Peru: domestic growth threatens gas-export schemes
THE victory of centrist Alan García in Peru's presidential election last month was a relief to private-sector oil companies. None more so than the US' Hunt Oil and Spain's Repsol YPF, which are involved in a $2.5bn project to turn Peru into Latin America's first liquefied natural gas (LNG) exporter by 2010. Robert Cauclanis reports.
Victory for García's rival, leftist-nationalist Ollanta Humala, would have seen resource-nationalism – a growing trend in the region – spread to Peru. Humala, an ally of Venezuelan President Hugo Chávez, said during his campaign that he would seek to change Peruvian law to give the state a much larger share of profits from energy projects.
García is much less likely to alter operating terms radically in the state's favour. Yet since the election, García's language on energy projects has been ambiguous. Peru LNG, under which Camisea gas will be shipped to Mexico and California, will go ahead, but certain aspects of the deal may be "renegotiated", he said. García wants guarantees that gas supplies to the domestic market will be ample and cheap, to fuel a gas-consumption boom he hopes will keep the economy on track for further growth.
Additionally, García's last term of office as president, from 1985 to 1990, was marked by exorbitant public spending and hyperinflation. As a result, analysts say, he may be tempted to boost state control over hydrocarbons, or to change the country's gas-export plans. And, in the long term, support for Humala, who won 45% of the vote, may grow.
Peru's economy grew at a scorching 6.7% last year and gas demand is rising at more than 20% a year. The government estimates demand will rise to 425m cubic feet a day (cf/d) by 2010, and to 0.74bn cf/d by 2025, requiring ever-greater production for domestic use. The government is, therefore, worried about diverting too much gas to export schemes. In recent months, demand for Camisea gas in the cities linked to the project by pipeline – Lima and Callao – has ranged between 35m cf/d and 110m cf/d, according to energy ministry figures.
Several large industrial plants in Peru have made the switch from petroleum products to gas and the country is also looking to gas-fired power plants to reduce its 82% dependency on hydro-electricity. Building more thermal-generation plants will be a "central energy objective" of the incoming government, according to García.
The switch to gas will reduce the costs of oil imports, as Peru's domestic oil production of 110,000 barrels a day (b/d) fell short of its 156,000 b/d demand. And, as gas-associated condensate output rises, Peru may even regain its status as a net liquids exporter.
Production at Camisea, which is said to hold 11 trillion cf of reserves, began in 2004 from Block 88, owned by Hunt and Argentina's Pluspetrol. Peru's proved reserves stand at around 12 trillion cf, but the ministry claims Camisea blocks 88 and 56 could hold a combined 14-15 trillion cf. Block 56, the export block, is estimated to hold 3-4 trillion cf, although production is yet to begin. In mid-2005, output from Block 88 reached 400m cf/d, but more than 75% was reinjected because of a lack of domestic demand.
However, further export schemes may not be viable given the availability of gas and the government's wish to encourage domestic consumption. Peru has been considering exports to Brazil, Chile and Ecuador. Energy-deficient Chile is particularly keen to sign up for supplies and could receive gas by pipeline or as LNG, once BG completes construction of a regasification terminal in the country in late 2008. Chilean officials claim exports to Chile could be more profitable for Peru than shipping gas to Mexico or the US.
However, with less than 12 trillion cf of proved reserves established so far, Peru has no chance of becoming South America's gas hub – unless it can find a lot more gas. Recognising that, García has already scrapped a $2bn plan conceived in 2005, with support from the Inter-American Development Bank, to pipe Camisea gas south to Chile, Argentina, Uruguay, Paraguay and Brazil. The plan had relied on a steady flow of Peruvian gas for the Southern Cone countries without relying on significant input from Bolivia (which has reserves of 48 trillion cf) or Venezuela (which has 158 trillion cf of gas).
"We have gas, but not so much gas," García told reporters at a Lima press conference after his election. "When it comes to gas I am a nationalist, for the basic reason that our gas must first serve Peruvians."
Under the Peru LNG scheme, partners Hunt (50%), South Korea's SK (30%) and Repsol YPF (20%), will export gas from Block 56, in Camisea's southeastern Amazon province. Part of the block's proved and probable reserves of 3 trillion cf of will be piped over the Andes to an LNG export terminal 105 miles south of Lima. Initial export volumes will be 4.2m tonnes a year, starting in 2010.
Ecuador to run seized Oxy block
ECUADOR has cancelled plans to auction a large stake of the 100,000 barrels a day (b/d) Block 15 to a foreign, state-run energy firm. Instead, PetroEcuador, the national oil company (NOC), will operate the fields, writes Robert Cauclanis.
The Amazon region assets were controlled by the US' Occidental (Oxy) until May, when Ecuador seized them over alleged breach of contract. The government says the seizure of the fields, valued at more than $1bn, was justified on the grounds that Oxy had sold Ecuadorean assets to Canada's EnCana without government approval. Oxy denies the claims and has filed for damages in international arbitration.
Initially, the government indicated it would invite an NOC to operate the blocks. Colombia's Ecopetrol, Venezuela's PdV, Chile's Enap, Brazil's Petrobras and China's CNPC are said to have expressed an interest.
Some observers have suggested the decision to appoint PetroEcuador as operator is the result of pressure from indigenous protesters and unions opposed to the involvement of any non-Ecuadorean firm.
However, the government of President Alfredo Palacios claims its decision to retain control of Block 15 is purely down to economics, despite there being no bidding process to determine how much cash could be raised for stakes in the field. The government will remain open in the future to "technical assistance" at the field from a third-party, officials say.
In mid-June, after Oxy's assets were confiscated, the US halted talks with Ecuador for a free-trade agreement (FTA). The US has signed FTAs with Colombia and Peru this year and had been close to signing with Ecuador. In April, Ecuador introduced a new hydrocarbons law that boosted the state's take of oil receipts to 50% from 20%.
Starting this month, PetroEcuador plans to send around 65,000 b/d of Block 15's Napo crude to Venezuela's PdV for refining, at a cost of around $5 a barrel, including delivery back to Ecuadorean ports.