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Natural gas propels hydrocarbons industry to new heights

Article - February 9, 2016

Following a decade of rapid expansion, Peru’s hydrocarbons industry is perfectly positioned to benefit from the historic slump in oil prices


A huge influx of investment has transformed Peru’s hydro-carbons sector from an industry in decline into a major contributor to economic growth over the past decade.

By 2016, oil and gas exports are set to yield $6.61billion a year – and the industry already generates nearly 9% of the country’s tax revenue from commercial activities.

Additionally, the booming natural gas industry has helped create a wealth of new opportunities in the country, while also allowing it to diversify away from contaminating sources of energy like oil.

Now, with global oil prices at historic lows, the president of the Peruvian Society of Hydrocarbons (SPH), Beatriz Merino, has said this is the perfect time to invest in the sector.

“We are at a time of opportunities,” said Ms. Merino. “Whoever wants to invest in the hydrocarbons industry must look at Peru with interest.”

“There have been first-class American companies that have been here and now, due to the fall in oil prices, there are American hedge funds that are investing in these oil companies,” she added.

“I think that we possess the values that a North American investor looks for: stability, clear and transparent rules of the game and protection of their investment.”

Domestic demand for gas has risen sharply in recent years, driven by government incentives, economic growth and a growing number of gas-fired electricity plants.

But the construction of a new gas field near the Camisea River has meant the country can easily keep up with demand, and has even been producing an exportable surplus since 2010.

The facility opened in 2004 and sits on an estimated 13.4 trillion cubic feet of gas and 482 million barrels of natural gas liquids.

“A year with growth of nearly 10% and having been one of the countries that best weathered the 2008 crisis would not have been possible if there had been no Camisea,” said David Lemor, Corporate Manager at Peru LNG.

“It has given the country competitiveness, compared to other countries in the region which competed to attract investment in the mining and hydrocarbons sectors.”

Peru LNG’s General Manager Igor Salazar said the Camisea Project has been a major engine for growth in the country over the past 10 years.

“In the 90s the country had a cleaner, more balanced economy without subsidies,” he said.

“In 2004 the world economy began to grow, after the Asian crisis.

“In Peru, we took advantage of the fact that we were a stable country to attract investment, mainly in the mining sector, which favored development in the past 10 years.

“But there was a fundamental factor, which was the development of Camisea – Camisea gave the market a cheap source of energy, especially given that there was an oil crisis in 2005, and it ended up costing $150 per barrel.”

“I’d like to add that this energy is more environmentally friendly, it has replaced polluting fuels,” said Mr. Lemor.

“On average, between 2003 and 2013, it has contributed 6% of the total country’s collection and in these terms it has grown 25%,” Ms. Merino said, speaking about the Camisea Project.

“This increase is also represented in the royalties, which are 10 times higher than the ones coming from the mining sector as rates are higher in our sector.”

Peru was the first country in Latin America to become a producer of hydrocarbons, with its first oil well drilled in 1863.

But for many years government policy and environmental concerns held back production – which peaked at slightly more than 200,000 barrels per day in 1982.

“Peru has succeeded in attracting oil and gas companies and top-rated international projects, but still 65% of the hydrocarbon basin remains unexplored – not even getting to produce 60,000 barrels per day,” explained Ms. Merino.

“Neighboring countries, such as Ecuador, reach around a million barrels per day.

“I think we have fallen into the trap of endless and inexhaustible red tape and we have lost the opportunity of oil being above $100 a barrel.

“While in neighboring countries with new findings of oil fields extracting oil would have taken around four years, in our country that could easily take 17.”

She added: “That is why today, as oil is around $60 a barrel, Peru has the opportunity to redesign its whole system of procedures and permissions to make it intelligent, just, flexible, executable and highly competitive at the international level, while also taking into account the protection of the environment and indigenous peoples.

“The lesson is that we should take advantage of this crisis to redesign Peru towards energy autonomy and security for the next five years.”

Investment in the country’s hydrocarbons sector increased from $20million in 1990 to $4.3billion in 1997. At the same time, the number of areas under operation went from one million to 23 million hectares.
This rapid increase in activity coincided with the arrival of political and economic stability in the country.

“Before the 90s Peru had an erratic economy, changing from one government to another, with breaks in the democratic process,” explained Mr. Lemor.

“In the 90s there was order in the country, we became part of the international community again, and there was a first wave of structural State reforms, which started to make Peru an investment destination.”

He continued: “In the 2000s, there was the wave of international treaty negotiations, which further strengthened the conditions of stability and predictability of the Peruvian economy, which encouraged more investment.”

“The Peru LNG project, the largest private investment (in the country), was a signal to the world that Peru is an attractive stable country for investors, with the support of world-class international foreign investment”

Igor Salazar, General Manager of Peru LNG

Around this time, the country began to shift its attention towards natural gas. While Peru had previously produced large quantities of oil, gas had never been considered desirable – and large reserves remained untapped.

Peru opened South America’s first Liquefied Natural Gas (LNG) plant in 2010, and its increased natural gas output attracted further investment in other sectors of the economy.

“We have been the catalyst for major investments in the country and we want to set an example regarding operational environmental and social management,” said Mr. Salazar.

