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Peru’s balancing act between industry and domestic demands

The country’s resources sector has seen growth surge over the past decade, making it one of Latin America’s most attractive destinations for foreign investment. But that success has also sparked a backlash. Justin Jacobs looks at how Peru is reconciling the needs of industry with a growing chorus of domestic demands

Peru has been a bright spot for the oil and gas business in Latin America over the past decade, and its industry-friendly government policies held up as a counterpoint to those of resource nationalists in Venezuela, Bolivia and Ecuador.

Production and investment levels have surged, the country has started up a major liquefied natural gas (LNG) export project and a string of successful licensing rounds have attracted a host of foreign companies into the country.

And the country has big plans for the future. A major exploration licensing round is scheduled for late 2012 and a string of major development projects have been proposed, including a multi-billion dollar natural gas pipeline and Perenco’s Block 67 development that could transform the country into a net oil exporter.

But as the industry has grown, so too has the backlash. Much of the exploration that has taken place is in remote jungle regions of Peru – the World Wildlife Foundation (WWF) says that 70% of the Peruvian Amazon has been auctioned for oil and gas exploration – and many environmentalists say that not enough has been done to protect the areas wildlife and biodiversity.

A number of indigenous communities – backed by Peruvian and international non-governmental organisations (NGOs) – have also resisted oil and gas development, which has seen relations between the industry and local communities in many parts of the country deteriorate.

While Peru’s economy has grown rapidly over the past decade, partly on the back of oil and gas and other mining operations, many of the country’s indigenous communities say that the spoils from the country’s economic success are not being shared equally. Basic services and infrastructure has been slow to come to the country’s Amazonian interior, where much of the development is taking place.

Meanwhile, many say they have been pushed off their ancestral lands by oil, gas and mining operations, a violation of Peruvian law that protects indigenous community rights.

Peru’s president Ollanta Humala won office in July last year on a promise that he would be better able to balance the country’s rapid development with the protection of the country’s indigenous communities and environment than his predecessor Alan Garcia.

Industry fears

Given his leftist background, many foreign investors expected Humala to crack down on the industry and put the brakes on development. It was largely because of these fears that Peru’s stock market plunged on Humala’s election victory. In the oil and gas sector, some expected Humala to forge a closer relationship with Venezuelan president Hugo Chavez and other resource nationalists.

Humala, however, has defied expectations. Rather than turning to the left after his election victory, he has, if anything, been more pro-business and pro-market than Garcia was. He has repeatedly sided with foreign investors in disputes between miners and local communities and thrown his support behind a number of controversial megaprojects. That has cheered foreign investors, but it has left many of those on the left that were instrumental in his election victory feeling embittered. That ill will is fuelling a new wave of social strife.

The Marxist guerrilla group Sendero Luminoso (Shining Path), which terrorised the Peruvian countryside in the 1980s and was one of the most feared insurgency groups in Latin America, has seen a resurgence, partly on the back of discontent with the Humala administration.

In April this year, Shining Path guerrillas kidnapped 36 Skanska workers at the Camisea gas project, the country’s largest gasfield. Two months later, Shining Path fighters raided a camp housing workers from Gas del Peru that were building a new gas pipeline, temporarily holding 20 people.

All of the hostages eventually escaped unharmed, but several members of Peru’s armed forces were killed in the rescue effort. It was a robust show of strength from an organisation that was thought to be defeated in the early 1990s. It has also been a blow to the Humala government, which entered office promising to bring economic growth with social inclusion.

In another setback for Humala, Talisman Energy announced on 12 September that it was exiting Peru. Richard Herbert, a senior executive at the company, said that the decision was made because, although the company had found oil at its Peruvian acreage, Talisman had been “unable to build a material position in Peru”.

The decision, though, is widely seen as a retreat in the face of stiff opposition to its operations in the Amazon from the Achuar indigenous community – which has previously mounted campaigns that saw Arco and Burlington Resources exit the same area – and international NGOs such as Amazon Watch that have taken up the issue.

The Achuar said that oil exploration in Talisman’s Block 64 was a threat to its hunting grounds and water resources and had called for the company to pull out of the area for years. The Achuar repeatedly protested at Talisman’s exploration acreage in Peru and took their protest to investor meetings in Canada, in a strategy that forced Talisman to rethink its strategy in Peru.

“Talisman’s exit sends a clear message to the oil industry: Trampling indigenous rights in the rush to exploit marginal oil reserves in the Amazon rainforest is not an option,” said Gregor MacLennan, Peru programme co-ordinator for Amazon Watch.

The same week that Talisman announced its exit from Peru, the Achuar occupied nine oil-producing wells operated by Maple Energy in the north of Peru. The group claimed that Maple Energy was responsible for a series of oil spills on their land that had not been cleaned up.

