Oil&Gas Peru 2011

PeruEnergy reportSeptember 2011

Peru Oil & Gas:The Modern Inca Gold

A s a country surrounded by mysteries and enigmas; dotted

with kilometers-wide geoglyphs only seen from the sky;

with dozens of deserts and the lush Amazon; from the

depths of the Pacific Ocean to the Andes’ 6000m heights – Peru’s

luring mystique is undeniable. For centuries, this country has enticed

opportunist explorers with tales such as the lost city of El Dorado.

Nevertheless, Peru’s new explorers are now searching for something

much more intangible and precious: energy.

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Iquitos Refinery. Courtesy of Petroperu

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As Latin America’s seventh larg-

est economy and a market of 30

million people, Peru has been the

continent’s fastest growing market

in the last five years, expanding

more than 8% in 2010. This growth

has aggravated the need for

energy resources. Since the discov-

ery of the 11 trillion cubic feet of

natural gas and 482 million barrels

of natural gas liquids in the Camisea field in 1986, Peru has increas-

ingly shifted its energy grid so that hydrocarbons play a greater role

in fueling the country. Such discoveries, together with an assertive

government plan to attract foreign capital, have boosted investor

confidence in the country as much as it has laid the ground for an

emerging Peruvian industry ready and able to study, explore, extract,

transport and market its own natural resources. While some investors

were uneasy with the election of left-wing presidential candidate

Ollanta Humala in June 2011, the majority of them are confident that

the new President will not interfere in the country’s economic policies

that have allowed for its impressive economic performance over the

last decade. Furthermore, while the rush for the new “Inca gold” has

been expeditious it definitely has not been careless.

Natural Gas: a modern Peruvian gold rushAfter two decades of market deregulation, privatization, financial

discipline and trade openness, particularly in the hydrocarbon sector,

Peru seems to be once again close to reach its self-sufficiency status

lost in the early 1990s. “One of the main objectives of Peru, as all

countries, is to have energy self-sufficiency, especially now during

times of such high volatility. The national demand is getting close to

200 bpd - right now Peru is consuming around 186 thousand bpd…

I’m confident we can supply this

demand in a few years with the

current speed of discoveries”

explains Luis Gonzalez Talledo,

director general of the General

Directorate for Hydrocarbons

(DGH), which serves as Peru’s

regulator for the oil & gas sector.

Private and public sectors alike

have taken upon themselves to

develop and exploit the country’s natural resources as efficiently

as possible to turn Peru into an energy self-sufficient nation. These

efforts have surely paid off allowing the country’s largest natural gas

reserve to be exploited and marketed to serve not only the local

market, but also those of neighboring countries and beyond. With

Latin America’s first LNG mega-terminal and suspected gas reserves

far beyond those of Camisea, Peru is ready to reap the benefits of

its new prized commodity well into the future.

The revamping of Peru’s hydrocarbon industry began in the

1990s when it was decided that the NOC, Petroperu, was too

inefficient to adequately manage the hydrocarbon demands of

the country. It was during this period that the company’s upstream

activities were sold off and

privatized while it focused on is

commercialization and distribution

activities. Parallel to this privatiza-

tion the Peruvian government

began an overhaul of the legal and

regulatory frameworks that would

become the backbone of today’s

flourishing industry. In 1993 “it was

decided to create an independent

Luis A. Gonzales Talledo, Director General of the General Directorate for Hydrocarbons (DGH)

Fig. 1: Energy mix

Before Camisea 2005 2030 Objective

7%

24%

69%

17%

27%56%

33%

33%

33%Petroleum

Renewable Energy (Hydroelectric, biofuels, wind, solar, geothermic, biomass, etc.)

Natural gas and LNG

Guillermo Ferreyros, Vice-President of the National Association for Min-ing, Petroleum and Energy (SNMPE)

Isabel Tafur Marin, General Manager of Perupetro


organization – Perupetro – solely in charge of promoting, negotiat-

ing, subscribing and supervising the license contracts between oil

and gas companies and the Peruvian State”, describes Isabel Tafur,

today’s general manager of Perupetro. That same year a new legal

regime was established as the basis to attract foreign investors with

pockets deep enough to tap into Peru’s unexplored hydrocarbon

areas. Tafur is proud to elaborate that “the hydrocarbon law gives

a lot of guarantees to investors. The signed contracts are law-

binding; they ensure tax stability and exchange rate guarantees,

as well as guarantees of remittance of foreign currencies by the

Peruvian Central Bank and tax return on investments in explora-

tion”. Furthermore, Perupetro has taken upon itself to become a

proactive agent in luring foreign capital by promoting the country’s

indefinite potential in oil capitals around the world, such as Houston

and London. This year the organization will launch a bidding round

for up to 25 exploration blocks that will push the total number of

blocks in the country beyond 100, compared to the original 21 that

existed when Perupetro was first created. “These blocks offer high

prospects for gas in the South, with

important on-going projects and

new discoveries such as the ones

from Petrobras in blocks 57 and

58” concludes Tafur.

