PAE was formed in Delaware in September 1997 as a strategic alliance between Amoco Corporation and Bridas Corporation for specific oil and gas activities in the Southern Cone of South America. Upon the formation of the alliance, each of Bridas and Amoco contributed to PAE their respective Argentine and Bolivian oil and gas operations. BP plc (following the 1999 BP-Amoco merger) now owns 60% of the equity interest of PAE, and Bridas Corporation the remaining 40%.

BP plc is one of the largest integrated oil and gas companies in the world, with operations in over 70 countries and worldwide proved reserves of 17.7 billion barrels of oil equivalent (boe) as of December 31, 2006. Bridas is a private company that is 100% Argentine owned. Bridas is engaged in three principal areas of operation:

- the exploration, development and production of oil and gas;
- the gathering, treatment and processing of gas; and
- the transportation and marketing of oil and gas and oil products.

The Capex Program for the Cerro Dragon block is estimated at $858.4 million. IFC proposes to invest $150 million for its own account and to mobilize up to $400 million in B loans. The company will meet the remainder of its funding requirements through internally generated cash flow. The unsecured senior IFC loans will have tenors of up to 11 years for the A Loan and 7-8 years for the B Loan.

150.0 million (USD)

Product Line	IFC Investment (million USD)
Risk Management
Guarantee
Loan	150.0
Equity

* These investment figures are indicative

The Cerro Dragon oil and gas block is located in the Golfo San Jorge basin in the southern provinces of Chubut and Santa Cruz in Argentina. The headquarters of the Argentine branch of Pan American Energy LLC is located in Buenos Aires, Argentina.

 - Fit with World Bank Group Strategy:

The World Bank Group’s (WBG) current program in Argentina focuses on sustained growth, coupled with enhanced equity, social inclusion and improved governance. IFC’s priorities for its direct investments is to provide long-term financing and structured finance products to companies and projects in strategic sectors with a focus on groups expanding on a South-South basis and export-oriented or export facilitating projects. Strategic focus sectors are oil, gas, mining, agribusiness, and the financial sector. The proposed IFC investment is fully consistent with this strategy.

- Development Impact:

Contribution to Alleviate Tight Gas Market in Argentina:

Gas demand growth outpaced gas supply in recent years in Argentina. The gap has been driven on the one hand by the sustained economic expansion experienced in recent years, fuelled mainly by the growth in the industrial sector and increased use of CNG in vehicles, and further enhanced by the distortion of energy prices, and, on the other, by the investment lag in developing gas reserves as a result of the new context. PAE is one of the few companies in Argentina that has grown its gas reserves and production during the last five years. Today, gas represents over 50% of the company’s proven reserves. Part of the 2007 investment in the project will go toward increasing gas production, which will help alleviate the current gas shortage in Argentina.

Creation/Preservation of Employment:

PAE is a key employer in the regions where it operates, especially in the Golfo San Jorge basin where it employs 575 direct staff and almost 6,400 contractors. The IFC investment will contribute to the company’s growth, which has lead to an average of 100 new direct jobs created per annum since 2003. In addition, the investment will help maintain employment levels on a company-wide basis in the provinces of Chubut and Santa Cruz, where the oil and gas industry offers significant employment opportunities.

Local Purchasing and Development of SMEs

PAE procures most of its goods and services in Argentina from over 1,500 suppliers and contractors. In 2006, PAE spent approximately $728 million on Argentine investments, goods and services. PAE’s efforts to develop Small and Medium Enterprises (SMEs) in the Golfo San Jorge area help maximize the impact of this local purchasing. This PAE corporate program launched in 2005 has as its objective the promotion of sustainable economic development through supplier development, government capacity building, and access to finance.

Support for Local Communities:

PAE has developed a strong positive relationship with the local communities in each of its areas of operation. Its commitment to sustainable community development is exemplified through the company’s support for numerous social development activities focused on the key areas of education, health, employment and environment. PAE has also engaged with a number of NGOs to identify opportunities for additional social investment and enjoys broad community support throughout its operations.

