It looks likely that the economic benefits of energy deals with Peru’s neighbours will outweigh political hesitation

Peru’s energy sector presents a large number of opportunities despite the continuing salience of various political obstacles. Peru’s energy resources, particularly natural gas and hydroelectric potential, exceed the country’s current demand for energy and will continue to do so for the foreseeable future. The country has around 60,000 MW of total hydroelectric potential and 15trn cu ft (tcf) of proven natural gas reserves. Currently, only a fraction of the hydro potential is used and gas reserves are continuing to grow.

Exploration

Alvaro Ríos, an energy consultant and former Bolivian energy minister, told the Financial Times that Peru’s natural gas reserves could exceed 50 tcf as exploration continues. As well as possessing abundant resources, Peru is surrounded by countries in need of energy. Chile’s mining sector pays very high electricity prices as the country lacks gas production and hydroelectric resources of its own.

Meanwhile, Brazil has also struggled to keep pace with growing domestic demand for energy as its own economy continues to develop. Both of these markets, as well as those of Ecuador, Colombia and Bolivia, provide significant opportunities for the exportation of energy. Furthermore, exporting to these countries would not be too difficult, as some of the necessary infrastructure already exists. It would be possible in several cases to generate electricity close to the borders with the intended export markets.

Demanda Interna

Both Peruvian and foreign businesses have been eager to capitalise on these opportunities, but politics has so far stymied such efforts. There is a strong populist tendency in Peruvian politics dating back decades, expressed most vocally in the form of resistance to the exploitation of domestic resources by outsiders and a concern with safeguarding the country’s indigenous heritage. This has turned energy management into an extremely delicate issue in national political debates, where the focus has remained on securing domestic energy demand, demanda interna in Spanish, even when the projects in question may ultimately have a net zero impact on domestic supply.

A Deal With Brazil

The closest Peru has come to initiating large-scale energy exports was a hydro-backed deal with Brazil. For several years, culminating in 2010, Brazilian and Peruvian officials were in negotiations over an agreement that would facilitate the development of large hydroelectric plants in Peru and the export of part of the energy produced by these plants to Brazil. Brazil’s agreement to guarantee demand was necessary to secure financing for the projects, which would have required billions of dollars of investment. The plants would have been located in the Peruvian Amazon near the border with Brazil and would have fed both the domestic Peruvian grid and transmission lines crossing the border into Brazil.

The agreement was signed by the executive branches of both countries and appeared to be ready for implementation. In late 2013, however, Peru’s Congress rejected the agreement, rendering the project void. The agreement ran into widespread resistance from objections to the project’s reliance on what was effectively a supply contract with Brazil. Supporters of the agreement had conversely argued that the opposition mischaracterised the deal as a handover of Peruvian resources to Brazil.

“The opposition was talking about a plant that did not exist. For it to be developed you need guaranteed demand and you can get that only from Brazil. If you don’t obtain that, you don’t have a project. Our reading is that the government sent it to Congress but did not adequately shepherd it through the process. This was not an issue they wanted to place a bet on,” María del Carmen Tovar, an attorney with the electricity practice at Estudio Echecopar, told OBG.

Exports To Chile

The economic case for exporting energy to Chile is even clearer than that for Brazil. Chile has similar geological characteristics to Peru, which means that it possesses significant mineral resources. The country is the biggest producer of copper in the world. However, it lacks Peru’s natural gas or hydroelectric resources, which has led to a shortage in the electricity supply and higher energy costs for miners. Whereas in Peru the spot price for electricity paid by miners fluctuates between $60 and $80 per megawatt hour, in Chile miners conversely pay as much as $280. These miners are concentrated in the north, where electricity from Peruvian generators could feasibly reach them at low cost.

Moreover, Chile’s high electricity prices could make it a highly profitable export market for Peruvian generators. For example, Chilean industry also pays a substantial premium for gas. “We need to realise that Chile is paying $14 per million British thermal units for gas while the average global price is just above $3. They need the gas. They would buy it for sure and Peru could export it easily,” Gonzalo Crosby, country manager of CBI Peruana, told OBG. Indeed, the southern pipeline will terminate close to the Chilean border. Extending it across the border would enable Peru to sell gas at higher prices than can be achieved in most markets, adding value to Peruvian gas without costs from refining processes.

Complicated History

While sending gas and electricity across the border makes economic sense, the matter is complicated by a history of difficult diplomatic relations, stemming from the War of the Pacific in the late 19th century. Ongoing maritime border disputes were not resolved until 2014, when the International Court of Justice in The Hague divided the disputed territory between both countries, finally resolving the conflict. Insofar as the decision can be claimed as a victory over Chile, exporting resources may become more politically palatable for Peru. That Peru already exports liquefied natural gas in large quantities could also make any arrangement more acceptable to the electorate. Gas exports are one avenue for the sale of energy resources abroad: Robert Kartheiser, an attorney in the energy practice of Allen & Overy in New York, told the Financial Times that he found it more likely that Peru and Chile would open their borders to trade in natural gas than electricity.

Ecuador

An existing electricity connection with Ecuador could help to normalise the concept of energy exports. Peru and Ecuador have a low-capacity transmission line that is currently used only on an emergency basis. However, the governments of both countries have discussed plans to build a larger, 500-MW line that could be used for regular trade. Such a transmission line would not have a significant economic impact on the country but would facilitate the development of larger-scale energy exports.

Export Incentives

Despite some uncertainty caused by opposition to the export of energy resources, Peru remains an economically open country, and a member of the Pacific Alliance, a free trade bloc to which Chile is also a party. Given the strong incentives for energy exports, it is likely that Peru will begin shipping surplus electricity and gas supplies to its neighbours, creating numerous opportunities for investors who can find a way to navigate political obstacles.

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The Report: Peru 2015

Energy chapter from The Report: Peru 2015

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