Peru's new government is undertaking a dramatic overhaul of its troubled petroleum sector.
The new administration of President Alberto Fujimori is taking bold steps to prune oil products subsidies and promote foreign investment in Peruvian upstream and downstream petroleum operations.
The steps are part of Fujimori's introduction of a far reaching economic stabilization program to lift the country out of its fiscal doldrums.
The push will stop short of privatizing state owned Petroleos del Peru. However, the state oil company stands to reap an infusion of cash that it hopes will enable it to pay its bills while building Peruvian oil, gas, and refined products output with foreign assistance.
Petroperu has experienced a number of setbacks in recent years, largely because of a cash squeeze stemming from the burden of petroleum products subsidies.
OPPORTUNITIES, PROBLEMS
Peruvian officials say the ambitious agenda offers opportunities for foreign investors in a wide array of petroleum projects under a new climate that presages slashed bureaucratic red tape and more attractive fiscal terms.
However, first on the agenda for Petroperu is a thicket of lawsuits and disputes with foreign operators and contractors that must be cleared away before much progress on cooperative ventures is forthcoming. That's essential for the company to rebuild its frayed petroleum infrastructure.
In addition, foreign participants in the revival of Peru's petroleum sector must contend with tough new environmental laws and continuing outbreaks of violence from leftist guerrillas in jungle areas that provide most of Peru's oil and gas production.
Some companies are already responding to the new climate created to attract foreign exploration and development investment, and existing operators are stepping up activity.
PROMOTING INVESTMENT
Peru will promote private foreign and local investment in all oil and gas exploration and development, said Juan Carlos Hurtado, Peru's new premier and finance minister.
Launching that effort is an invitation to private investors for immediate development of Camisea and Aguaytia gas fields.
The government intends to rebuild a technically bankrupt Petroperu and provide financing for the state company's exploration and development programs, including the possibility of joint ventures with private capital.
The government will also seek private capital to invest in refining, transportation, and marketing of oil and gas and their products, Hurtado said. The program includes promoting conservation to provide a surplus for export in the near and medium term. No details were immediately available.
Fernando Sanchez, Peru's minister of energy and mines, confirmed that effort with an invitation to private foreign and local firms to invest in refining and marketing operations that are currently reserved for the state.
There is no question of privatizing Petroperu, however, he said. Sanchez said the government is looking for technical assistance to cut production costs as part of a program to improve Petroperu's performance.
The company does not have funds for exploration and development programs, seeking instead to arrange joint ventures with private local and foreign companies.
Development of Chambira field, discovered last year in Petroperu's northern jungle Block 8, is one of the state company's priorities.
Sanchez said the government also will assess alternate energy sources such as hydropower, coal, gas, wind, solar, and biomass.
It also is reviving energy conservation programs abandoned the past 5 years when the price of fuels was heavily subsidized. This includes a program of auditing use of oil based fuels in industry.
PETROPERU'S CRUNCH
Petroperu's cash squeeze stemming from fuel price supports has hampered the state company in maintaining oil and gas production and refinery output while domestic oil demand continued to climb in recent years.
Operating companies and contractors alike have withheld or scaled back operations for delayed or disputed payments by Petroperu. Several times in 1989-90, those actions caused Peruvian oil and gas production to plunge for brief periods (OGJ, May 7, p. 43).
Production fell to 130,400 b/d last year from 188,500 b/d in 1985 largely because income that could have been spent for exploration and development was siphoned for heavy subsidies for domestic fuel prices.
Hurtado said these had cost Petroperu $1.5 billion the past 5 years.
Petroperu's fiscal woes in turn contributed to the nation's staggering economic problems when its oil trade turned from surplus to deficit.
Peru's bill for crude and products imports exceeded its oil exports revenue by $31.15 million in January-April this year. By contrast, the country had a $16.2 million surplus in oil trade during 1989.
