New projects are being rolled out as foreign investment grows

of rapid transformation. Energy demand was still low ten years ago when the country depended almost entirely on hydroelectric power in addition to petroleum imports to meet its needs. At that time, Peru still had limited oil production, no production of natural gas and little to speak of in terms of energy exports. Today, by contrast, the country is among the leading producers of natural gas in the region, a growing hub of oil production and an important target of investment by foreign energy firms. Plans have also been put in place to develop the infrastructure that would be needed to add value to hydrocarbons resources through refining and petrochemical manufacturing.

Reserves

According to the BP Statistical Review of World Energy, at the end of 2013 Peru had 1.4bn barrels of proven oil reserves, up from 0.9bn barrels at the end of 2003, with a reserves-to-production (R/P) ratio of 37.5 years. However, in the past decade exploration has expanded in the south-east jungle region at the Camisea field, which was first discovered in the 1980s. As a result of these shifts in exploration and demand, by the end of 2013, Peru’s proven gas reserves had grown to 15.4trn cu ft (tcf) making them the third biggest in Latin America, following those of Venezuela (196.8 tcf) and Brazil (15.9 tcf). At the end of 2013, Peru’s R/P ratio for natural gas stood at 35.7 years.

Production

Production of natural gas has grown in the past decade while oil output has fallen. Oil production in May 2014 stood at 69,000 barrels per day (bpd), having declined from 87,500 bpd in 2003. Then as now, these levels of production placed Peru at the bottom of the ranking of the seven regional countries tracked by BP. Natural gas output, however, has grown quickly, owing to the beginning of production at the Camisea field. For instance, in 2003, Peru produced only 17.7bn cu ft (bcf) of gas. By 2013, this figure had grown to 430.8 bcf. Natural gas production in large quantities in Peru began in 2004 and it remains the smallest among the seven countries tracked. However, the gap between Peru’s energy sector is currently undergoing a period of rapid transformation. Energy demand was still low ten years ago when the country depended almost entirely on hydroelectric power in addition to petroleum imports to meet its needs. At that time, Peru still had limited oil production, no production of natural gas and little to speak of in terms of energy exports. Today, by contrast, the country is among the leading producers of natural gas in the region, a growing hub of oil production and an important target of investment by foreign energy firms. Plans have also been put in place to develop the infrastructure that would be needed to add value to hydrocarbons resources through refining and petrochemical manufacturing.

Reserves

According to the BP Statistical Review of World Energy, at the end of 2013 Peru had 1.4bn barrels of proven oil reserves, up from 0.9bn barrels at the end of 2003, with a reserves-to-production (R/P) ratio of 37.5 years. However, in the past decade exploration has expanded in the south-east jungle region at the Camisea field, which was first discovered in the 1980s. As a result of these shifts in exploration and demand, by the end of 2013, Peru’s proven gas reserves had grown to 15.4trn cu ft (tcf) making them the third biggest in Latin America, following those of Venezuela (196.8 tcf) and Brazil (15.9 tcf). At the end of 2013, Peru’s R/P ratio for natural gas stood at 35.7 years.

Production

Production of natural gas has grown in the past decade while oil output has fallen. Oil production in May 2014 stood at 69,000 barrels per day (bpd), having declined from 87,500 bpd in 2003. Then as now, these levels of production placed Peru at the bottom of the ranking of the seven regional countries tracked by BP. Natural gas output, however, has grown quickly, owing to the beginning of production at the Camisea field. For instance, in 2003, Peru produced only 17.7bn cu ft (bcf) of gas. By 2013, this figure had grown to 430.8 bcf. Natural gas production in large quantities in Peru began in 2004 and it remains the smallest among the seven countries tracked. However, the gap between Peru and its regional peers has narrowed and Peru’s production has grown every year during the past decade.

Consumption & Imports

Peru relies on imports to meet its demand for petroleum products, including crude oil to feed the country’s refinery capacity of around 200,000 bpd, nearly double that of national oil production. Average consumption in 2013 was 171,000 bpd, according to the US Energy Information Administration. The majority of the crude imported came from Ecuador with smaller portions coming from West Africa and other countries in South America. Peru imports refined products, particularly distillate fuel oil from the US, at a rate of 63,000 bpd in 2013.

