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Interview

with Guillermo Ferreyros, Vice President, Sociedad Nacional de Mineria Petroleo y Energia (SNMPE)

04.03.2011 / Energyboardroom

Since the early 1990s Peru has become a net importer of hydrocarbons, a fact that certainly helped its policy-makers to change attitudes and incentivize private investments. How efficient have these market-friendly reforms been in reverting Peru’s energy deficit?

The changes in the last two decades in the Peruvian oil and gas industry, and for that matter in the Peruvian economy as a whole, have been drastic. Once the previous inward-looking economic model showed its chronic problems, Peru decided to open the strategic sectors of its economy to private investors.
The end of Petroperu’s monopoly and the privatization of important segments of the oil and gas value-chain brought some initial transformations, but after decades of isolation, it was not easy for Peru to attract investors. As Peru kept improving its economic fundamentals and continued increasing its legal stability, investors started looking for opportunities into the country. This was helped by the increased hostile environment in some important oil and gas producing countries, especially in Latin America, leaving Peru as an interesting and fast-growing exception. As a result, Peru began to stand among those few investor-friendly markets with a large and still unexplored potential.
As a matter of fact, Maple was the first international company to acquire two hydrocarbon concession agreements with Perupetro and one refinery lease agreement with Petroperu in 1994 under the new Hydrocarbons Law. This was an important milestone because Peru had gone years without any important discoveries and foreign investment. The last significant discovery was Camisea in 1986, not because there were not hydrocarbons to be found, but because there were no investors looking for it.
Now things have completely changed. Perupetro has celebrated 89 licensing contracts, followed by last year’s 14 blocks awarded – which alone are expected to bring $700 million in new exploratory investments into Peru. This only became possible due to two decades of continued and persistent progress in making Peru a stable investor-friendly nation. Needless to say, all these investments will invariably bring more energy supply and security to the Peruvian people and economy.

If economists’ predictions prove right and Peru keeps on growing above 6% in the next four to five years, its energy needs will grow even faster. Will the current E&P and infrastructure projects in Peru be enough to fulfill this fast-growing demand? What are the main projects in the pipeline that could bridge this gap?

Naturally Peru’s current economic growth brings higher energy demand. This year alone our hydrocarbons consumption grew at double digits and the natural gas consumption in 2009 was at the level expected for 2016
In order to supply all this energy demand, Peru managed to attract grand investments, such as the $3.8 billion Melchorita LNG plant – Peru’s highest infrastructure investment ever and the only exporting LNG terminal in South America’s Pacific coast. Until 2016 this project alone will drive more than $7.5 billion to the country. It’s thanks to Melchorita LNG Plant the trade balance will be reversed into positive results the next years.
In the upstream front, major discoveries have been recently made, and more are expected to be released soon. Companies such as Pluspetrol, Hunt Oil, Petrobras, Repsol, Savia, Maple and Perenco are actively working on the exploration of their existing blocks and the production of natural gas and oil will surely keep pace with Peru’s fast growing economy.

Last year Perupetro made a very successful bidding round of exploration areas that – thanks a great deal to Sociedad Nacional de Minería, Petróleo y Energía (SNMPE) members’ active participation – is expected to attract more than US700 million in investments. What’s your assessment of Peru’s current bidding-system and what can still be improved?

The bidding-system has improved significantly in recent years. At first all you needed was to come to Perupetro and present your interests in a specific exploration area. Now the system is much more open, transparent and competitive.
However, there is always room for improvement. For instance, Peru has a permit system which requeriments of information take periods of 6 or more months and also the evaluation takes similar periods, despite the system of other countries that are more expeditive.
To give you a personal example of the hurdles this model brings, at Maple we decided to purchase a drilling rig rather than to lease one because we didn’t know when the studies were going to be approved and you always need to know in advance in order to have a drilling company working for you. This is a big challenge for E&P companies. So even though the bidding system is far better than what it was until recently, the following steps after the blocks are acquired still pose some problems.

