with Gustavo Navarro, Planning and Production Manager, PETROPERU
Petroperu’s modernization is a major example of the deep transformations that the economic liberalization brought to the Peruvian economy. As two of the main responsible for this process inside Petroperu, how would you describe its main guidelines?
Miguel Celi (MC) – Petroperu as it is nowadays is a product of different cultures that matured throughout time. Our origins date back to the International Petroleum Company, a subsidiary of Esso Corporation. Then Petroperu got a purely national character after the wave of nationalizations that Peru experienced in the late 1960s, forming the Empresa Petrolera Fiscal, a company composed basically by Peruvian professionals and technical experts.
The necessity to bring innovation and create further knowledge made these two cultures mingle to create lines of work that were converted in operations in all the value-chain, from exploration to retail, including production, refining and distribution. With these work-groups, Petroperu overcame major challenges and built lasting milestones to the Peruvian oil and gas industry. For instance, the construction of the Norperuano oil pipeline to transport the production of oil discovered in an oil well drilled by Petroperu and its Peruvian workers in the 1970s changed the economy of the north of Peru and brought the country even closer to its energy self-sufficiency.
A second milestone made by the employees of Petroperu was the expansion of the national refinery complex, both La Pampilla refinery in Lima, nowadays operated by Repsol, and the Talara complex. Petroperu also started to work in the Petrochemicals sector, with the Negro y Humo plant, the fertilizers and solvents facility that was later on closed due to market changes.
However to conquer all these milestones Petroperu grew in an excessive way. It reached an amount of personnel that crossed every comparison with other similar Latin American companies. The operational costs became very high and the company was not profiting from the products it produced. This is why Petroperu had to go through a sharp downsizing process. Gustavo Navarro can tell you more about this.
In that way the Board of Directors approved to send a mission to YPF Argentina the transformation plan of this company before its privatization. I was a part of this mission, which designed the frame of Petroperu Transformation Plan.
Gustavo Navarro (GN) – In order to do so the Committee for Transformation was established, and I had the honor to participate on it. The philosophy we followed was based on the ‘four Rs’: Rationalization, Re-powering, economic-finance Regulation and Reorganization. In 1988 Petroperu was the company with highest losses in Latin America, though most of these losses were financially related, due to an unpaid debt linked to infrastructure projects financed by Japanese investors.
The ‘four Rs’ reforms were so profound that Petroperu soon became one of the most profitable organizations in Latin America. In 1993 we managed to meet ends and in 1994 Petroperu already became the most profitable company of Peru!
Most of Latin America went through similar market-driven policies that resulted, in the most successful cases, in Latin American multinationals such as Ecopetrol and Petrobras. Why Petroperu is still some steps behind such players?
MC – The main difference between Petroperu and Ecopetrol, for instance, is that our Colombian counterpart has reserves and production. During the privatization process, Petroperu lost its upstream assets, debilitating the company. Today the owner of Petroperu (the Peruvian State) should strengthen the company by giving it the means to reenter such an important activity as E&P.
Petroperu’s participation in E&P would strengthen its portfolio and secure the supply of raw products in better conditions than buying it from other companies. Nowadays Petroperu is still relatively vulnerable to market volatilities if you compare to other fully integrated Latin American companies.
Petroperu is already a non-operator in block 155. Should we expect further moves from the company towards the upstream sector?
MC – I am very positive about it. The technical capacities nowadays are very easy to acquire. In the past companies required a quite big organization to do so, but now the service companies compensate the necessities of the operative part. What companies such as Petroperu have to do is to maintain the brain, the knowledge, inside the company.
This means to have a center of high-skilled technical people able to face the challenges of new businesses and manage, in the example of upstream, reservoir engineering, geophysics, geology, and all other aspects related to these sciences. Also in downstream I believe that the people who make the companies viable are the process engineers, more than everyone else. The engineering part is important but the operative part is very easy to be contracted.
From President Alan Garcia to the common citizen, everyone in Peru reckons the lack of infrastructure as one of the major challenges faced by the country to keep on its fast-growth path. What main investments is Petroperu doing to cope with the growth of the Peruvian demand?