Peru’s reliance on imports of crude oil and refined petroleum products has decreased in recent years and may continue declining in future. The windfall of natural gas from Camisea has enabled some segments of the economy that used to consume oil to switch to gas. Public transportation and taxis are notable examples, while many of Peru’s public buses have converted to liquefied petroleum gas (LPG) as their fuel source.

An additional 160,000 light vehicles, mostly taxis, also now run on LPG. The trend of adopting natural gas-derived fuel sources for vehicles can be expected to continue as Peru’s domestically produced gas is cheaper than imported petroleum products. The most significant factor driving consumption growth has been the adoption of natural gas as the primary input for electricity generation.

Today around half of Peru’s electricity is derived from thermoelectric plants burning gas from Camisea, whereas thermoelectric generation made up a very small portion of Peru’s electricity mix a decade ago. Since that time, as production at Camisea has expanded, domestic natural gas consumption has grown from 16bn cu ft (bcf) in 2002 to 418 bcf in 2013.

Energy Exports

Despite Peru’s vast electricity resources, it is politically very difficult to win popular support and governmental approval for energy export projects (see analysis). As a result, today the country’s only significant energy export is liquefied natural gas (LNG). LNG exports began in 2010 after the government granted a consortium led by Hunt Oil, an American company, a concession to build a liquefaction plant on the coast. The plant’s capacity in 2014 was 215 bcf per year, while exports in 2013 totalled 209 bcf.

Plans are in place to expand the plant’s capacity. As the only LNG plant on the Americas’ Pacific coastline, the operation is well situated to export to Asia and the west coast of Latin American countries. As a result, Japan, South Korea and Mexico have become several of the plant’s biggest export markets.

The plant also sends LNG to Spain (Repsol holds a 20% stake in the operation). The business is profitable and has a favourable impact on Peru’s trade balance. However, it faces the constant risk of being shuttered by politicians in Lima responding to popular opposition to the export of natural resources. This risk has so far been managed by two regulatory measures.

First, LNG exports may continue only as long as domestic demand for natural gas is met. The second specifies that the natural gas from the larger of the two most productive blocks in the Camisea field (called Lot 88) will only be sold on the domestic market. Moreover, the production from the smaller of the two most productive fields (Lot 56) is designated solely for export. As exploration continues and it becomes apparent that Camisea will be able to securely supply the domestic market in the long term, resistance to exports may wane. This would be a boon to the economy as global demand for LNG is stable and growing.

Meanwhile, the export of electricity has been politically unpalatable in various quarters. The one connection with a neighbouring country, Ecuador, is a small line with capacity of 220 MW, but this is reserved for emergency use. Plans have been discussed by both governments to build a new line with capacity of 500 MW that could be used on a regular basis. This project could serve as a precedent for the development of larger electricity export projects, but on its own it would have not have a major economic impact.

Oil Opportunities

Before production began at Camisea, Peru had relied heavily on oil to meet its energy needs, when around 70% of energy came from the fuel. Today natural gas plays a more important role than it did in the past, but it has still not unseated oil as the top energy source. Gong Bencai, vice-president of China National Petroleum Corporation (CNPC) subsidiary Sapet, told OBG, “The discovery of the Camisea gas fields and the recent approval for the construction of the southern pipeline have had a significant impact in ensuring the country’s energy stability and increasing its potential to export. But the government needs to work on promoting new oil exploration and extraction, as it remains Peru’s main energy source.”

As of late 2014, several opportunities are being developed and others have recently come on-line. The Spanish company Cepsa began production at its Block 131 concession in the north in early 2014, while Ecopetrol has seen production gains at its offshore drilling facility. These developments have helped to offset falling production at an oil block operated by Pluspetrol, an Argentinean company, which accounts for about a quarter of Peru’s crude production. New opportunities include offshore exploration carried out by BPZ and Pacific Rubiales in the north and, most importantly, the development of Block 67, a concession in the northern Amazon region by Perenco, a French firm.

As of late 2014, Perenco was producing between 5000 and 7000 bpd and shipping this production by river. However, this represents only a small portion of the project’s potential. When the project is fully developed it is estimated that it will produce around 60,000 bpd, nearly doubling Peru’s current production. Perenco is building an extension to an existing pipeline to accommodate the anticipated higher levels of production. While none of these projects will turn Peru into an oil powerhouse, they will help decrease the country’s reliance on oil imports.

