Guía Oil & Gas 2017/2018

2017-2018 Guide that brings together key information on the hydrocarbon sector in Peru that should be considered by investors.

The Oil & gas industry in Peru has evolved from an industry in decline to a major contributor to the economic growth in Peru. From 1995 to 2014, investment in the sector increased from $147 million to $1,190 million, which means an increase of 800%. For years 2017-2018, it is expected that US$2,898 million will be invested in around 15 oil and gas projects, which represents 14.2% of all the investments to be made in 2017-2018, exceeding investments obtained in the sector in 2016 by 5%.

Among other key factors in the success of this industry is its enormous potential. Currently, Peru has a hydrocarbon potential of 10,000 million barrels of oil across the country (including both on-shore and offshore blocks). Camisea project and other new industrial opportunities around this source, such as biofuels or petrochemical industry, have also contributed to increase this potential.

This oil & gas investment guide has been structured to help investors broadly evaluate Peru’s oil and gas sector investment conditions and provide them a general updated landscape of the industry. In that sense, we have included various aspects usually taken into consideration by investors from around the world before making critical decisions on the development of new oil & gas operations.

Within this guide, we have examined a wide-range of information from a macroeconomic perspective (overview of Peru’s political structure, business environment and favorable investment promotion conditions) to the specific key indicators, regulatory requirements, growing potential and also some information regarding some topics currently discussed by experts in this field.

We have also included a description of the hydrocarbon terms and fiscal regime applicable to oil and gas companies, considering major government taxes, royalties and similar levies, as well as an overview of the customs, labor and accounting aspects that should also be taken into account when starting a business and developing oil and gas activities in Peru.

Importance of Peru’s oil and gas sector

The oil and gas sector in Peru has gone through a transformation, from an industry in decline to a major contributor to the economic growth in Peru. Historically, Peru became an importer in the late 1980s and early 1990s. The combination of a state-dominated turn in Peru’s energy sector in the 1960s (political interference such as policies that changed from government to government, refusal by various governments to grant new contracts, and fixed petroleum prices) and a lack of significant discoveries over the years, set Peru on a path of dwindling reserves. The implementation of such policies caused a decline in private investment.

Under these circumstances, the military regime decided to expropriate the International Petroleum Company and created a state-owned oil company named Petroperu, which controlled the sector for approximately 25 years. Nevertheless, their management did not result in an improvement of the sector as revenues, reserves and production started declining. For this reason, the government in force through the 90’s decided to restructure the company implementing a privatization process, ceasing Petroperu’s downstream operations, and assigning Perupetro (newly created governmental agency) the commercial faculties to negotiate and subscribe license and service contracts with investors (see more detail about Petroperu in page 72).

 As a result, Peru’s oil and gas sector became more competitive. From 1990 to 1997, investment in the sector increased from $20 million to $4.3 billion. Areas under operation hiked from 1 million to 23 million hectares in the same period. Prices were set by the market, not the State.

This growth increased significantly in 2004- 2005, when the major reserve of natural gas reserves near the Camisea River in the Amazon began producing (which now is known as the “Camisea Project”)*. From that moment on, Peru has entered into a takeoff stage, explained not only by the Camisea discovery and the geological potential, but also by the economic and political stability that it has achieved during the last years. This situation boosted the oil and gas sector, as well as the oil and gas discoveries in several locations of the country. The rising investment in Peru during the last years reflects such growth.

Due to smarter energy management, Peru began to diversify its energy use, reduce its dependence on imports, and position itself as an exporter of liquefied natural gas (LNG). Still, challenges remain, particularly as exploration and development activities show resilience in a context of low prices.

Hydrocarbon Investment (2005-2016 exploration and exploitation phase in millions of US$)

Trends in the oil and gas industry in Peru

The actual international context, in which oil prices have still slumped more than 60% of their value compared to 2014, truly puts companies a stage in which it will be necessary to produce more efficiently. But it also brings an opportunity to discuss new policies that may help to develop new projects.

In particular, this means that governments will have to step up in order to prevent negative consequences in economies which rely heavily on oil. Certainly, countries like Mexico and Colombia have taken decisions towards reducing the tax burden of oil companies. Meanwhile, Peru is looking forward following those steps, especially regarding the reduction of royalties.

In this regard, during the last months, Perupetro has began revising hydrocarbon regulations and identifying topics that could be changed in the short-term. The main goal of this reform is to provide energy security, sustainable economic growth and to improve the quality of life of the population. In this sense, the reform has been focused on redesigning and reinforcing the institutional framework in order to articulate more efficient and timely plans.

In particular, Perupetro’s reform will focus on three pillars or main topics, which are:

1. Regulatory framework
2. Reinforcement and redefinition of Perupetro’s role
3. National Plan
   

The first pillar aims toward elaborating a more competitive framework with worldwide tendencies that allows it to attract new sustainable investments, with a wide entrepreneurial, technological, social, and environmental support. This means, among other aspects, a revision of contractual terms, a regulatory update of norms and regulations, and socio-environmental license achievement.

The second pillar is focused on making or Perupetro into an active investment promoter, leading the interaction and development of sector policies, with full capacity and autonomy. This will include the institutional and organizational strengthening of Perupetro, a redefinition of the promotion process carried on by it, contractor’s support, hydrocarbons production and reservoir management.

The third pillar will aim towards the elaboration of a National Hydrocarbons E&P Plan, by establishing medium and long term production, reserves and goals.

As part of these reforms, Perupetro is also revising the current royalty framework, the contract model and the requirements related to legal, technical and financial capacity of oil and gas companies. Results of these activities are expected to be approved on the first, second and third quarter of this year (2017).

Perupetro is also planning to carry out oil bidding rounds on several on-shore and off-shore blocks during the coming years and thereby promoting investment in the Peruvian Oil & Gas sector.

The opportunity opening for Peru is important, even more so if we consider that the majority of the oil sedimentary basins have not been explored yet. Also, there are large natural gas reserves not only in the area surrounding the Camisea project, but also in other locations, such as Piura and Tumbes.