One company the bet early on

Peru to find immense returns is

that of Argentine Pluspetrol, who

in 2000 led the consortium that

would explore the Camisea gas

fields that are the country’s hydro-

carbon pride and joy. Initially discovered in 1986 by Shell, Camisea

is estimated to contain over 11 trillion cubic feet (TCF) of natural

gas reserves and is the source of natural gas for the country’s LNG

mega-terminal, which represents Peru’s largest investment (US$

3.8 billion) into a single infrastructure project and the only terminal

of its kind in the region. Located

deep within the Amazon jungles

of Peru, the extracting, transport-

ing and distribution of Camisea’s

gas was no easy task and required

the expertise and financial back-

ing of several companies. For

the upstream, Pluspetrol joined

forces with Hunt Oil from the

USA, SK Corporation from South Gustavo Navarro Valdivia, Production & Operations Manager of Petroperu

Miguel Celi Rivera, General Manager of Petroperu

Operating in the Amazon jungle. Courtesy of Geokinetics Peru Geokinetics crew. Courtesy of Geokinetics Peru

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For information, contact us at Francisco Masias 544, 10th floor, San Isidro, Lima, Peru. Tel: + 51 1 712 3108 Email: [email protected]

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via rivers or by air”. Today Plus-

petrol is the largest hydrocarbon

producer in the country and counts

on its Peruvian operations for 70%

of its global revenue.

Camisea was symbolic for the

country in many ways as it marked

a turning point for Peru’s hydro-

carbon industry. It was because

of this and other NG discoveries,

as well as a diminishing petroleum production, that the country

decided to shift its energy matrix to focus on natural gas rather than

petroleum derivatives. Before Camisea, Peru relied on petroleum to

supply 69% of its energy needs while natural gas only represented

7% and other energy sources (hydroelectric, biofuels and renewable

sources) 24%. The aim today is to shift the country’s energy supply

to rely predominantly on natural gas and hydroelectric power, and

by 2009 NG and its liquids had already moved to become more

than 52.5% of the country’s total energy produced while petroleum

had decreased to 28.7%. In essence, NG has become the promise

Korea and Tecpetrol (owned by Techint) from Argentina, while the

transportation concession was headed by Tecgas (owned by Techint)

and also included Pluspetrol, Hunt Oil, SK Corporation, Sonatrach

and Graña y Montero. The transportation concession involved the

construction of two 540 kilometer pipelines, one for natural gas

(NG) and the other for natural gas liquids, from central Peru across

the Andes Mountains and ending at a terminal in the city of Pisco

on the Pacific coast. Additionally, the concession required that the

gas be transported and distributed to Lima and the main port-city

in the country, Callao. This required the construction of a second

714 kilometer pipeline that carries

the gas along the coast to Peru’s

capital. Roberto Ramallo, general

manager of Pluspetrol, says that

“Camisea represents for Pluspetrol

the most challenging project to

be accomplished by the company.

Logistically, the project was truly a

test because of the lack of roads

and having to transport everything Barbara Bruce, President and General Manager of Hunt Oil Peru

Roberto Ramallo, Executive Manager of Pluspetrol Peru Corporation.


of a steady energy supply to the country’s booming economy as

well as one of the most lucrative commodities comparable to the

precious metals that are also sourced from Peru’s mineral-rich earth.

Guillermo Ferreyros, vice-president of the National Association

for Mining, Petroleum and Energy (SNMPE), explains that “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.

Until 2016 this project alone will drive more than $7.5 billion to the

country. Thanks to Melchorita LNG Plant the trade balance will be

reversed into positive results in the coming years”. The colossal

project leading to the inauguration of the Melchorita LNG plant in

June 2010 was conducted by a consortium of companies known as

Peru LNG, headed by Hunt Oil with the participation of SK Energy,

Repsol and Marubeni. The world-class liquefaction plant was built

by the Chicago Bridge & Iron Company (CB&I) and has an annual

capacity of 4.4 million tons of LNG that will be exported to other

countries in the region.

