PERU FINE TUNING NEW HYDROCARBON INVESTMENT LAW

Negotiations for new oil contracts in Peru are on hold until about the end of November as the Ministry of Energy and Mines fine tunes details of the country's newest hydrocarbon law.

The new law is designed to boost private investment in Peru's struggling petroleum sector.

Companies with pending contracts affected by the delay include Repsol SA, Madrid, Santa Fe Energy Resources Inc., Houston, Grana y Montero unit GMP SA, Lima, and a combine of Olympic Oil & Gas Co., Houston, and Cia. Petrolera San Juan, Piura, Peru.

Meantime, the ministry is establishing Perupetro SA as a company under its aegis to take over Petroleos del Peru SA's (Petroperu) role of promoter, negotiator, and supervisor of the domestic petroleum industry.

In addition, the government will try again to sell Petroperu's shipping subsidiary Oct. 12.

THREE AGREEMENTS EXCEPTED?

Although Energy and Mines Minister Daniel Hokama said the new, contracts will not be signed until at least November, industry sources in Peru expect Petroperu to sign contracts with three foreign companies that have signed preliminary agreements for areas awarded them in public tenders. They are:

• Petrotech International Corp., Delaware, which is to take over Petromar SA's offshore Block Z-2.

• Sapet Development Corp., Los Angeles, a unit of China's state owned China National Petroleum Corp., which is to operate Block VII near Talara on Peru's north coast.

• Maple Gas Co., Dallas, which is to develop Aguaytia gas field and Petroperu's central jungle blocks.

Perupetro will assume responsibility for these contracts from Petroperu after the law takes effect at the end of November. Petroperu also will sign licensing agreements with Perupetro for an exploration and production contract covering its jungle Block 8 and existing northern coast production areas.

WHAT'S INVOLVED

Industry executives in Peru say the new law is very positive but expect the switch from Petroperu to Perupetro to cause confusion.

The point of the switch is for the government to avoid a conflict of interest by forcing Petroperu to compete on a equal footing with other companies in exploration and production while Perupetro negotiates and signs new licensing contracts. In essence, the new arrangement turns Petroperu into just another operating oil company in Peru while Perupetro retains a purely supervisory role over the domestic oil industry.

The main change in the new laws is the introduction of licensing contracts under which contractors will own and freely market oil and gas production for which they will pay the government a royalty. Under previous contracts, Petroperu retained ownership of production and paid contractors a fee for production.

The new law also requires Perupetro by Nov. 20 to organize and administer a database on oil and gas exploration and production. Petroperu and the ministry of energy and mines' hydrocarbons office will transfer all technical, financial, contractual, and legal information on oil E&P to Perupetro. This will allow the new company to sell data packages on specific areas where there is interest in investing in Peru's oil and gas sector.

NEW ADVANTAGES

Companies operating under earlier legislation have until Oct. 20 to decide whether to take advantage of four key factors in the new law:

• Free marketing of oil and gas production.

• Payment of taxes in cash.

• International or national arbitration.

• Guaranteed free use and availability of foreign currency.

Until now, Petroperu had first rights to buy production at a price pegged to a basket of international crude prices in order to cover the difference between domestic supply and demand. At the same time, the prospect of paying taxes in cash instead of in kind will eliminate disputes such as the one with Occidental Petroleum Corp. del Peru over the value of production received. The dispute with Oxy dragged on for months and crippled Peru's biggest source of crude production.

The new laws also lift restrictions on foreign companies operating within 50 km of other countries' borders.

Executives with foreign companies operating in Peru say Peru's recent ratification of Icsid, the international accord for settling investment disputes, is in some respects more important than the new hydrocarbon law because it establishes a mechanism for companies to go to arbitration.

The government in recent months also ratified agreements with the Multilateral Investment Guarantee Agency (Miga) and the Overseas Private Investment Corp. (OPIC).

SHIPPING UNIT PRIVATIZATION

Petrolera Transoceanica SA's committee will auction Petroperu's shipping subsidiary next week, the second such effort at a sale.

The new minimum bid is $21.25 million.

The first auction, held May 26 and featuring a $26 million minimum bid, failed to attract bidders.

However, Pedro Reategui, the privatization committee chairman, said four Greek shipping companies, two U.S. shipping companies, two Chilean fuel transport companies, a Mexican company, and two domestic shipping companies are interested in bidding this time around.

Jacq Peirot Jr. & Sons Inc., New York, the privatization committee's advisers, are offering bid documents.

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