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with Alejandro Segret, General Manager, Kuntur

23.02.2011 / Energyboardroom

As the person in charge of carrying out the transportation side of Peru’s turnkey project – the Camisea Pipeline from 2000 to 2005 – what lessons have you learned then that you’re now applying on the South Andean Pipeline, a project of even greater technical and economic magnitude?

The main lesson I learned with the Camisea pipeline was that, besides all the technical and environmental challenges, the priority to have a successful infrastructure project in Peru is its integration with the local communities; the social aspects have to be the pillar of any important project in Peru. If you don’t succeed on it you will not have a project at all. There is no coincidence in the fact that the first person we hired when Kuntur was established in 2008 was the social manager from Camisea’s project.

As the South Andean Pipeline will be 1085km long, it will cross several different communities with different cultures and languages, from the Machiguenga people in the Amazon, to the Quechuas and Aymaras in the Altiplano, and the costal populations, not to mention the gigantic geographic changes along its route. At this stage of the project, Kuntur has performed more than 2000 workshops with the local communities since 2008, some of them with the help of translators. On total we contacted more than 40.000 people throughout the project. As well, we performed 284 workshops and 15 public hearings with local authorities and communities along the project, to present the environmental impact assessment as required by law.

No matter how complex the engineering and the construction side of the South Andean Pipeline project might be, no matter how steep the slopes of the mountains are, or how many river crossings it has, it doesn’t compare to the amount of effort we will invest in our relations with our social environment.

Since its official launch in October 2008, the South Andean Pipeline has suffered delays on its timetable. Now that you have given a guarantee of around $70 million to the Peruvian State, have you overcome all the license hurdles? If so, what is Kuntur’s current timeframe for the finalization of the project?

Most of the delays were linked to natural related issues, for instance last year’s floods in Cusco had an impact on our field works. Kuntur has already complied with all requirements under the concession contract; it presented the risk study; the design manual; the tariff scheme, the land-owners survey; and we finally presented the environmental impact assessment. In sum, we complied with all milestones along the concession contract. The last requirement given was the environmental impact assessment; once Kuntur gets its approval we will present the final schedule for the whole project. But we are confident the project will be finalized on 2016 the latest.

Of course the project is linked to the existence of enough natural gas reserves to supply its demand. By now Kuntur had expected to have that clear enough to start at full speed with the construction project, but we are still waiting for Petrobras and other players to unveil the amount of reserves available. What we don’t have any doubt is that reserves are going to be enough.

The South Andean Pipeline is a major project that will transport the necessary natural gas to make viable the construction of a petrochemical cluster, thermoelectric power generation and large-scale natural gas consumers, not to mention the opportunity brought to smaller local consumers and eventually exports if there are available reserves. What we have clear is that the local market will come first and then others will come after.

Due to the lack of information on the exact amount of reserves available, we could not start at full speed. Even so, we expect to start by April this year with the land acquisition and archeological permits. This is important because, for instance, in Camisea we discovered exactly 1000 archeological sites, of which we avoided 902 and then had to unbury 98 that could not be diverted.

The South Andean Pipeline is expected to be even more challenging than Camisea in regards of archeological sites. This is why the second team we hired was the archeological one.

Last year Kuntur more than doubled the magnitude of the pipeline, which will now also transport liquids from Petrobras’ Block 58 and 57, increasing the expected investments up to $3 billion. Could you highlight the major changes the project has gone through and the reasons behind them?

At the beginning the South Andean Pipeline was conceived as a natural gas transportation system only, and now it has both gas and liquids transportation systems. This means the project now involves the development of a petrochemical cluster and a LNG plant which naturally required an increase in the amount of necessary investments. As a result, the projected figures went from around $1.3 billion to $2.5 – $3 billion. Naturally the constructor thinks it’s more, but we have yet to conclude the EPC negotiation and there is a long way to go.

Odebrecht has the purchase option of 51%, though they didn’t exercise it yet. A project of this magnitude needs many partners, and the consortium will probably have more than four players. Sooner or later it will integrate the upstream, downstream and transportation companies, being a scheme very similar to the one we developed for the Camisea project. If you keep in mind all investments included in order to make the South Andean Pipeline project reality, from upstream to downstream, we expect total investments of around $26 billion. This is a huge amount of money and it requires tremendous strength on the financial side.

How will you attract these investors while decreasing the financial risks and costs in a project where basic things such as the supply and demand are not 100% given?

Attract investors is the easy part, but to decrease the risks and financial costs takes time. At the moment we need to wait for Petrobras to finish the drilling works they are doing. We also have promising blocks throughout the route of the South Andean Pipeline (for example Block 76, Block Fitzcarrald, and the Candamo1X well, which was drilled by Mobil). Kuntur still has a lot to talk with all these players and define the final diameter of the pipeline. So far the project is tailor-made to Petrobras’ fields, but we have to take into consideration all blocks along the project. Perupetro has already bid new concessions in the south of Peru, and Bolivia is considering integrating their pipeline system to Peru’s, giving them an extremely necessary gate to the Pacific Ocean. Kuntur is talking with YPFB to figure out if we have the opportunity to integrate Bolivia and Peru. In 2003 we held a meeting in Peru with Argentina, Brazil, Uruguay, Bolivia, Chile and Peru to discuss how to integrate their national natural gas systems and energy markets, creating some swap mechanism through the region.

