Deep in the heart of the Amazon jungle lies one of South America’s largest discovered reserves of natural gas, known as the Camisea. Its discovery and development are now integral elements in Peru’s economic development, with royalties from the project alone anticipated to pour more than $30bn into government coffers during its estimated 40-year duration. The discovery of the field also makes Peru South America’s second-largest holder of proven gas reserves, behind Venezuela.

Located in the San Martín Reservoir in the southeast, Camisea has already had a significant impact after just eight years of operation by prompting investment into hydrocarbons exploration, reducing energy costs and generating significant export revenues. The government is also looking into the prospect of using by-products from Camisea to create an entirely new petrochemicals industry.

THE BENEFITS: Cheap, clean and efficient natural gas has emerged as the fossil fuel of choice on the world energy market lately. Generally made up of 80-90% methane, natural gas has a variety of uses, including heating homes, fuel for natural gas vehicles and electricity generation while its by-products, such as ethane, are used across a variety of industries, including the production of petrochemicals.

Natural gas combustion results in far lower emissions of toxins such as dioxide and carbon monoxide into the atmosphere compared with dirtier fossil fuels coal and oil – thus reducing environmental concerns such as smog, acid rain and greenhouse gas emissions. Vitally, it can also be transformed into liquid form at temperatures of -162°C, condensing its mass 600 times and allowing for easy transportation via liquefied natural gas (LNG).

RAMPING UP PRODUCTION: Following the discovery by Shell of the San Martín and Cashiriari fields in 1986 it took nearly two decades before Camisea would yield any natural gas. Political and economic factors put its development on hold for 13 years before the Special Committee for the Camisea Project began to initiate an international bidding process to award the concession for its exploitation.

In February 2000 the awarding of a 40-year licence for the upstream development and extraction of natural gas was given to a consortium led by Pluspetrol Perú Corporation, Hunt Oil Company, SK Energy Corporation and Tecpetrol del Perú.

The original discovery of the San Martín and Cashiriari fields are now known together as Block 88, which is estimated to contain proven reserves of 8.7trn cu feet (tcf), of which 6.8 tcf, or 78%, is considered to be recoverable. In addition, when combined with probable reserves, the figures increase to 11 tcf of total reserves with 8.24 tcf capable of recovery. Block 88 also contains 411m barrels of proven reserves of natural gas liquids, such as propane, butane and condensate. Block 56, Camisea’s second field, meanwhile, has an additional 3 tcf of natural gas reserves, which brings the total probable reserves of Camisea to 14 tcf. In 2008 Pluspetrol had international energy consultant Gaffney, Cline and Associates verify these figures.

According to data from Perúpetro, since operations began in 2004 at Camisea natural gas production in Peru has risen from 83m cu feet per day (mcfd) in 2004 to 1.1bn cu feet per day (bcfd) in 2011.

OTHER GAS FIELDS: There are nine producing natural gas fields in Peru, although Pluspetrol’s Blocks 88 and 56, which respectively averaged 457 mcfd and 589 mcfd in 2011, were together responsible for 95% of national production. The country’s other major productive natural gas fields include Aguaytia Energy’s Block 31-C with 18 mcfd, Savia Energy’s offshore Block Z-2B with 11 mcfd and Petrobras’ Block X with an average of 13.6 mcfd.

LNG production is limited to four operating fields, with Camisea’s Block 88 and 56 again leading the way. 2011 production averaged 83,163 barrels per day (bpd), of which Block 88 and 56 were responsible for 79,507 bpd, while Savia’s Z-2B yielded 1420 bpd and Aguaytia’s 31-C 2495 bpd. WHAT’S THE USE? The question of how to maximise national benefits from the exploitation of natural gas has sparked an intriguing discussion. The development of thermoelectric power plants that utilise gas from Camisea has reduced electricity costs by as much as 30%. Some have estimated that the country’s natural gas reserves could supply local energy demand for close to 60 years. On the other hand, the Ministry of Energy and Mines (Ministerio de Energía y Minas, MEM) claims to have tapped only 5% of the country’s renewable hydroelectric resources, which, until the introduction of natural gas, were by and large responsible for supplying the entire national grid. Expanding hydroelectric facilities in the country would free up gas for export as well as domestic uses such as heating.

Initial plans reserved only Block 56 for export, but later Block 88 was also freed in 2005 under the government of former President Alejandro Toledo. Now the government has re-entered negotiations with the consortium over exactly how much natural gas may be exported and how much the consortium will pay in royalties from exported natural gas.

ENTER LNG: Export of natural gas would not be possible without the Pampa Melchorita LNG complex, which, at a cost of $3.8bn, represents the largest single investment in Peruvian history. Inaugurated in June 2010, Pampa Melchorita, located 170 km south of Lima, is South America’s first LNG complex. The single-train facility has a capacity to produce 4.4m tonnes of LNG per year, or 620 mcfd, and is operated by Perú LNG, a consortium of Hunt Oil Company (50%), SK Energy, Repsol YPF (20%) and Marubeni (10%). Financing for the project was provided primarily by Perú LNG, which put up $2.25bn, with the remaining $1.55bn coming from an assortment of loans, including $800m from the Inter-American Development Bank and $300m from the International Finance Corporation. When complete, the facility is expected to bring in over $300m in exports annually.

GAS PIPELINES: Camisea’s remote location in the Amazon is separated from Peru’s developed western coast by the Andes Mountains. To transport natural gas from Camisea to the coastal port of Pisco and the capital Lima, the first pipeline to emerge from Camisea, known as Transportadora de Gas del Perú (TGP), was constructed at a cost of more than $1bn. TGP, built as part of a downstream agreement with the Camisea consortium, consists of a 714-km natural gas pipeline and a 540-km liquid gas pipeline. The TGP pipeline, which supplies several thermoelectric power plants south of Lima in the town of Chilca, plans to double its current capacity of 450 mcfd to 900 mcfd in 2012. A second 1085-km pipeline ferrying gas to the southern coast is being developed by Peruvian firm Kuntur Transportadora de Gas and Brazil’s Odebrecht. Its cost could soar above $2bn and the new pipeline will supply gas for exports, adding further thermoelectric generation capacity in the south and potentially be the supply line of the prospective petrochemicals plant.

ROYALTY NEGOTIATIONS: The opening of the $3.8bn LNG terminal in Pampa Melchorita in June 2010 saw Peru converted into a gas-exporting nation, which resulted in widespread protests over the export of natural gas, pushing former President Alan García’s government to enter into negotiations with the Camisea consortium. These talks were on and off throughout the whole of 2011.

The government would like to ensure supply to the local market as well as guarantee that royalties paid on gas for domestic use are never more than those paid on exported natural gas. To ensure local supply, the government would like to revert Block 88 once again to being reserved for the domestic market, one of President Ollanta Humala’s campaign promises. The Camisea consortium insists that it is under no legal obligation to renegotiate legally valid contracts before contractually agreed dates. At the crux of the dilemma is Repsol’s agreement with the Mexican government to begin exporting LNG in early 2012, paying royalties reported as being significantly less than that on natural gas for internal use. At the time of writing negotiations were still ongoing.

Camisea represents the largest energy project in the history of Peru, and as such its importance to the national economy cannot be overstated. It has added much-needed generating capacity to the national electric grid at a time when rising demand was threatening the outstrip supply. It has created tens of thousands of jobs, attracted billions of dollars of foreign direct investment and will continue filling government coffers for years. It may even result in the creation of a new industry. Perhaps most importantly, its discovery has led to an uptick in exploration that may yet yield another major find. And although debate over where the country’s natural gas is best served will continue for months if not years, few, if any, will dispute its significance.