Plans to develop a pipeline in the south of the country look set to spur industrial development, opening up numerous opportunities

Since starting production of large quantities of natural gas at the Camisea field in 2004, Peru has primarily burned its gas production in thermoelectric plants or, since 2010, exported it in liquefied form. Both the government and Peruvian industry are now turning their attention toward developing higher-value end uses of natural gas. The most significant is the development of a petrochemical complex in Peru’s south, developed by Braskem, the Brazilian chemicals giant, and facilitated by the federal government. This complex, which is in an advanced stage of planning, could catalyse the development of a Peruvian petrochemical industry, backed by domestic natural gas resources.

Gas Transport

The viability of a petrochemical operation in the south depends on the construction of the Gasoducto Sur Peruano (Southern Peru Gas Pipeline), a pipeline that will transport gas extracted at Camisea to the southern Pacific coast. This project has been discussed for years but has stalled several times, leading to speculation about whether or not a petrochemical industry will ever come to fruition. However, the concession for the construction of the pipeline was awarded to Odebrecht, the Brazilian construction company that partially owns Braskem, in 2014 . Construction is set to begin in 2015 and Odebrecht says the pipeline will be operational in 2017.

Southern Industrialisation

Both the southern pipeline and Braskem’s planned petrochemical complex form part of a government initiative to spur industrial development in the south. The new pipeline will enable cheap thermoelectric generation, boosting competitiveness and incentivising infrastructure development. Indeed, several mining projects in the south have increased the need for additional infrastructure investment as they will be large consumers of electricity and require more transport and export infrastructure than is currently ready for use. Several thermoelectric plants have begun operating in recent years, while those currently running, such as a plant operated by EnerSur in the southern state of Moquegua, are burning diesel until the southern pipeline is completed. Once they have access to natural gas feedstock their generation costs will become highly competitive.

Government & Gas

When Braskem began exploring the possibility of developing a large-scale petrochemical facility with a 1m tonnes per annum (tpa) cracker in Peru it found that the government was willing to facilitate the project, especially with regard to securing the significant amount of feedstock the plant would need.

This was crucial since the primary factor that attracted Braskem to Peru was the quantity and characteristics of the natural gas resources. Peru’s gas reserves are the third biggest in Latin America, following those of Venezuela and Brazil. The gas also contains a relatively high level (10%) of ethane, which is the input needed for the production of polyethylene, the primary material that Braskem plans to produce.

Export Markets

A southern Peruvian facility was also attractive to Braskem because of the possibility of shipping products to Asian markets directly from Peru’s Pacific ports. As regional economies have become more sophisticated in the years since Braskem began evaluating the project, the market opportunities for a Peruvian petrochemical plant have become more diverse.

Marcelo Odebrecht, CEO of Odebrecht, told Reuters in 2013, “When we started to look at this, we imagined the petrochemical market was in Asia, but if you look five years ahead then Colombia, Ecuador, Peru and Chile would be able to absorb the production.” As a result, the strategy for the plant has shifted toward meeting Latin America demand, with exports to Asian markets occupying a secondary role.

“Regional demand enhances the competitiveness of the project,” Sergio Thiesen, director for South America at Braskem, told OBG, “By 2020 Peru will be able to absorb 50% of the plant’s production, and within the region you have demand that can absorb 100% of its production.” According to Thiesen, the primary export markets will be Chile, Ecuador and Colombia, none of which possesses the natural gas resources to develop large-scale petrochemical plants of their own. A Peruvian plant would therefore seem to be well positioned to meet growing demand over the coming years.

Today, Braskem has projects in Brazil, Venezuela and Mexico. While Brazilian production is exported throughout the region, Thiesen expects that in the medium term the Brazilian market is likely to absorb all Braskem’s Brazilian production, leaving a vacuum in other regional markets for the Peruvian plant to fill.

Benefit To Industry

Peruvian manufacturers that use polyethylene as an input, tend to import the material from Brazil, the US and Asia, principally Korea, in roughly equal shares. This does not present any issues in times of abundant supply, but is problematic when supply is tight. “Small, distant markets are the first to be cut off by exporters,” Thiesen explained.

As a result of this, polyethylene consumers in Peru and other regional markets have to bear the cost of maintaining large stores of the material. The ability to source the input locally will lead to a significant decrease in these costs for local manufacturers and thereby improve the stability of supply.

Infrastructure Holdups

The Peruvian petrochemical project has been discussed for years and there had been some speculation about whether it would ever be realised. The primary cause of the holdup was the slow development of necessary infrastructure in the south, particularly with respect to pipelines. One big petrochemical project already faltered while waiting for infrastructure to catch up investors’ plans. CF Industries, an American fertiliser manufacturer, had planned to develop a $2bn petrochemical complex to produce ammonia and urea in the southern coastal region of Ica. CF Industries got as far as submitting an environmental impact assessment to the government in 2010. Plans for the project broke down once the company sought assurances from the government about infrastructure development in the region.

This delayed the project, raising projected costs to the point that CF Industries decided to abandon it. “At that time, some of the infrastructure requirements were not properly guaranteed by the government,” Inés Vázquez Vargas, an attorney at Estudio Echecopar, the firm that represented CF Industries in its dealings with the government, told OBG, “However, we believe that the infrastructure gap that prevented the development will not be a problem in the future.”

Next Steps

Braskem is currently working out long-term supply contracts with gas producers at Camisea. The government has appointed Petroperú, the state oil company, to act as an intermediary. Indeed, Thiesen told OBG that as of late 2014, negotiations were progressing smoothly and he expected Braskem would secure a long-term contract at a competitive price.

With Braskem now seemingly within distance of securing a supply contract and the southern pipeline project finally underway, it appears, for the very first time, that Peru will be able to start petrochemical production within the next few years. This project would offer the country its first opportunity to add a significant value to its existing natural gas resources.

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The Report: Peru 2015

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