In response to the rising social strife, the Humala administration has proposed new regulations that would require consultations with local communities before contracts for oil, gas or mineral exploration and extraction starts. Humala has also put forward a proposal to strengthen environmental rules in the Amazon.

It remains to be seen how successful Humala’s government will be in improving relations between local communities and the industry. Meanwhile, an increasing sense of uncertainty is hanging over some of the country’s most ambitious projects.

The next major test for Peru’s oil sector will be French independent Perenco’s Block 67 project. The development is expected to add 60,000 barrels a day (b/d) of oil over the next five years, enough to turn the country into a net oil exporter. 

The field, which holds more than 200m barrels of oil, lies in the Marañon basin in a remote part of the country in the Amazon near the Ecuadorian and Colombian borders. Perenco plans to build a 200-km pipeline from its field to the existing Oleoducto Nor Peruano pipeline.

Because it has the potential to transform the country into a net oil exporter, the project was declared to be in the national interest be then-president Garcia in 2009.

Critics of the project, though, say that there is evidence of non-contacted and isolated tribes living in the area that would be threatened by the oil development, a claim that Perenco has repeatedly denied.

Hidden tribes

The controversy flared in May of this year when UK newspaper The Guardian claimed that it had obtained leaked evidence from consultancy Daimi Peru that it said showed the group had suppressed evidence of non-contacted tribes near Perenco-operated Block 67. Perenco often cites a 2008 Daimi Peru report as evidence that there are no such tribes in the region.

Non-contacted tribes could be put in danger if they were to come into contact with oil workers because of their lack of exposure – and therefore lack of immunity – to a host of common 21st century ailments, anthropologists say.

The government, though, was unconvinced and on 3 August this year approved Perenco’s Block 67 environmental impact study. That has paved the way for first oil in 2013 and Perenco hopes to expand its exploration in the region. Nevertheless, there will, no doubt, be further protests and controversy over the project.

Another test for Peru’s oil industry will be the upcoming 2012 bidding round. Perupetro, the country’s oil and gas regulator, has delineated 22 new blocks across five basins, including the Marañon basin near the Block 67 project, that it says it will auction in the fourth quarter of this year. Perupetro has said that majors such as France’s Total, ExxonMobil, Chevron and BP have all shown interest in the round.

First, though, Perupetro is carrying out extensive consultations with local communities in areas where exploration is being proposed, as part of a process set up by the country’s new prior consultation laws.

If the consultation is a success and the round is launched on schedule, it could lay the groundwork for a more positive relationship between hydrocarbon development and the communities where it takes place.

Further delays to the round, which was originally scheduled for last year, or new controversies arising from the consultation process, though, could see Peru’s oil and gas renaissance threatened.

Peru LNG hit by new controversy

The Camisea gas project, Peru’s flagship energy development, has been roiled by a threat from the government that its licence to operate the Camisea gas fields could be revoked over underpaid royalties.

Peru’s oil and gas regulator Perupetro has said that over the past year, the Camisea consortium has exported as many as 10 cargoes on which it paid royalties based on prices in the original destination, the US Gulf Coast.

As demand for liquefied natural gas (LNG) in the US has dried up, though, those cargoes were instead sold into other markets, such as Japan or Europe, where prices – and royalty payments – would have been much higher.

US Henry Hub prices, the US Gulf Coast benchmark, have averaged around $2.50 per million cubic feet (cf) over the past year. In Spain, which, according to government data, was the destination for a number of Camisea cargoes, LNG would have fetched around $8.00/m cf. And in Japan, another country where government trade data indicates a number of cargoes were sent, LNG would have sold for around $14.00/m cf.

Perupetro has not said how much in unpaid royalties the government is seeking, but the dispute looks like it is headed for an international arbitration panel after the consortium said it would seek an international hearing to settle the issue.

Companies involved in the development and export of gas from Camisea include Spain’s Repsol, Argentina’s Pluspetrol and Tecpetrol, US company Hunt Oil, South Korea’s SK Energy, Japan’s Marubeni and Algeria’s Sonatrach.

The controversy comes months after the Camisea consortium bowed to government pressure and agreed to set aside vast gas reserves in Block 88 exclusively for the domestic market. Gas from neighbouring Block 56 currently feeds the Peru LNG export plant. Together the fields hold as much as 18.6 trillion cf.

A recently announced discovery by Repsol and Brazil’s Petrobras of between 1 trillion and 2 trillion cf in nearby Block 57 adds to the region’s resource potential, though the decision to ringfence Block 88’s gas for the domestic market makes it uncertain how those reserves will be developed.  

The Peruvian government hopes to use the country’s recently discovered natural gas wealth to power local industry and establish a major petrochemicals complex on the country’s coast. Peru has proposed building a 1,000 km, $6bn natural gas pipeline from the Camisea fields to cities in southern Peru. President Ollanta Humala has called the project – known as the Southern Andean Gas Pipeline – “the most important project in Peru in the last 100 years”.

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