Luis Ortigas, Former President, Perupetro: Interview

Interview: Luis Ortigas

To what extent can the country balance domestic production and demand, given the constraints of declining production?

LUIS ORTIGAS: In 2014 oil production in Peru stood at 70,000 barrels per day (bpd), an increase from 60,000 bpd in 2013. If we also take into account growth in the output of liquefied natural gas, we can see that energy production is expanding.

However, it is true that certain parts of the sector have reduced their output, mainly among private enterprises. Decreased international oil prices, which, at current operational costs, need to be near $70 per barrel for some fields to be profitable, has created a key challenge. Since there are expectations that international oil prices will recover, an uptick or even a freeze on current production levels is a decision that has a high opportunity cost.

However, this has not stopped the decline in exploration investment, which by itself requires a significant amount of financing and, therefore, higher returns than the ones offered by markets today.

What steps are being taken to ensure that electricity generation meets demand?

ORTIGAS: Based on existing installed capacity, demand is covered until 2018, with bids currently in progress to install another 1000 MW of capacity through hydroelectric power plants in the south. However, the energy mix is changing, with natural gas gaining ground every year due to its advantage in terms of price and because infrastructure takes less time to build than hydroelectric power plants.

Public authorities are also taking steps to reduce the procedures involved in constructing new plants and commencing operations, with the aim of further expanding installed power capacity. Such rules aim to clarify the maximum time that public authorities can take to approve the paperwork presented by companies. They also aim to reduce the amount of paperwork required. However, further reduction in bureaucratic procedures, which takes into account the opinion of all parties involved, may add to social unrest, since there are parts of the population that may start to feel that their voices are not being taken into consideration.

To what extent is social conflict a threat to attracting new investment, and what measures are being taken in response?

ORTIGAS: A potential rise in social conflict heightens the degree of risk of investing in Peru, raises overall costs and lowers competitiveness. To avoid the sort of conflicts that are currently affecting the industry, the government has approved the Prior Consultation Act, known as Ley de Consulta Previa, where all members of a community based near a metal-reserve field get to vote on its future after engaging in negotiations with the state. Enforcement of this law should diminish social conflict significantly, as it provides the people with a voice inside the system rather than from the outside.

What infrastructure is needed to facilitate increased natural gas and electricity exports?

ORTIGAS: Natural gas production currently stands at 400m cu feet per day, and the last findings at Lote 66 have increased our reserves considerably. This enhances our capability as a gas-exporting country.

Gasoducto Sur Peruano is scheduled to start operations in 2018 and will also facilitate large-scale exports of natural gas to Chile, as the pipeline passes close to the border and can be connected to the Chilean network. Brazil and Argentina also stand out as large potential markets, but the appropriate infrastructure still needs to be developed.

That being said, it is also important to highlight that our first priority is to satisfy the needs in the south of the country, where local demand is growing quickly.