Refining Expansion

Peru’s six oil refineries have a combined capacity of 200,000 bpd. Slightly more than half of this capacity comes from the La Pampilla refinery in Lima, which is operated by Repsol. The rest comes primarily from Petroperú-owned refineries including the country’s second-largest refining facility, Talara, located on the northern coast. Current refining capacity is not able to meet domestic demand. Although demand was 171,000 bpd in 2013 – less than refining capacity – some of Peru’s refined petroleum is exported and the existing production capacity does not produce enough fuel oil. As such, Peru relies on imports, especially from the US, to satisfy demand. Statistics from the US Energy Information Administration show that Peru imported 63,000 bpd of refined products from the US, up 142% from 2008. Distillate fuel oil accounted for just under 80% of the imports by value.

Talara

To decrease reliance on imports and add value to growing domestic crude production, Petroperú has initiated a significant expansion and modernisation of the Talara refinery. For example, in May 2014 Petroperú announced that it had awarded the Talara concession to the Spanish firm Técnicas Reunidas in the form of a lump-sum, turnkey contract worth $2.7bn. The facility constructed by Técnicas Reunidas will effectively replace the existing refinery, as opposed to updating it. Due to this distinction, the Ministry of Energy and Mines (Ministerio de Energía y Minas, MINEM) has described the project as practically a greenfield investment. The scope of work includes equipping the refinery to produce both diesel and gasoline with maximum sulphur content of 50 parts per million (ppm).

Before the project began, Talara produced fuels with sulphur content of 2000 ppm. The new refinery will also have the ability to process heavy crude extracted in Peru’s northern Amazon regions. According to existing plans, this crude will come from Perenco’s Block 67. When Técnicas Reunidas’ work is complete, the new Talara refinery is expected to have a total capacity of 95,000 bpd, and it should also significantly expand Petroperú’s portfolio of overall petroleum products. The refinery is scheduled to begin operating in 2017. PETROPERÚ IPO: The Talara expansion was originally tied to the ongoing effort to open Petroperú to private investment. As early as 2003, an initial public offering (IPO) of a minority of Petroperú’s shares was meant to finance the Talara project. However, the IPO never materialised and the auction of the concession for the Talara job was repeatedly delayed. The delays came amid various allegations, and subsequent dismissals of Petroperú executives related to kickback schemes and other irregularities in the bidding process. The scandal surrounding the corrupt bidding underscored the need to modernise Petroperú, which had been one of the goals of partial privatisation in the first place. Ultimately, the Talara expansion got ahead of the IPO, and is now financed with debt. However, legislators have not forgotten their goal of seeking private investment in Petroperú and all signs indicate that shares of the company will finally come to market by 2017.

Ecopetrol

Colombia’s state-controlled oil company Ecopetrol is the model for Peru’s privatisation project. The firm offered shares on the Bogotá stock market in 2007, most of which were bought by Colombian retail investors. Since the offering, Ecopetrol has modernised, becoming a vertically integrated oil company that is able to compete for projects in international markets alongside oil majors. Since the offering, the value of Ecopetrol’s shares has doubled. Mexico’s Pemex, a substantially larger company than Ecopetrol, is trying to pull off a similar feat of modernisation now that the Mexican oil sector has been opened to private investment. At the end of 2013, Peruvian legislators passed a law that authorised Petroperú to sell up to 49% of the company on the Bolsa de Valores de Lima (BVL), the Peruvian stock market. The law also initiated the process of modernising Petroperú to prepare it for listing.

As a result of the law, Petroperú began interacting with the BVL as if it were a publicly traded company. According to Gustavo Navarro, the sales manager at Petroperú, the company discloses all material business developments, publishes its balance sheet and adheres to the standards of transparency that are applied to firms listed on the market.

Petroperú is also in the process of evaluating its corporate structure and practices to become more efficient, guided by the consultant Wood McKenzie. These measures aim to ensure that by the time the stock is listed, Petroperú is prepared for the scrutiny and standards applied to publicly traded firms.

The goal is to make Petroperú, which is by revenue the biggest company in Peru, more competitive. “For me, the primary benefit of private investment is that we can distance ourselves from political influence,” Navarro told OBG. Once Petroperú accepts money from the public, fiduciary responsibility to those investors will require the company to take decisions based only on business imperatives, rather than political calculations. Additionally, increased scrutiny of Petroperú’s finances should decrease the likelihood that debacles, such as the original Talara bidding scandal, will recur.

