Peru: Determining gas potential
With a 13% surge in gas production during the first half of 2012 and a planned tender for several new exploration blocks expected in the final months of the year, Peru seems well on its way to becoming a more significant player in the regional natural gas sector. However, new rules concerning the participation of Petroperú, the state-owned oil company, combined with an unclear system of consultation with indigenous peoples prior to the awarding of contracts, may limit investment potential.
Peru had 12.5trn cu feet of proven reserves of natural gas at the end of 2011, while production stood at 402.6bn cu feet, the majority of which came from the Camisea fields. Further cementing the production potential of the area, located in the southeastern Amazon region, in September 2012 Repsol, a Spanish oil and gas company, confirmed a new gas discovery with reserves estimated to be between 1trn and 2trn cu feet in Block 57. Repsol owns 53.84% of the block, while Brazil-based Petrobras owns the remainder.
While this cannot be classified as a massive discovery, it offers encouragement for further oil and gas potential. With a tender for 36 new exploration contracts expected to take place in late 2012, both Peru and a number of exploration companies are hoping for more discoveries. Upcoming tenders include blocks in the Amazon jungle, the highlands and off the Pacific coast.
Mario Contreras, country manager for Exterran Peru, a US-based oil and gas services firm, spoke to OBG about the importance of developing these new blocks quickly and effectively. “With the shale gas revolution continuing in the US, it has become clear that it is the era of natural gas,” he said. “Unless Peru moves quickly to develop current reserves and discover new ones, the country will not be able to capitalise on its gas potential.”
However, investor appetite for the upcoming bidding round could be undermined by a new governmental position requiring Petroperú to have a stake of between 25% and 49% in the new blocks. While most industry experts were expecting Petroperú to participate in the new blocks, preliminary estimates had placed the state-owned firm’s involvement at around 20%.
Industry analysts have seen this as an effort to boost the expertise and knowledge base – not to mention the coffers – of Petroperú, long relegated to the petrochemicals sphere. In defense of the new policy, Jorge Merino, the minister of energy and mines, told local press that many companies were in support of the move, as state involvement in oil and gas blocks is commonplace in many other countries in the region, citing Petrobras as an example.
“The inclusion of Petroperú will give confidence to investors. Additionally, it will improve relations with the local communities…” Merino said. “This does not represent a change in the rules of the game.”
While Peru still expects to see significant international interest in the bidding round, ongoing issues with local communities will need to be dealt with if the industry is to further develop. In an effort to appease people who have claimed they had no voice in energy, mining and infrastructure projects on their land, in 2011 President Ollanta Humala established the “Law on the Right to Prior Consultation of Indigenous or Native Peoples (LPC)”, requiring that locals be consulted before large-scale projects were approved in their lands. However, the details of the law have not been clarified for both investors and local citizens, and the term “indigenous” has yet to be fully defined.
Additionally, a number of recent decisions by government authorities have been sending mixed signals to international investors, including one to pause US-based Newmont Mining’s Minas Conga project, which at $5bn would be the country’s largest-ever foreign direct investment, due to social unrest.
Additionally, while the LPC does not grant local communities veto power over government-approved projects, a recent ruling by Peru’s constitutional court affirming the right of the indigenous Amazon population in the Madre de Dios region to block access to its lands is also adding to the confusion.
As a result, a number of challenges lay ahead for the nascent sector, and the Peruvian government must work to clarify its position on a number of policies in the industry. If the country’s leadership is able to define its regulatory framework, the future of the gas industry in Peru may indeed look bright.