CUTTING SUBSIDIES
A first step to resuscitate Petroperu's economic outlook was to halve crippling fuel subsidies.
The new government increased fuel prices thirty-fold Aug. 8, taking the price of 84 octane gasoline to the equivalent of $2.25/gal. One third of this goes to Petroperu, the rest to Peru's treasury with a setaside to preserve retail margins.
Sanchez said Petroperu had been receiving about 12/gal for local fuel sales, while its costs were 55-58/gal. The new price it receives is about 52/gal after taxes-as much as 58/gal for top selling 84 octane gasoline-following further devaluation of the Peruvian inti to 420,000 to the U.S. dollar Sept. 11.
At the same time, other state entities such as electric power monopoly Electroperu, municipal transit company Enatruperu, and the armed forces owe Petroperu money for fuel. The treasury is issuing tax vouchers to these companies for payment to Petroperu, which in turn will use the vouchers to pay taxes.
All other deliveries are to be made for cash.
Peru's huge jump in domestic gasoline prices slashed demand to 40,000 b/d within 2 weeks of the price jump. Gasoline sales rebounded to about 75,000-80,000 b/d in first half September. Demand had been averaging about 110,000-120,000 b/d-as much as 140,000 b/d in July with stockpiling ahead of expected price hikes in August.
With the drop in demand, Petroperu is offering 50,000 b/d of resid and gasoline for export. Petroperu says it has also stopped imports of jet fuel, kerosine, and diesel but will continue to import undisclosed volumes of LPG and light crude oil to accommodate refinery slates.
FISCAL REFORMS
A breakthrough for foreign firms in securing attractive terms for operations in Peru came with much needed fiscal reforms in the late summer and early fall.
Occidental Petroleum Corp. is receiving the free market foreign exchange rate for oil it produces in Peru under regulations approved by the Fujimori administration.
The new rules eliminate the official base rate the government used to pay for import of basic foods and medicines and the crude Oxy produces for Petroperu.
The new, free market rate was about 310,000 intis to the dollar in mid-August when Oxy obtained it, compared with the former official base rate of about 52,000 intis to the dollar. Oxy also will now pay for its imports of oil field equipment and supplies at the free market rate.
Even with the fuel subsidies slashed, Petroperu still has had to struggle to pay its debts.
PAYMENT PROBLEMS
Petroperu still is sorting out battered finances before paying its debts to suppliers.
The company estimates it needs to spend $232 million immediately on debt payment and imports of oil field equipment and supplies and maintenance just to sustain current production.
However, it is starting to meet current payments while it prepares a schedule to pay overdue debt.
Without the price hikes Petroperu would have been forced to close its doors before the end of August, company officials said.
Peru will have to settle claims with several other foreign companies before it can get backing for big development projects, Sanchez said. They include:
- Payment to Oxy of about $41 million for earlier crude deliveries in addition to payment for current production. The state company is paying Oxy $800,000/day for current deliveries until it can rebuild its finances. The price Petroperu must pay Oxy has increased as well, tracking the rise in world oil prices. Oxy now is to receive as much as $20 million/month, up from $12 million/month before the recent runup in crude prices.
- A lawsuit against Petroperu and its subsidiaries filed in Washington by American International Group (AIG) to recover $260 million in compensation, including interest and costs, paid to Enron Corp., Houston, under a political risk insurance policy for expropriation of Enron's Belco oil field assets valued at $144 million. The lawsuit is in abeyance while AIG negotiates a settlement with the new government. The government has offered to present a final proposal this month, although it will not pay cash.
- A payment of $25 million due to Cia. Petroleo El Oriente, Lima, and a German group formed by Gwerkshaft Elwerath, Deutsche Texaco AG, and Wintershall AG for takeover of Maquia oil fields in 1974.
- Settlement with Royal Dutch/Shell Group for Petroperu's unilateral cancellation of its exploration contract after Petroperu failed to reach agreement on development of Camisea gas field. The new government intends to invite Shell to participate in development, but it's not clear on what terms.
