Peru: Promoting greater production
Following years of declining oil production, several oil companies operating in Peru have formed a new organisation to request that President Ollanta Humala make changes to the sector’s regulatory framework to encourage greater investment. The Peruvian Hydrocarbons Society (PHS), established in March and comprised of 16 firms from the local oil industry, hopes that legislative reforms will serve to reverse a pattern of decline and perhaps turn the country into a net crude exporter in the long term.
In the 1980s Peru produced upwards of 195,000 barrels per day (bpd), a figure that has steadily decreased since, dropping 20% over the past decade. In January 2013 production was 62,000 bpd, requiring complementary imports of about 95,000 bpd, mostly from Ecuador and Africa. This production figure is particularly low in the region. Colombia and Ecuador produced 915,000 and 509,000 bpd in 2011, respectively.
The president of the new organisation, Beatriz Merino, said production has decreased in part due to excessive bureaucracy and a lack of resources available to the authorities who oversee the sector. The PHS estimates it takes around 15 years from when an oilfield is discovered to when production begins, while the same process is estimated to take only three years in Colombia.
In 2011 Peru’s proven oil reserves stood at 580m barrels, after rising from a low of 353m in 2003. However, members of the PHS estimate only one-third of the 901,436 sq km with hydrocarbons potential has been explored. “The oil is there, but what we are seeing is an industry that does not have favourable institutional and regulatory frameworks,” Merino told international media.
One key difference between Peru’s hydrocarbons industry and that of its Latin-American counterparts, such as Brazil, Colombia and Ecuador, is the lack of an established state-owned enterprise (SOE) in the upstream segment. Petroperú, the state-owned oil company, ceased production around 15 years ago and has since dedicated itself to downstream activities.
This is set to change, however. Officials have announced the SOE will be granted a minority stake in the 36 new onshore and offshore oil and gas blocks that will be auctioned off sometime in 2013, once the government has completed discussions with indigenous groups located in the highlands and the Amazon jungle. Additionally, Petroperú announced it would take over upstream operations at Block 64, which had been held by Canada-based Talisman Energy until the firm left the country in September 2012.
Merino said the industry welcomed increased participation, but that companies in the private sector may not be happy if Petroperú is not obligated to invest in exploration activities, but still able to benefit from royalties once production begins. In an interview with the press, Merino said the SOE “could be a good partner, but to be a good partner it has to participate not only in the benefits, but also the risks”. This view has been echoed by others in the industry, who have told OBG that this policy may undermine some of the interest in the new bidding round.
The participation of Petroperú in the new blocks is not the only change industry players must now contend with. The government introduced a new law in April 2012 that aims to promote communication between companies completing extractive activities and indigenous communities. Additionally, in December 2012 Congress enacted the National Environmental Certification Service (Servicio Nacional de Certificación Ambiental, SENACE), an organisation that will oversee environmental impact assessments.
It seems that industry players are receptive to these changes, with Merino telling local press that sector players understand why the new law and agency have been introduced, stating that the industry should become a “virtuous circle in which everyone wins”.
With substantial areas of the country yet to be explored, Peru exhibits potential not seen in many other countries. If leaders work to offer a stable and clear investment platform for the industry, domestic and international firms operating in Peru should be able to reach their collective goal of doubling production over the next 10 years, thus benefitting private companies, government and the Peruvian people.