MC – The most important and emblematic project is the Talara refinery expansion and modernization. Today the refinery is composed by a primary unit of 65 thousand bpd, where we do the fluid catalytic cracking with vacuum unit. In terms of conversion, our facilities’ complexities range moderately. With the planned process of modernization we will go to a deep conversion stage. The company in charge of this modernization, after an open and transparent bidding, is Técnicas Reunidas from Spain, internationally recognized and with a strong presence in Asia and Middle East. The main objective of this project is to produce cleaner diesel and gasoline with higher quality and environmental standards, which currently are mostly imported into Peru.
Regarding the modernization of the Norperuano pipeline, this is one of the most complex pipeline projects worldwide. More than thirty years on this is an asset that must be modernized so that we can also transport oil with other characteristics from newer fields. We hired a conceptual engineering study to assess what kind of modernization we should do with the pipeline. Mustang Engineering, an American engineering company, advised us on the changes the pipeline must undergo in order to transport the new heavy oil fields discovered by Perenco in block 67, the additional production from block 1-AB, and the light oil discovered by Talisman in Block 64. Northern Peru has the geological complexity that gave us both light and heavy oil. As a response, Petroperu is adapting the oil pipeline to deal with these different fuels and to fully capitalize on the potential of this region.
As the major investor in Peru’s oil and gas industry, what are the main challenges that Petroperu faces to take its projects from paper to reality?
GN – Petroperu, as a state-owned company, has to go through very complex procedures that takes time – from the bidding rounds to the final approval of projects. The main challenge regarding our activities and the procedures and permits involved are the ones related to environmental issues.
The refining and port projects in the coastline are much easier to be implemented because we have very high environmental standards and the local communities have seen that. The fundamental in all this is to provide jobs to the local communities without damaging their environment. These investments will also improve the lives of people in consuming areas, since the fuels will be cleaner. For instance, after the investments previously mentioned in our refineries, the sulphur particles in fuels like diesel will be very close to the Euro V standards.
When we talk about projects in the rainforest the picture is much more complex. In the coastline people see the necessity of investment and understand the direct relation between investments, new economic opportunities, and quality of life. In the jungle these investments have a different connotation. Local communities are rooted to the earth; nature is a constant part of their lives. So they fell that companies that come to explore the ground will take something away from them. Today companies have learned to consider, in their investment plans, that the local communities are part of the stakeholders, forcing them to create necessarily on win-win approach.
Institutions such as Perupetro are very active in regulating and promoting such collaborations. But this is not easy because local communities are being influenced by two types of interests; one by well intentioned but naive groups such as NGOs financed by foreign contributors that often inculcate in these communities a complete denial to any extractive activity, regardless of whether they are carried out properly, respecting the environment and communities. In some cases, citizens that are not well informed receive information about activities carried out 30 to 40 years ago or use examples of accidents that happened in other countries to convince native communities that, if oil and gas E&P companies come to their regions, they will be poisoned and the whole environment will be destroyed.
Besides, there are other interests of groups at the margins of law that illegally exploit the rainforests’ resources. For them, it is not interesting that the State or legal companies get any close to the areas they exploit because it would make them visible, so they also convince the natives in a few places that our entrance will be bad for them.
Since last year there have been talks in the financial markets that Petroperu is willing to raise capital to finance its expansion and modernization. How are you planning to do so?
MC – Petroperu is further modernizing itself to be, above all, a transparent company and to attract investors interested in being part of our success. However, the company will first try to finance its growth through its own revenues and, eventually, go to financial markets to cover Talara refinery expansion project. The Norperuano pipeline project will be financed internally with the tariffs charged from oil producers that will benefit from it. The stock exchange can be an alternative, though the necessary permits for this operation are not yet obtained.
Human resources continue to be the pillar for the success of big and small oil and gas companies. How is Petroperu managing to attract and retain the brightest brains in an ever more competitive labor market?
GN – Petroperu has the strategy to attract many young people through student and professional internships. The company is the number one work provider of many of the professions related to our core business activities, such as petrochemical engineering, mechanical engineering, and so on. Petroperu select the candidates with the highest potential and they are maintained in the company so that Petroperu can overcome the ever greater challenges and transformations that the oil and gas industry is demanding. After all, in the end of the day these young people are the ones who will replace us in the future.