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Upstream investors unsettled by Humala win in Peru

Peru’s oil and gas industry must wait to see if President-elect Humala follows up on his promises of radical energy-sector reform

Left-wing nationalist Ollanta Humala’s victory in Peru’s presidential election has brought uncertainty to the country’s energy industry. Investors fear he will make good on a radical election-campaign promise to halt exports of natural gas.

The former army commander previously pledged to cease exports from the country’s Camisea gasfields, saying Peru was “wasting” its natural resources. “When domestic demand for natural gas is catered for, we can justify exporting the surplus,” says Humala’s manifesto. “We are wasting the opportunities that Camisea’s gas can bring.”

Guiding role

Humala added the country’s upstream regulator, Perupetro, will play a “guiding” role in deciding if any Camisea gas can be exported. Last year, consultancy Netherland, Sewell & Associates estimated the fields’ gas in place at 15.92 trillion cubic feet (cf).

Humala narrowly beat former president Alberto Fujimori’s daughter, Keiko, on 5 June, winning 51.5% of the vote to Fujimori’s 48.5%. He will succeed President Alan Garcia on 28 July for a five-year term.

Lima’s stock market plunged by 12.5% on 6 June following the news of Humala’s victory, signalling investor uncertainty over his economic policies. Analysts say he will face a huge task in restoring market confidence.

“For oil and gas investors, it will be a case of wait and see what signals Humala sends,” said Diego Moya-Ocampos, an analyst from IHS. “It’s in Humala’s interests to guarantee investors he will respect the rules of the game.”

Peru’s rapid economic growth in recent years has led to an increase in energy demand, especially from the industrial sector. Peru’s gas demand has soared from 50 million cf/d in 2003, to over 500 million cf/d last year, according to Cedigaz (see Figure 1).

Huge potential

With the fourth-largest proved gas reserves in South America, 12.5 trillion cf according to BP, Peru has the potential to be a large producer. But a lack of upstream investment has restricted output growth.

Production jumped last year, to 700 million cf/d, up from 340 million cf/d in 2009, following the June start-up of South America’s first liquefied natural gas (LNG) export plant, at Pampa Melchorita. Liquefied natural gas (LNG) exports of 1.3 million tonnes (around 175 million cf/d) in 2010, went mainly to North American markets. The facility, with an export capacity of 4.4 million t/y, was developed by a consortium of Hunt Oil (50%, operator), South Korea’s SK (20%), Repsol (20%) and Japan’s Marubeni (10%).

Increased production from Camisea and the Peru LNG plant have allowed the country to become a gas exporter despite rising domestic consumption spurred by new gas-fired power capacity. Electricity generation accounts for around two-thirds of Peru’s total gas consumption according to the US Energy Information Administration.

Oil accounts for 50% of the country’s primary-energy consumption. Peru produced 157,000 barrels a day of oil last year (see Figure 2). The country is a net oil importer, although it has ambitious plans to double output by 2013

Moya-Ocampos said markets and investors are “waiting for encouraging signs” that Peru’s recent, commodity-driven growth will continue. Some investors, particularly in the energy and mining sectors, are concerned that Humala will increase state control over the economy and potentially reverse a decade-long trend of economic growth.

Humala pledged to raise tax on foreign mining operator’s profits, from 30% to between 40-45%, and to raise royalties on gas and oil production. He said the money will be used to fund domestic social-regeneration projects.

A former army commander, Humala fought Maoist Shining Path guerrillas in the 1990s and has described himself as a nationalist. He also attempted to oust former president Alberto Fujimori in 2000, following revelations of a corruption scandal.

Venezuelan President Hugo Chavez’s endorsement of Humala’s 2006 presidential bid has not helped dispel fears that he may align his policies with Venezuela’s Bolivarian revolution, although analysts believe he is likely to follow a more moderate political path.

His choice of energy and finance ministers will be crucial to the message he sends to foreign investors about his plans for the energy sector. A former president, centralist-leaning Alejandro Toledo, is expected to play a significant role in the new government.


Humala will have to temper his policies, said IHS’ Moya-Ocampos. “He doesn’t have the level of support to pass radical legislation. Peru’s congress is full of moderates so he will need to be pragmatic.”

With no party holding a solid majority, Humala needs to maintain the support of the moderates. His party holds only 47 of the 130 seats in Peru’s Congress, while Toledo’s has 21, placing the former president in a strong position to tone down radical policy moves.

So far, Humala has been signalling that he is prepared to appease investors by adopting a more moderate stance. He has backtracked on earlier pledges to renegotiate oil and mining contracts, and says he plans to follow Brazil’s economic model, rather than Venezuela’s. Humala has tried to distance himself from associations with Chavez, saying: “The path for Peru is its own.”

Humala has certainly moderated his politics since his presidential bid in 2006. He has now ruled out nationalising Peru’s natural gas resources and says his focus will be on boosting the country’s domestic energy supplies.

Brazil’s 2002 election of President Luiz Inácio Lula da Silva also rattled markets. But Lula’s pragmatism saw Brazil’s economy surge and propelled the country’s oil and gas industry forwards. If Humala is to inspire investor confidence, he would be wise to follow Lula’s, not Chavez’s, example.

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