Peru Oil: Mixed Outlook

Beatriz Merino, president of Sociedad Peruana de Hidrocarburos. (Photo: SPH)

Can Peru double its production of hydrocarbons?


Inter-American Dialogue

Sixteen foreign and domestic energy companies operating in Peru launched a new trade group last month. The Sociedad Peruana de Hidrocarburos, led by former Prime Minister Beatriz Merino, says that existing government regulations are stifling investment and holding back production. The group has set goals for doubling hydrocarbon output and "achieving energy independence," among others. Is Peru's government holding back the country's energy sector? Why haven't businesses operating there been performing better to date? What specific changes would deliver the best results? How is Peru's situation different from other countries trying to develop energy resources? 

R. Evan Ellis, associate professor at the Center for Hemispheric Defense Studies in Washington: 
Although obtaining licenses to produce oil in Peru is hampered by delays and uncertainty, the industry is a success story. The new Sociedad Peruana de Hidrocarburos argues for legitimately needed reforms by exaggerating the problem. It rightly notes that 1980s oil production was higher than today, since the industry collapsed in the 1980s under state oil company PetroPeru; yet with the 1993 privatization and 1989 reforms, the industry began to turn around, with sustained growth in both oil and gas production since 2004. Oil production jumped more than 10 percent last year, and by 2021, Peru could become a net exporter, producing over 500,000 barrels per day. Moreover, the 20 years required to develop the Camisea gasfields masks Peru's leadership in other areas. In 2010, Peru became the first Latin American country to export LNG, and has advanced in shale gas as well. Peru's stable contractual environment has survived the transition from Alan García to Ollanta Humala, and investors have committed more than $20 billion for coming years. Nonetheless, both investors and regulators should proceed with caution. The major known petroleum deposits are in environmentally sensitive areas, highlighted by the environment minister's recent declaration of an 'emergency' in the northern Amazon. Moreover, Peru's concept of surface versus 'subsurface' rights repeatedly creates problems with those who live on the land. Recent violent protests in Bagua and Cajamarca over mining should remind the new hydrocarbons group that lobbying the government to get licenses faster may backfire if the operations are not politically, as well as environmentally, sustainable. 

Jeremy Martin, director of the energy program at the Institute of the Americas: For years, a simmering undercurrent of social unrest in Peru has threatened investment and economic development, particularly in natural resources. Rural, and in many cases indigenous, populations in the Amazon and Andean highlands assert that they have failed to see the windfall from major projects and, worse, they must bear the environmental brunt of what are largely extractive industries. In September 2011, President Humala enacted the prior consultation law for indigenous or native peoples, a law intended to improve project and local community interaction and consultation. However, even with those measures, myriad energy and mining projects have faced an increasingly hostile, even violent, opposition. At the same time, Peru's natural gas sector is a regional success story. Natural gas has completely altered Peru's energy outlook. Today, natural gas accounts for just over 20 percent of the Peruvian energy matrix and is forecast to comprise more than one-third by 2030. These trends have clear and direct implications for the nation's natural gas industry. Massive investment in pipelines and distribution networks, as well as the upstream that is required to satisfy Peru's growing needs. Therefore, both the government and industry must continue to manage local indigenous and environmental opposition in order to move desperately needed infrastructure projects forward. Indeed, how to balance these factors is severely testing the Humala government and proving the old adage that it is easier to be in opposition than to govern. The creation of the new hydrocarbons association should be interpreted as an important effort to further dialogue on many of these key issues-and by extension to sustain the upward trajectory of Peru's economy. 

César Gutiérrez, director of in Lima and former chairman of state oil company PetroPeru: The rhetoric of President Ollanta Humala's government regarding the energy sector is prolific and promising. But it is only talk, as there is a shameful lack of clear ideas and concrete action. This applies to all forms of hydrocarbons and the power sector as well. There are four main underlying problems: ignorance, over-eagerness to make announcements about billion-dollar investments, cumbersome environmental procedures and a lack of authority to face the opposition of organized social groups. Ignorance is found at the highest levels, as there is no clear vision about the true possibilities that Peru has in its energy sector. Nor is there the capacity to issue specific policy measures that favor investment. With regard to announcements about projects, there is immense irresponsibility as projects are touted even though they are economically and financially unviable. With regard to environmental procedures, they are complex, cause delays of 18 to 24 months and increase project costs. To this is added the resistance of organized groups that oppose extractive industries, purportedly in the name of the environment, through pressuring the media and social mobilization that many times results in violence. This is happening in a country in which the government is afraid to exercise its authority. The solution lies in relieving those in public office from their duties and replacing them with others who have knowledge and experience. Otherwise, the situation will only worsen.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor

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