:

This project aims to establish a new oilfield services provider focused on the Indian market. Therefore, risks typically associated with start-up companies will apply, including Punj Upstream’s lack of operating history and small capital base.

Supplement local financing with debt and equity investments:

The proposed IFC investment will supplement debt financing from other financial institutions in order to complete the phase one financial plan.

In addition, IFC is also expected to play the following roles:

Provide credibility to the company by becoming a founding shareholder:

The oilfield services business is cyclical and competitive. Punj Upstream will need to compete with other local, regional and international players to obtain contracts from E&P companies. IFC’s reputation for undertaking comprehensive assessments of companies in which we invest is expected to provide credibility to a nascent company in its early stages of formation. Our stamp of approval with respect to the company’s business plan, E&S policies and procedures and corporate governance systems is expected to enhance Punj Upstream’s credibility in dealing with various counterparties.

Develop an integrated environmental, health, safety and social management system:

IFC will assist the company in developing an integrated Environmental, Health, Safety and Social Management System (EHSSMS), which will allow Punj Upstream to manage its operations with a consistent approach and with the same standards and procedures at each project site. The company will become the first Indian oilfield services company to adopt the Performance Standards.

Provide long-term financing:

The oilfield services business, especially onshore and offshore drilling, is highly capital intensive and requires long-term financing, given the long payback period of the equipment. The proposed IFC investment will provide long-term financing to a first-time borrower and strengthen the capital base of the start-up company.

Environmental and social issues - Category B

This investment is a Category B project because a limited number of specific environmental and social impacts may result, which can be avoided or mitigated by adhering to generally recognized performance standards, guidelines or design criteria. Potential impacts from drilling and well completion activities, besides being mitigable, are likely to be limited to project site, short-term and reversible, and likely to have limited impact on environmentally sensitive areas. Furthermore, it is possible to readily design and implement engineering and management measures to mitigate adverse impacts during rigging and operations. The company will manage its environmental and social performance in accordance with applicable local laws and regulations, and international standards, including IFC’s Performance Standards on Social and Environmental Sustainability.

IFC’s review of this investment builds upon the review undertaken for the proposed corporate investment in PLL, and consisted of appraising technical, environmental and social information submitted by Punj Upstream including:

- the company’s business plan;
- sample oilfield services bid and contract documents;
- PLL’s human resource policies (which will be applied to the company as well);
- PLL’s EHSSMS; and
- Punj Upstream’s technical collaborator’s EHSSMS.

The appraisal team also interviewed Punj Upstream’s corporate and project management professionals.

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