Chinese Investment

A significant portion of new investment in Peruvian energy projects comes from China. As one of the biggest importers of gas and oil, and with its demand projected to continue rising, China has engaged in a flurry of acquisitions of energy resources in Latin America and around the world. In Peru, China’s state oil company, CNPC, established its presence in late 2013 with the acquisition of Petrobras’ oil and gas assets for $2.6bn. Petrobras explained the divestment as being part of its strategy to decrease exposure to foreign markets to focus on exploiting deep-water reserves found off the Brazilian coast.

Petrobras’ assets in Peru included three oil and gas blocks that were producing around 800,000 tonnes of oil equivalent per year at the end of 2013. In May 2014, CNPC announced that the company planned to invest an additional $2bn in Peru over the next 10 years; however, this figure could rise significantly as new opportunities are explored. Already in mid-2014, CNPC had received environmental licences to carry out exploration for natural gas in one of the blocks bought from Petrobras. This project alone is expected to cost $1bn.

The Southern Pipeline

One project that CNPC missed out on is the Gasoducto Sur Peruano, or the Southern Peruvian Gas Pipeline. Gong said that CNPC had been interested in this project, but ultimately the concession was awarded to Odebrecht, the Brazilian construction firm. The awarding of the concession marked an important step forward for the southern pipeline, a project in the works for years. Odebrecht will now build the pipeline with a partner, Enagas.

The pipeline will extend 1000 km from the Camisea field in the Amazon, passing through Apurímac, Cusco and Moquegua, among other regions, before reaching Mollendo on the southern coast. The total cost of the project is estimated at $7.3bn, of which $3.6bn is investment and the rest is related to operation and maintenance costs. Construction is scheduled to begin in 2015 and Odebrecht says the pipeline will be operational in 2017. This relatively quick turnaround is due to the fact that Odebrecht had previously planned and shelved a similar project, which stalled over financing issues.

However, Odebrecht had already completed and gained approval for the project’s estudio de impacto ambiental (environmental impact assessment, EIA).

Since the new pipeline is very similar to the originally planned one, Odebrecht expects to be able to simply tweak the existing plan and be able to move forward with construction soon.

Among other benefits, the pipeline will enable Peru to more evenly distribute its electricity generation and transmission throughout the country. Geographic coverage and transmission to economically growing, but accessing remote parts of the country have been the main challenges faced by utilities.

Generation

Gross generation, on the other hand, has not been a problem. The increase in generating capacity has kept pace with consumption thanks to Peru’s significant hydroelectric and natural gas resources. These resources will continue to be abundant in the medium term, or longer, as only a small portion of the country’s hydroelectric resources have been tapped and production and exploration at the Camisea natural gas field is expected to continue. While resource availability is not a problem, moving energy to consumers has become an obstacle. In the past decade, Peru derives an ever-increasing share of its generation from natural gas-fired thermoelectric plants. Investment continues to pour into the construction of plants because the margins on gas-produced power are high, owing to low-cost, locally available natural gas. However, generating capacity is outstripping distribution infrastructure. Only one pipeline carries gas from the Camisea field, and this pipeline, known by the initials of its operator, Transportadora de Gas del Perú (TGP), is running at capacity. The pipeline runs to Lima and around half of the country’s electricity generation depends on it. The high dependence on this pipeline limits the growth of generation capacity and also represents a significant risk for the country. If it were damaged, especially in any of the remote mountain regions through which it passes, the consequences for the country could be devastating. Peru’s infrastructure also remains limited in terms of electricity transmission networks. Economic growth has disproportionately affected Peru’s more remote regions, such as cities in the Andes and those near the Amazon, which had previously been less developed than other areas. As a result, energy demand has skyrocketed in these regions and utilities have failed to keep up. In the short term, generation is expected to keep pace with demand, but the distribution and transmission gaps will have to be addressed to avoid energy shortfalls in the future.

“After 2020, it is impossible to talk about increasing generation by building more gas power plants. There simply won’t be enough supply unless more pipelines are built,” Alejandro Ormeño Durand, general manager of SN Power, a Norwegian company operating hydroelectric plants in Peru, told OBG.