AIG SETTLEMENT
Peru has reached agreement in principle to form a joint venture between AIG of New York, state offshore oil company Petromar, and an operating company to increase production from Petromar fields.
Increased output would be used to compensate AIG for payment made to Enron for expropriation of Belco assets in December 1985. Belco previously operated the Petromar fields under a contract with Petroperu.
There are still details to be resolved on a number of subjects, including the amount of compensation.
The production increase would require added investment of about $50 million, although none of the parties agreed to put up the money. AIG, Enron, and an undisclosed operator apparently turned down a suggestion that they make the investment.
The plan is to form a joint venture in which AIG and an oil field operator would have the majority interest with Petromar as a minority partner. One option is for an operator to put up money for the investment by buying into the venture.
AIG meanwhile agreed to suspend its suit against Peru and to study the possibility of lifting its claim against Peru with the U.S. Trade Representative to eliminate preferential imports of Peruvian products.
AGUAYTIA PROJECT
Petroperu wants to annul an agreement signed in July 1988 with Mexico's state oil company Petroleos Mexicanos for a $30.7 million joint venture project to develop Aguaytia gas field in Peru's central jungle.
The project includes an 80 mile gas pipeline between Aguaytia and a processing plant at Pucallpa to yield natural gasoline, kerosine, and LPG.
The initial plan called for producing 5 MMcfd to fuel the 20,000 kw Yarinacocha power plant, Petroperu's 1,500 b/d Pucallpa refinery, and the San Juan brewery, as well as other plants in the area.
The Pemex contract was to have been financed with a $50 million government to government credit line from Mexico. However, the deal didn't go through. Reasons given at the time were outstanding Peruvian debt to Mexico and guerrilla activity in the area. Aguaytia is in the midst of a coca producing and cocaine manufacturing area.
Petroperu is looking for a new investor to develop the field and hopes to improve security in the area. Petroperu says it will resume work in the area as soon as the new regional government and the armed forces guarantee security there.
The revised project includes a $15 million investment for Aguaytia drilling and workovers. To date, Petroperu has spent $5 million on studies and preliminary work. It earlier hired Parker Drilling Co., Tulsa, to continue the work but this also was postponed.
PETROPERU'S RESTRUCTURING
Petroperu now faces a major push to restructure management, set new operating goals, and rebuild technical teams after 5 years in which fuel subsidies racked up huge losses and political appointees ousted career managers.
Petroperu says despite increases in fuel prices it is short of funds necessary to repair and maintain deteriorated facilities in oil fields and refineries.
Its first priority is to make critical repairs and maintenance to keep production at its present level of 135,000 b/d for the next 6 months. Half of its production comes from Oxy, which could increase production by about 10,000 b/d if It received regular payments.
In the next step, Petroperu will resume normal maintenance and service and rebuild stocks of spare parts. The company currently carries $20 million worth of critical parts stocks compared with $150 million worth it held 3-4 years ago. The company needs to spend as much as $12 million on equipment to return the La Pampilla refinery near Lima to normal operation. In a third phase of its restructuring, after 3-4 years, Petroperu expects to be operating at optimum conditions.
E&D JOINT VENTURES
Petroperu's new general manager, Eleodoro Mayorga, says the company wants to sort out pending business with Oxy, Mobil Oil Corp., and Edward Callan Interests (ECI), Houston, before seeking more foreign investment in upstream ventures.
Talks with Oxy, apart from outstanding payments, include tax differences and disputes over prices. Petroperu also is trying to expedite Mobil's exploration in Block 53, included in its original contract but stymied by red tape.
ECI has been unable to start exploring the Santiago basin in the northern jungle because of a missing signature from one of the previous government ministers. New officials are reviewing details before they sign. Petroperu expects to seek joint ventures to develop Chambira field, discovered in its northern jungle Block 8 more than a year ago, although details on the type of venture are still being negotiated.