While Peru’s economic and political stability of the last two

decades have allowed for the national oil & gas industry to thrive,

this growth has not come devoid of obstacles. Some of the most

often-mentioned challenges are the remoteness of Peru’s hydrocar-

bon reserves compounded by the lack of a robust local offering of

service providers that can assist the E&P companies. The fact that

oil & gas reserves are mostly located deep in the Amazon jungle

is complicated enough from a logistical point of view, but it also

involves environmental and social hurdles for companies. Douglas

Reichenbach, general manager of the Andean Region operations

of US-based Geokinetics, speaks of the difficulties his company has

Bayovar Terminal, arrival point of crude oil from the jungle


Carlos Lozano, General Manager of Wood Group Peru

faced conducting their seismic studies in Peru: “When you look at a map outlining the

blocks that were operating in Peru in November 2010 as compared to one of 2007, the

difference is simply staggering in the amount of new blocks that have been opened for

exploration. With that kind of growth of course there will be a lot of challenges, especially

when one of our priorities is to maintain the same environmental standards across all of

our projects. This is a very time-consuming process and obtaining the environmental per-

mits sometimes takes longer than the actual project. The other challenge of exploration

here in Peru is the remoteness of most of the projects

and the complex logistics that are required to carry

them out”. Geokinetics’ experience is echoed by the

majority of the industry and has highlighted the defi-

ciencies in human capital and industry experts. “If you

consider that there are 50 foreign oil companies coming

to Peru and each one has their exploration block and

each one needs personnel who are experts in the field

of environmental affairs; as such, there is a premium for

local environmental experts” says Reichenbach.

Building Peru from Oil & GasEven though Peru’s rapid economic growth, averaging at 6% for the last decade, does

not allow for wasted time, the challenges it faces to maintain this pace don’t stop once

the oil and gas reserves are found. Since most of its discoveries are on the foothills of

the Andes in the Amazon rainforest, transporting it through the mountains is a major

challenge that requires the construction of an entire infrastructural system to distribute

the energy resources of the country. Only ten years ago the local hydrocarbon indus-

try had a deep shortage of service providers to support the needs of the industry as it

expanded. Discoveries such as Camisea highlighted the magnitude of the Peru’s hydro-

carbon wealth and were the catalyst for a local oil & gas service industry to develop.

Even though the situation still has much room for improvement, Peruvian and interna-

tional companies alike have taken on the challenge and created a robust service offering

to ensure the sustainability of the industry.

At the forefront of modernizing the industry’s infrastructure to meet present and future

demand is NOC Petroperu who was originally the sole operator in the country prior to

the privatization of its upstream activities. Its history is representative of the different

phases the sector has gone through. “In 1988 Petroperu was the company with high-

est losses in Latin America. But the reforms were so profound that the company soon

became one of the most profitable organizations in the region. In 1993 we managed to

meet ends and in 1994 Petroperu already became the most profitable company of Peru”,

explains Gustavo Navarro, manager for production and planning at Petroperu. Today the

company is driving its growth by modernizing essential infrastructure that is decaying,

from its refineries to its pipeline transportation system in the north of the country.

One of their most significant renovation projects is that of its Talara refinery that was

originally built in 1917 as one of the first refineries in Latin America and the main source

of fuel in Peru. The principal objective of the Talara modernization project that begun in


Greening Peru’s Growth

As Peru races through its develop-ment, the government has made

sure that this growth is mindful of the cultural, social and natural wealth of the country. Particularly for the oil and gas industry, heavy environmental regulations have been imposed and any kind of proj-ect, from a seismic study to the drilling of a well, needs to submit an environmental impact study (EIA) to local authorities. In fact, many companies feel that governmen-tal approval for EIAs is too prolonged and can be a major source of delays. Indeed the government seems to be overwhelmed with the number of EIAs it has to process, most of them related to the hydrocarbon and mining sectors, which highlights the need for companies to hire their own envi-ronmental experts that can work through the system as nimbly as possible.

External consulting firms, such as Walsh and Golder Associates, were quick to identify the demand for these kinds of services and are today some of the

industry’s most reliable environmental specialists. Rafael Davila, managing direc-tor of Golder Associates in Peru, explains that “the directorate in charge of EIA for oil and gas projects is a professionally managed directorate, but we should keep in mind that it takes care not only of oil and gas, but other energy subsectors like hydro, thermal and petrochemical proj-ects…finding the right balance between the wishes of the private companies and their investors and the needs of the government and the communities of stakeholders is always very difficult, and this is where we stand providing our best services to our clients.” With operations in every continent in the world and over 7000 employees, the Lima office for Golder Associates has become the big-gest office in the Latin American region in terms of head count with a total of 320 employees and one of the largest provid-ers of ground engineering and environ-mental services to the sector. They have

participated in flagship projects such as the Camisea pipeline and Melchorita LNG plant and continue to grow in parallel to the country’s economy, always with the aim to ensure the sustainability of Peru’s boom. As a Peruvian himself, Davila con-cludes that “despite the outcome of the presidential elections and the uncertainty this brings, I think this country will con-tinue being open to investments because this is the mind framework we Peruvians have had in the last centuries or millennia and that we still share today.”