The Camisea Project – the flagship project of the Peruvian oil and gas industry in the last two decades – is now facing increased criticism over its exports prices up to a point were the stakeholders were encouraged to renegotiate prices and conditions with the government. How this might jeopardize Peru’s ambition of becoming a safe investment hub in the region?

According to the law, the parts that sign a contract are free to negotiate any modifications they agree..
Having said that, there is political pressure applied to all players involved in the negotiations, even though the companies involved don’t have the obligation to.
I believe this creates some discomfort among investors that might perceive the government as unwilling to respect the contracts agreed due to political circumstances. But, again, as far as we are concerned, no measures have been taken in such regards.

When Focus Reports covered traditional mining markets such as Australia, India and Brazil, it was interesting to witness how local mining players have expanded their business into oil and gas and how they gained international leverage. What is it missing for Peruvian companies to follow the same steps and become growing international players in the oil and gas industry?

In the mining sector Peru has some internationally competitive companies such as Buenaventura, and in the O&G sectors we had companies such as Graña y Montero Petrolera, which migrated from construction to oil and gas services, and more recently entered into E&P. Besides, Peru has promising service providers such as the Compañia Consultora de Petroleo, amongst others.
True, Peru still lacks international oil and gas companies, but you have to bear in mind that in the decades previous to Peru’s market liberalization two factors determined this fate: Petroperu had a heavy-weigh and monopolistic position in the market, crowding-out any potential competitor in the industry, and Peru’s devastating economic environment didn’t allow most companies to grow and develop as internationally competitive players. Reality has changed and we do expect to see some thriving Peruvian players gain relevance in the regional and international energy and mining arena.

We have seen many companies active in the Peruvian oil and gas industry who are not yet SNMPE members. How is the SNMPE working to increase its role as a broad representative body of the Peruvian oil and gas industry?

The SNMPE is the organized voice of the mining and oil and gas industry in Peru, with more than 100 years of existence. Since 1952, when for the first time the hydrocarbosn companies were accepted in the SNMPE, we have walked a long way. For now the most relevant oil and gas companies are members of the SNMPE and we count with several service providers. It is important to highlight that the oil and gas sector has gained a relevant voice inside our organization. For a second time, the actual president of SNMPE comes from the Peruvian hydrocarbon sector and the relevance of this sector is growing hand-in-hand with the growth in importance of the oil and gas industry in Peru. As I mentioned, the oil and gas industry is now responsible for Peru’s biggest infrastructure project and it is now taking part, of the mining sector, as the main source of revenues for the Peruvian State.
Regarding the services and activities we provide to our members and to the sector as a whole, the SNMPE has a vast array of activities that go much beyond the traditional representation duty of an association. We have several committees and sub-committees on topics concerning different areas such as downstream, upstream, legal issues, human resources, social concerns, communications, and so on.
The association also has activities with other stakeholders who are not our members but have shared interests, especially among the civil society. For instance, we have very successful educational tools used with teachers and their students, presenting the sector and some basic facts on the industry that are still unknown to most Peruvians. Naturally, the SNMPE is also very active in bridging the dialogue between the government and the industry, constantly meeting with the Ministry of Energy and Mines, Perupetro and other entities. Often they prefer to talk directly to us because the SNMPE doesn’t act as an independent company, we are an association.

What will be your final message to the readers of the Oil and Gas Financial Journal about the SNMPE and the opportunities waiting for them in Peru?

Peru is providing more and more opportunities to invest on the oil and gas industry all over the value-chain. Few countries in the world have a boosting national market, a widely unexplored territory and an investors-friendly environment for private players willing to capitalize on those factors. Don’t forget that Peru is an investment-grade country.
The SNMPE is trying to promote not only the economic benefits brought by the development of Peru’s oil and gas industry, we want to show how this development will bring social progress to the country and the communities directly involved in the projects. This is why the SNMPE works closely with our members and the communities involved in their projects to guarantee that the vast economic and social potential that Peru has are developed to their fullest.

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