It also expects to continue exploration in the central and northern jungle, where an International Development Bank financed program has been under way for the past 3 years. Once Petroperu identifies areas for its own exploration programs, it will split up Block 8 for tenders.
Petroperu does not yet have a budget under which it can plan 1991 exploration and development.
CAMISEA PROJECT
One of the company's priorities is to find a partner to develop Camisea gas/condensate field, discovered by Shell in a 1982-88 exploration campaign in the central southern jungle that cost $175 million.
The vice-minister of energy, Ricardo Gieseke, says the plan now is to seek a partner to first develop condensate reserves estimated at 650 million bbl and reinject the gas until it can be produced for sale. Petroperu estimates gas reserves at 17 tcf.
Gieseke places the project's cost at $2 billion, including upstream facilities and construction of a dual pipeline to the coast,
Camisea development was postponed in 1988 after Petroperu failed to reach agreement with Shell, mainly over financing difficulties.
Petroperu plans to approach Shell on the possibility of developing Camisea field in association with other international oil companies.
However, Petroperu sees Camisea as a long term project for which the government has to build support from all sectors of the country to avoid a renewal of political quarrels. These contributed to ending Camisea development talks between Petroperu and Shell in September 1988.
TEXAS CRUDE PLANS
Texas Crude Inc. (TCI), Houston, has requested an oil operations contract with Petroperu for Block 61 in the northern jungle.
The newly designed block includes the southeast tip of Petroperu's Block 8 and small sectors of Blocks 7, 10 immediately south of Block 8, and 57 to the southeast.
Petroperu proposes to divide Block 8 for operations contracts, keeping only producing areas for itself.
MOBIL UPDATE
Mobil has stepped up operations in Peru's central jungle with the arrival of two helicopters to provide air transport for supplies and equipment.
The helicopters are in use for a seismic survey under way by Halliburton Co.'s Geophysical Service Inc. The company had completed 211 line km by Aug. 17. Mobil is committed to complete 1,600 line km in the Huallaga basin by Mar. 12, 1992,
Mobil has 640 workers and technicians on site. Work includes surface geology studies, gravity surveys, and interpreting data from an aeromagnetic survey completed at the beginning of the year.
Mobil was unable to sign an agreement with Petroperu to exercise its option to explore Block 53 in the same area before the change of government (OGJ, Aug. 6, p. 34). However, officials say this will occur soon.
ECI PLANS
ECI called for bids on a contract for a 200 line km seismic survey in Block 50 in the Santiago basin of Peru's northern jungle on the border with Ecuador.
ECI's Peruvian subsidiary, Petromineros del Peru SA, is beginning exploration with an aeromagnetic survey after ironing out snags in the contract signed July 3 with the outgoing Garcia administration.
Petromineros signed a new contract with Petroperu under the present government Oct. 23. Petroperu said there was only one minor change in the text and that a problem had been caused by failure of the previous finance minister to ratify the executive decree required to approve oil exploration contracts.
The company expects to spud its first wildcat before the end of next year. It is committed to spend at least $32.2 million in the first 6 year exploration stage.
NEW ENVIRONMENTAL CODE
Fujimori signed Peru's new environmental code into law Sept. 7.
The law outlines cleanup obligations and pollution control for factories and mining companies. It also institutes a policy whereby environmental offenders are charged fines and penalties. Repeat offenders face jail sentences.
Oil exploration and development contracts already require companies to take basic precautions against damaging the environment, although these were not previously backed up by penalties.
The new legislation calls for environmental impact studies to be carried out on all private and public sector projects, including pipeline construction.
The code establishes environmental policy and brings together an estimated 1,200 environmental regulations covering agriculture, fishing, mining, industrial, and energy and mines sectors that failed in the past to implement environmental legislation.
Peruvian companies, in the midst of a recession following the government's austerity measures launched in August, say it now will be difficult for them to spend heavily for expensive technology to clean up the environment.
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