Benefits to Government:

PAE contributes significant fiscal revenues to all levels of government. During 2006, PAE made an estimated $1 billion in payments to various levels of government consisting of income taxes, royalties, export tariffs and other taxes. The company submits on a quarterly basis financial statements as part of its obligations to Argentina’s National Securities Commission, and such disclosures are available publicly. PAE is expected to remain a significant contributor of tax revenues for both the federal and regional budgets and is also expected to continue contributing to Argentina’s foreign currency earnings and over the life of the IFC loans.


Indicators to monitor development impact include:

- gas production,
- payments to government,
- employment maintained/created,
- purchases from local and national suppliers, and
- investment in social and community development.

IFC has several important roles to play, as outlined below:

Political Risk Mitigation:

Given the high profile of the oil and gas sector and the resurgence of resource nationalism in the region, investors in Argentina remain concerned about providing long-term financing under conditions that PAE would find attractive. IFC’s presence provides important comfort in this regard to both the company and potential investors. PAE also values its long standing relationship with IFC and in particular views IFC’s role as a partner that will continue to be present in Argentina notwithstanding political events.

Credit Optimization:

PAE’s substantial annual capital expenditure program makes it critical for the company to maintain a sound capital structure, including obtaining longer term financing consistent with its business profile. IFC’s proposed participation will allow PAE to extend tenors at competitive pricing beyond what it is able to achieve in the capital or commercial banking markets.

Mobilization/Funding Diversification:

Given the capital intensive nature of its business, it is critical that the company maintains access to a broad range of financing sources. Although PAE currently has access to medium-term finance through the capital markets, the banking market remains reluctant to provide long-term financing without the presence of a multilateral or an offshore security structure, even to blue-chip companies such as PAE. IFC will help PAE mobilize up to $400 million in B loans from international commercial banks with a tenor of 7-8 years, and hopes to attract new banks thus expanding PAE’s banking relationships to ensure flexibility and access in future capital raisings.

Enhancing Local Benefits:

PAE and IFC have already partnered on the implementation of a technical assistance project near PAE’s Acambuco block, which includes:

- the creation of income generating opportunities for area residents,
- strengthening local municipalities’ ability to support smaller businesses, and
- fostering local entrepreneurship.

The program is expected to have a strong impact on the province of Salta, a frontier region within Argentina with a GDP per capita considerably below the national average. The company has expressed an interest in developing further its collaboration with IFC in the area of community and enterprise development for its operations in the Golfo San Jorge basin, and has requested IFC to carry out an SME mapping exercise to determine how PAE can expand both the scope and size of its existing SME program.

This is a Category B project according to IFC’s Procedure for Environmental and Social Review of Projects 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. The review of this project consisted of appraising the project’s technical, environmental and social information, in addition to appraising the EHS and Social management at the Cerro Dragon operations. The following management elements were assessed:

- Adequacy of the existing Environmental, Health, Safety and Social Management to satisfy IFC’s Performance Standards requirements;
- The client’s assessment of potential EHS & Social impacts related to the project;
- The company’s capacity to manage multiple projects and their EHS management programs;
- Labor issues, Human Resources policy, and Health and Safety performance;
- Contractors’ EHS performance;
- Air emissions;
- Produced water disposal;
- Liquid and solid waste management;
- Drilling and Workover procedures including their solid waste disposal;
- Emergency Response Plans including oil spill response plans;
- Field Security;
- Community engagement and public consultation;
- Potential related land use/rental or compensation issues;
- Social development programs;
- Cultural and Archaeological chance-find procedure;

The company has plans to address these impacts and ensure that the project will, upon implementation of the specific agreed measures, comply with the environmental and social requirements - the Argentinean laws and regulations and the World Bank/IFC environment and social policies and the environmental, health and safety guidelines. The information about how these potential impacts will be addressed by the company is summarized in the Environmental and Social Review Summary (ESRS) and in the Action Plan agreed with the client.