Camisea pull-out due to ownership rules

Following the withdrawal by Royal Dutch/Shell and Mobil Corp. from development of the giant Camisea gas fields complex in Peru, it has become clear that government rules over project ownership were behind the decision. Project operator Shell Prospecting & Development Peru (SPDP) and partner Mobil Exploration & Producing Peru Inc. failed to meet a July 15 deadline to commit to field development (OGJ, July 20, 1998, Newsletter).

July 27, 1998

5 min read

Project operator Shell Prospecting & Development Peru (SPDP) and partner Mobil Exploration & Producing Peru Inc. failed to meet a July 15 deadline to commit to field development (OGJ, July 20, 1998, Newsletter).

Shell and Mobil had planned a $2.5 billion development of Camisea area fields, after a 2-year evaluation by both and earlier exploration by Shell that have cost a total of $250 million. Plans included using gas for electric power generation and delivering gas by pipeline to Lima.

The companies had been pressing the government for participation in the distribution of the gas in Lima and/or permission to export. The government, however, has banned distribution by companies generating gas and said it is not ready to discuss potential exports until costs and prices could be defined.

Alan Hunt, general manager of SPDP said, "We are all disappointed. Over the past 2 years, we have worked hard to overcome the complex technical, environmental, and commercial challenges that would enable the Camisea project to become a reality.

"The Camisea reserves offer Peru the potential to reduce energy imports, improve the balance of payments position, reduce electricity prices, create new employment, and attract new industries to the country.

"We regret that it was not possible to resolve issues that prevent the progression of the project at the current time and the realization of the substantial benefits available.

"Shell and Mobil remain active in exploration activities in Peru and are interested in future opportunities."

SPDP said the companies sought solutions jointly with the authorities to crucial issues related to the introduction of Camisea gas into the Peruvian market, but these solutions could not be found by the July 15 deadline.

Shell and Mobil asked for a 6-month extension in May, but state regulator Perupetro SA said it considered 2 months were enough. Shell believed a short period for further study increased the risks, considering the great amount of fracturing found in Camisea reservoirs.

Peru's President Fujimori said that the development of the Camisea gas fields will not be halted and that the gas would be delivered on schedule. The president gave 2003 as the start-up date, the latest allowed by the contract signed in May 1996 by Shell and Mobil. The companies anticipated beginning deliveries to Lima by yearend 2001.

Other firms interested

Industry sources said that companies that could be interested in Camisea include Chevron Corp., Repsol SA, Coastal Corp., Elf Aquitaine, and Enron Corp.

Chevron, Repsol, Coastal, and Elf are already exploring for oil and gas in Peru, while Repsol is also the technical operator and main shareholder of Peru's La Pampilla refinery.According to reports from Argentina, a YPF SA official said the company would like to join forces with Brazilian state firm Petrobras to develop the gas fields.

One source in Peru said, "It has to be a serious situation for the government, because it may find that other companies that have indicated an interest in Camisea may well demand the same conditions as Shell."

This is the second time that Shell has pulled out of Camisea: the first was in 1988, when the Garcia administration unilaterally ended negotiations with Shell to develop the fields at an estimated cost of $1.3 billion.

At the time, Shell said it had spent $175 million on exploration leading to the gas find and claimed it had first rights to the field. After Alberto Fujimori was elected president, Shell resumed contact with the authorities for new negotiations.

The decision to pull out of Camisea follows a 2-year appraisal program during which Shell and Mobil drilled three appraisal wells. The companies completed environmental impact assessments and financed studies and planning documents by a consortium led by Bechtel Corp. that had been hired to build the gas treatment plants and pipelines.

Perupetro said that it regretted Shell-Mobil's decision and that both sides of the contracts had complied fully with contractual conditions. It added that, in recent weeks, subjects discussed with Shell-Mobil had been strictly commercial, such as distribution of gas and changes in the tariff structure for electricity, which were not included in the contract and could not be reconciled.

Demand study

Meanwhile, the Lima government committee in charge of natural gas development signed a contract on July 10 with Stone & Webster Overseas Consultants Inc., Houston, for technical studies on potential demand for Camisea gas over the next 20 years. The consultant must complete the study within 120 days.

Shell and Mobil are currently drilling a wildcat, Pagoreni X-1, on Block 75 neighboring Camisea, while Mobil is drilling a wildcat on Block 78 in the Madre de Dios basin.

Both companies have long-established commercial operations in Peru, including networks of service stations, while Mobil has a minority share in the 100,000 b/d La Pampilla refinery.