“During these five years, we have proved to international clients we are a reliable energy source.”

This development has driven Peru’s economic growth in recent years, stimulating the country’s entire economy.

“The Peru LNG project, the largest private investment, was a signal to the world that Peru is an attractive stable country for investors, with the support of world-class international foreign investment,” said Mr. Lemor.

“This has generated a stream of investments in other sectors as well, not only hydrocarbons.”

But Ms. Merino argued that more can and should be done to grow the country’s hydrocarbons sector, and ensure Peru remains strong and prosperous in the years to come.

“The hydrocarbons industry contributes nearly 9% of the tax revenue from commercial activities, and in general terms, from 100 new soles that the tax administration collects, six come from this activity”

Beatriz Merino, President of Sociedad Peruana de Hidrocarburos (SPH)

“The importance of the contribution of this industry to the national economy should be reflected in the government institutions,” she said.

“Currently, the hydrocarbons sector is represented by a National Direction, which is at the same time inside a Vice Ministry inside the Ministry of Energy and Mines, which in my opinion is a flaw that the Peruvian government needs to fix.

“It would be convenient if this government, before it finishes its term, left as a legacy at least the creation of a Vice Ministry of Hydrocarbons, providing the sector with a stature in line with its contribution to the national economy.”

She added: “I think that Peru should address this industry with a comprehensive reform, starting by giving the national public policy of hydrocarbons the necessary priority inside the country’s energy policy.”

The huge level of investment Peru’s oil and gas sector has enjoyed in recent years has helped the hydrocarbons sector grow into a major contributor to economic growth in the country.

But despite the transformative effect the industry has had on the country, the majority of its hydrocarbon basin still remains untapped.

Peru has 18 sedimentary basins with hydrocarbon exploration potential. However, only three of them have been exploited to date.

Utilizing this vast store of natural resources could help Peru secure strong economic growth for many years to come – something President and General Manager of Hunt Oil Peru, Barbara Bruce, is keen to encourage.

“Peru is still attractive because it is still growing,” she said.

“To be competitive, it has to look outside – otherwise it will not attract investment in the hydrocarbon sector.”

She added: “It was clear for Hunt Oil that we are guests and we really appreciate being accepted because the opportunity that Peru has given us is huge.”

She called on the government to allow for further exploration in the region, so that new gas fields can be developed.

“The only big gas supply is Camisea and due to the exploration restrictions and the lack of incentive to invest in explorations, mainly in the surroundings of Camisea, we cannot guarantee big fields in the future,” she said.

Mr. Salazar also argued that the country needs to do more to incentivize the development of new oil and gas fields.

“The big challenge we are facing is that the State, the companies, the communities may have a fluid conversation and confidence, which will allow Peru to attract investment,” he said.

“The resources are there, but we have the problem that sometimes we cannot make explorations.

“I think the issue of how to connect the three actors is what is missing at present.”

Ms. Bruce acknowledged that the low price of oil has had an impact on the profitability of certain oil and gas fields in the region – such as Lot 152, an area in the north of the country almost bordering Ecuador, which no companies are currently interested in exploiting.

But she argued that there’s no reason these empty lots shouldn’t become profitable again in the future.

“Fields never die, we have seen the price going up and the fields revive,” she said.

“When the price falls, the fields sleep but those which are already producing undergo ups and downs but they do not disappear.  

“They may dry up but if the price is correct, that last drop which remains there because of the low price is also valuable at a better price.”

She added: “The same happens with the fields located in the forest.

“They are also valuable, and proper planning must have been carried out as regards the following areas: environmental, social, operational and tech-nical transference.”

Mr. Lemor stressed the importance of protecting Peru’s unique habitats and ecosystems when exploring new opportunities in the country – and touched on some of the work Peru LNG does to minimize the impact their operations have on the environment.  

“We have very high corporate social responsibility and environmental parameters and one of our auditors, who has helped us a lot with our project, has been with the Smithsonian Institute,” he said.

“We are currently carrying out a biodiversity monitoring project together, thanks to which new species have been found.

“There are also other important American institutions supervising us.

“Both Camisea and Peru LNG are good examples in Peruvian investment of how things can be done well in connection to society and the environment.”

Ms. Merino went even further, and argued that companies have a moral responsibility to consider the environment when expanding their operations.

“Something that I quickly learnt in this industry is that environmental degradation is a human disgrace and that the protection that we owe to the planet is a moral mandate,” she said.

“We have seen that it is possible to work with transparency and communication. We’ve brought the know-how and the best-practices (and) worked on the environmental area, from Peru LNG to Lot 76 analyzing the biodiversity, and the protection that the area needs”

Barbara Bruce, President and General Manager of Hunt Oil Peru

“All of us have the obligation to take care of our home, to defend it and keep it well for the ones that will come after us.”

But she concluded that the huge wealth the hydrocarbons sector brings to the country outweighs the risks – and easily justifies its commitment to investing in the industry in the future.

“No industry is immune to accidents, but the commitment is there,” she said.

“I oppose the positions that hold that the industry should be kept away from this country, as those benefits remain out of our system and do not reach the most vulnerable, making their isolation and poverty a permanent thing.”