Peru's unfinished business
Peru has the makings of a regional gas powerhouse if the next government keeps things on track
THE COUNTRY'S energy sector breathed a sigh of relief in April’s first round of the presidential vote, when two centre-right candidates beat out left-wing nominee Verónika Mendoza, who had promised a return to resource nationalism. Up next is July’s run-off election to succeed president Ollanta Humala. Keiko Fujimori, the daughter of the imprisoned former strongman Alberto Fujimori, will face former finance minister Pedro Pablo Kuczynski.
Peru’s robust economy has been a standout among Latin America’s resource exporters as the commodity price crash laid waste to economies across the region. But whichever candidate wins will face a difficult job keeping the gas-rich country’s energy industry – a key component of growth – on track amid low prices and an industry-wide downturn.
The centrepiece of president Humala’s energy agenda has been gas “massification”, an effort to make the most of Peru’s resource bounty at home by hooking consumers up to a rapidly expanding gas grid and building a petrochemical industry. The initiative has had success. The president says that 450,000 households are now on the grid compared with just 30,000 when he took office in 2011. Incentives have been put in place to switch the nation’s vehicle fleet away from petrol to natural gas – a strategy designed to cut down the country’s costly oil deficit.
But Humala will leave the project incomplete. For now, it is mostly just the capital and surrounding areas that are hooked up to the huge Camisea gasfields and visions of a burgeoning petrochemical and gas-fueled industrial base in the south have yet to materialise.
Assets to burn
Critical for the next administration to push the gas expansion programme forward will be seeing through the completion of the $5bn Gasoducto Sur Peruano (Southern Peru Gas Pipeline) project, the most ambitious infrastructure scheme ever seen in the country. The 0.595bn cubic foot per day (cf/d) pipeline will cut south 1,000km from the Camisea gasfields through the Andean city of Cusco to the coastal port of Ilo in the south. Along the way it will supply gas to smaller cities and rural Peru. It’s expected to feed a petrochemical plant and a 0.5-gigawatt power plant in Ilo.
The pipeline is expected to underpin strong demand growth over the next decade. Peru LNG, Latin America’s only liquefaction plant, sucks in a steady stream of around 0.6bn cf/d of gas for export and is expected to continue doing so for the foreseeable future. Domestic demand, on the other hand, is on the rise. Wood Mackenzie, a consultancy, has forecast Peru’s natural gas consumption will rise around 50% from 1.2bn cf/d in 2015 to 1.8bn cf/d by 2025.
The southern gas pipeline project is around 35% completed, Humala says, but it will have to complete the remaining 65% without the majority owner and contractor Odebrecht. The project has been caught up in the collateral damage from Brazil’s Carwash corruption scandal. Odebrecht, whose founder is in jail after being convicted of bribing Petrobras officials, is reeling from the scandal’s fallout and is selling billions in assets to stabilise its finances. Enagas, a minority stakeholder, says it wants to buy 6% of Odebrecht’s 55% interest leaving a 49% interest in the project up for sale. (Brazilian authorities are investigating allegations that Odebrecht paid $3m in bribes to Humala to win the project.)
Any potential investors will want to see how the election plays out, and know that the project still has the full backing of the government. China National Petroleum Corporation (CNPC) said in 2014 that it was interested in the pipeline; it may now have a chance at it.
The new president will also need to put a framework in place that encourages enough production to fill all of the new pipelines. Blocks 56 and 88, together known as the Camisea fields, produce about 90% of the country’s gas. The fields’ existing reserves are enough to cover about a decade of projected demand, but the country will eventually have to expand beyond that base.
The best hope to do so is in nearby Block 58. CNPC bought the rights to develop the area from Petrobras in 2014 for $2.6bn. Petrobras said early exploration drilling had found potentially more than 2 trillion cf of gas in the block. CNPC had pledged to invest heavily in the field, but a corruption scandal of its own at home and the plunging crude price has crimped its spending on major projects abroad.
Elsewhere exploration activity has been thin on the ground. Only four exploration wells were drilled in 2015, and fewer than 50 have been drilled over the past five years, according to government data, leaving future reserve growth in doubt. On this front, Fujimori looks to be the preferential candidate to Kuczynski, who has talked of re-opening the Camisea gas production contracts to negotiate friendlier terms for the government. The move would spook investors at a time when the country is competing with others for a scarcer pool of industry cash.