New contract on offer at prolific Peru oil block

For over a decade, proposals to partly privatise state-run oil firm Petróleos del Perú (PetroPerú) and allow it to return to upstream activities have been debated in Peru’s Congress. Following the privatisation of the oil industry in the early 1990s, the company has been restricted to refining, transporting and commercialising petroleum products. However, at the turn of the decade, the success and seemingly strong prospects of national oil companies (NOC) in neighbouring countries, such as Petrobras in Brazil, intensified calls for the firm to play a greater role in Peru’s energy industry. Additionally, in 2007 Colombian NOC Ecopetrol listed 10.1% of its stock value on the Colombia Stock Exchange and had become a vertically integrated company, competing with outside firms.

New Law

In late 2013 legislators passed a law allowing up to 49% of PetroPerú to be listed on the Lima Stock Exchange (Bolsa de Valores de Lima, BVL). For the past two years the firm has adhered to BVL’s regulations regarding publicly traded firms, supplying quarterly financial updates and informing the market of all material business developments. However, in March 2015 it announced that an initial public offering would not take place during that calendar year, with German Velasquez, the firm’s president, only stating it would take place when the company was “suitably attractive.” However, analysts believe the company will have difficulty attracting private capital while the government retains a controlling stake.

To a large extent the future attractiveness of the company depends on the successful completion of the upgrade and expansion of the Talara refinery. The $3.5bn investment is the biggest project in the company’s history, and in 2013 Law No. 30130 was passed obliging the firm to give priority to the project. The law, in the eyes of many, prevented the Peruvian company from entering upstream activities as an operator, and any movement in that direction was expected to be as a minority partner in joint ventures.

Opening Doors

In August 2015 an unexpected opportunity arose. With the 30-year production licence of Argentine firm Pluspetrol’s Block 192 set to expire, the government held an auction for which no bids were received. The block has proven and probable reserves of 204m barrels and is Peru’s most prolific oil property, although daily production has fallen from 117,000 barrels in 1979 to 12,000 barrels in 2015. Unwilling to see the pumps stop, on September 1, 2015 Perúpetro – the state regulator that awards licences and is distinct from the NOC – awarded Canadian firm Pacific Exploration & Production (Pacific E&P) a two-year contract to operate Block 192. However, in Iquitos, the capital of Loreto, protests erupted against the decision. On September 3, 2015 Congress passed a bill modifying Law No. 30130, allowing PetroPerú to operate the block.

Compromise

The decision has led to divisions in the government. Rosa María Ortiz, head of the Ministry of Energy and Mines, said passage of the bill would send “a horrible signal to investors.” Those against the measure believe PetroPerú, which has not produced oil for 20 years, lacks the technical expertise and funding to return to upstream activities. Those in favour say strategic investors could be sought to finance the project and that personnel who operated the block for Pluspetrol, many of who were hired by Pacific E&P, could be contracted by the NOC.

With little prospect of effectively vetoing the bill, President Ollanta Humala sought a compromise by modifying the legislation to make it explicit that PetroPerú would only be eligible to take over Block 192 following the expiration of Pacific E&P’s two-year contract. With elections set for April 2016, the future direction of the NOC will be a key issue for the next president. Energy nationalism has been a rallying cry for left-wing factions, but all the leading presidential candidates support some version of the pro-investment policies that Peru has followed since the 1990s.