I am now insisting on this potential and we have started conversations with YPFB. Both sides are very optimistic about the potential of this integration, and this has to be accounted in the final design of the project. We still have time to do that because it would only imply an increase in the diameter and that’s a relatively simple task.

One of the risks for Peru today is restraining the growth of its economy due to a slow development of its energy sector, and this is why we have to work with the Government in order to avoid the uncomfortable situation in which Peru is right now where the demand exceeds the supply of natural gas in Lima and other regions. The national government is doing its homework and I’m confident that they will be able to maintain their current growth in the medium and long-term.

The south of Peru specifically has a huge potential to grow. Arequipa and Cusco are the second and the fourth cities of the country. Arequipa is an industrial city with a huge hidden demand that will explode once we have the pipeline in operation. In the case of the Camisea Pipeline, when we forecasted the demand we were quite afraid about not finding a market for natural gas at all. However, the demand we were expecting for 2020 was reached in 2009. In the beginning of the project big companies didn’t want to sign any contracts, they didn’t understand the benefits of using natural gas and home owners close to the pipeline route though their houses would lose value, the opposite happened.
We are now expecting to replicate this success in the South Andean Pipeline, where you also have the inter-oceanic highway that goes from the coast of Peru to Brazil. If you sum up these major projects with gas facilities, mining, electricity, and so on, Peru will grow in the next 15 years at rates that could be even greater than the ones witnessed today.

Kuntur will take natural gas to strategic regions close to the border of Bolivia and Chile, energetically and logistically linking two of the major cities of the country, transforming these regions in a growth magnet for the whole of Peru.

Strategically, the South Andean Pipeline also brings great value to Peru, diminishing its dependence on only one transportation system that supplies with natural gas to thermoelectric power plants that account for roughly 40% of the electricity generated in the country, and only one transmission line to offset the deficit of power generation in the South. Right now Peru is transferring from Lima to the South almost 400MW of energy, this is a huge amount of energy depending in only one transmission line and one pipeline.

What we are doing is giving more reliability to the Peruvian electric energy system and allowing the relocation of some of Peru’s power generation through thermoelectric plants. Also the country can hedge itself from the risks of overdependence on hydraulic power, because in Peru you don’t have enough dams. For all those reasons this project is vital from a strategic point of view for Peru.

On a personal note, what advantages the fact that you are an Argentinean might bring to your task of guiding a project that involves partners from Brazil, Peru, USA and the world over?

The only advantage of being an Argentinean is our long-dated know-how in the natural gas market. I must say that, after so many years in Peru, I am kind of half Argentinean half Peruvian and I love this country and its people. The fact that so many prominent Argentinean companies know the gas market very well allow us to talk with the main international competitors from Russia, USA or Saudi Arabia in equal terms. We know the industry and we have been in Peru before. Of course the major advantage we have is that our team is pretty much the same that did the Camisea Pipeline in the beginning of the decade. Kuntur has all the experience necessary to develop the South Andean Pipeline and we know what to expect. When we transfer that knowledge to the potential partners they will feel very secure of our capabilities.
Another thing that greatly facilitates Kuntur’s job is that Peru is a very stable and serious country in the region. As a result, Peru has been growing constantly since the early 1990s. In the next elections all candidates prize the economic stability and want to give continuity to the main economic policies of the previous governments.

When you look towards the future, especially the next four to five years when the South Andean Pipeline shall be finalized, what are your main ambitions and expectations for Kuntur and the South Andean Pipeline project?

Being realistic, the South Andean Pipeline will be concluded around 2015-2016, because we have to integrate the petrochemical pole, the LNG plant and the upcoming upstream fields, so it doesn’t make sense to accelerate the investments and then sit on the assets. Regarding the existence of reserves, I don’t have any doubts that Peru is a rich country in natural gas – the issue is not if, but when. My only doubt about the timeframe is if we will start building by the end of this year or at the begging of next. The doubts are now centered pretty much on the diameter of the pipe. I hope the diameter will be enough to attend the supply of gas from all the adjacent fields, which are expected to enter production in about eight years; the pipe itself will be ready in five. Kuntur has to take that into consideration and it is also the role of the government to facilitate and be involved in the energy market, at least temporally, so that such strategic projects can give Peru the energy security it so urgently needs.

What is your final message to both the private and the public stakeholders involved in Peru’s major infrastructure project?

We have in our hands a project that represents a huge opportunity for both the private and the public sectors. It involves the planning of the state and private players sitting at the table and determining the strategy of growth not only of Peru, but the entire region – the integration with Bolivia will impact countries like Brazil, Argentina, maybe even Chile. The South Andean Pipeline also opens a huge opportunity to come and invest in the south of Peru because this region is about to go through a major economic boom. So I call both the private and public community to look at the opportunities opened by the South Andean Pipeline and to join forces with us to capitalize on the great economic and social potential the South of Peru offers to investors.



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