Infrastructure

The long-term solution to these problems is the construction of the southern pipeline and of new transmission networks. Both of these projects are under way, but they will take years to be completed. In the meantime, the government has sought to reduce energy risks by awarding concessions for cold reserve generation plants. Currently two large plants of this type are in place. One of these is operated by EnerSur, a Peruvian generation company, in Ilo in the southern state of Moquegua. The plant came online in 2013 with a capacity of 460bMW. The plant is currently burning diesel but will switch to gas once the southern pipeline is completed. Cobra Group runs a separate diesel- and gas-fired plant in Eten, on the northern coast, with a capacity of 220 MW.

There is also a need to improve energy storage facilities, which would help to reduce the risk associated with dependence on the TGP pipeline. Carlos Gonzales Camargo, general manager of PRIMAX Perú, a petrol station operator, told OBG, “While fuel demand has increased by 40% since 2000, storage capacity has risen by just 1% and there is a real risk of shortage, especially in the case of a natural disaster. The government and private companies need to create a common strategy to solve this and ensure energy security.”

Industry executives have also spoken of the shortcomings of the electricity transmission infrastructure, urging an urgent resolution so that the country’s economy can move forward. Indeed, the country has challenges with the power distribution grid, which has not developed at the same pace as domestic energy demand. The government needs to provide incentives to upgrade the system with a long-term view and not risk reaching breaking point. Projects such as the development of power lines linking major cities need to be considered of national importance, and the government also needs to take a more active role in ensuring that issues such as environmental licences or dealing with communities are resolved in reasonable amounts of time.

Presidential Politics

As in the mining sector, environmental and social factors are also significant considerations for all energy projects in Peru. President Ollanta Humala ran his campaign on an economically populist platform. In practice, however, he has tended to be more sanguine about big business in office, recognising the need for foreign investment in the country.

This potential conflict came into sharp relief in March 2014 when MINEM proposed measures that would have waived stringent requirements for EIAs to be conducted before all seismic exploration. Waiving this lengthy process could have helped to accelerate investment in projects in the energy sector, but also opened up political controversy given the potential for seismic exploration to disrupt ecosystems and negatively affect indigenous communities.

The government’s goal is to surpass the 100,000-bpd barrier in the short to medium term, but in order to do this there have to be many more exploration projects, and the timeframe to acquire a licence will likely need to be shortened. Today the process takes an average of around two years, which is preventing many projects from moving forward.

Accordingly, subsequent debate over the legislation led to splits in Humala’s own government, with MINEM ultimately walking back its plan to abolish EIAs, proposing instead to replace them with environmental impact declarations, which would speed up the assessment phase without abolishing it altogether. Even so, in July 2014, Humala and the minister of energy and mines, Eleodoro Mayorga, pushed through reforms that eased environmental burdens on miners, despite protests from NGOs, academics and the Ministry of Environment.

Renewables

The government has set ambitious goals for renewables. “The government’s goal is to reach 30% of the energy matrix in unconventional renewable energies by 2020. To achieve this, there need to be more incentives to invest in thermal and wind power, as today’s low cost for gas and hydroelectricity make it difficult to generate competitive prices,” Giovanni Goyzueta Puccio, general manager of Pacific PIR, an energy and mining consultancy, told OBG. According to the National Energy Plan 2014-25, released in mid-November 2014, unconventional renewables are forecast to account for 5% of the energy matrix by 2025. Unconventional renewables include solar, wind, biomass and geothermal generation, but not large hydroelectric plants. Peru has resources in all of these areas, which are being exploited on a small scale.

According to official figures, Peru has 22,000 MW of exploitable wind resources along the coast, a small portion of which are being exploited. Cobra Energía, a Spanish company, is the biggest wind producer. In 2014, it ordered new turbines from Siemens to add 100 MW of capacity to its Tres Hermanas project. This expansion should boost total installed wind capacity in Peru to more than 300 MW. Solar energy resources are concentrated in the south where five concessions auctioned by the government in 2009 and 2011 account for around 100 MW of installed capacity. Three biomass power plants have a combined capacity of 30 MW, while geothermal resources are also being explored.

Outlook

Peru is resource rich but infrastructure poor. Natural gas reserves and hydroelectric resources should enable the country to achieve long-term energy security once adequate pipelines and transmission networks are constructed. The government is aware of the deficit and willing to work with private companies to rectify it, providing more opportunities for multinational infrastructure and energy firms. With Peru’s economy projected to keep growing at a high rate, energy needs will only expand, driving development and creating a steady pipeline of investment opportunities.

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The Report: Peru 2015

Energy chapter from The Report: Peru 2015

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