2010 “is to produce cleaner diesel and gasoline with higher quality

and environmental standards, which currently are mostly imported

into Peru”, according to Miguel Celi, general manager of Petroperu.

With an estimated $1.3 billion being invested in the project, Talara

will increase its production capacity from 65,000 to 95,000 bpd and

will allow for the processing of heavy crude oil which is increas-

ingly being discovered in the northern part of the country. Yet, the

company’s most daunting task ahead is to upgrade the Norperuano

oil pipeline that extends 1100 kilometers from the northern jungle

to the coast. “Regarding the modernization of the Norperuano

pipeline, this is one of the most complex pipeline projects world-

wide. More than thirty years since its construction, this is an asset

that must be modernized so that we can also transport oil with other

characteristics from newer fields”, states Celi. Until very recently

processing this heavy oil was not

profitable, but thanks to increas-

ing discoveries, greater capital

opportunities and higher oil prices,

Peru is now expecting to use this

petroleum.

The assessment study of the

Norperuano modernization was

conducted by American Mustang

Engineering that is a part of the

greater Wood Group. The group

has been adapting itself to the needs of the Peruvian market by

offering complete service solutions to its clients and bringing new

technologies to the market. “That’s why we are here, to help with

the development of Peru’s greatly needed oil and gas infrastructure,

bringing new technologies and expertise to this booming but still

greatly unexplored market”, says Wood Group Peru general man-

ager Carlos Lozano. There are very few companies in Peru that can

offer integrated support to the oil & gas sector, and Wood group

is betting that this will set them apart from their competitors. “The

advantage we have over the competition is clear. It is difficult to find

a company in the world with all the capabilities the Wood Group has

as a one-stop-shop. But that is not enough. The Wood Group tries

hard to be tuned with our client’s needs”. Having been a part of

the Peru LNG and Camisea pipeline project, the company’s current

strategy in Peru “is to revise its

relationship with existing clients

and assess whether some of our

sister companies can add value to

our current services or can satisfy

an unattended need for the client.

The idea is that instead of having

three or four companies target-

ing the same clients, we can work

together to offer a single company

portfolio”, adds Lozano.

Rafael S. Davila, Principal Managing Director, Golder Associates Peru

Sergio Puch Villavicencio, Com-mercial Manager for Corporacion Petrolera (CORPESA)

Victor Sanz Parra, Director at Univer-sidad Nacional de Ingenieria.


tant construction and logistics

providers to some of largest com-

panies operating in the Amazon

Jungle basin, such as Pluspetrol,

Talisman, Repsol and Perenco. We

haven’t stopped growing since we

began operations and every year

we invoice more than the previous

one. Just to give you an idea, since

I started working for the company

in 1998 our yearly revenues have gone from US$1.5 million to an

expected invoicing of US$75 million”, states CORPESA commercial

manager Sergio Puch. While the company’s founder recognizes that

Peru is not the easiest market to operate in and growth can be dif-

ficult to achieve because of small margins, CORPESA still has great

ambitions and aspirations for the future. “We would like to become

the best oilfield service company for integrated logistics and con-

struction. If we are indeed recognized as such, the rest will come by

itself including the clients and the revenues. Ultimately we would like

to see CORPESA taking on major infrastructure EPCM projects: gas

plants, refineries, etc.”, concludes Puch.

In the meantime, while Peru’s new hydrocarbon transportation

systems are built and modernized the country still depends heavily

on maritime transportation to supply its major cities located along

the coast. As the country grew and industries such as mining and oil

& gas required a local shipbuilder, Servicios Industriales de la Marina

(SIMA) stepped up to the plate. SIMA is the country’s largest and

most successful shipyard and was originally mandated to exclusively

serve the Peruvian navy. From tugboats to tankers, as well as the

Melchorita marine terminal, this company has expanded to keep up

with the demands of their oil & gas clients that rely entirely on the

ocean and Amazon waterways to transport their precious cargo. “Our

strategy now is to expand into other markets and become a major

regional player. We have already begun doing this by building ships

for Chile and now for the new Panama Canal. The idea is to add value

to the country, and we need to believe that the country’s growth will

continue far into the future as long as we all believe and bet on it.

Some people are nervous because of the results of the recent presi-

dential elections, but I believe that Peru is like the Barcelona soccer

team; regardless of whom the coach is, the team will always win”,

states Jason Saavedra, executive director of SIMA. Furthermore, “the

company recently obtained ISO 14000 certification for our envi-

ronmental standards and OHSAS 18001 certification for health and

safety, additional to our ISO 9000 which we’ve had for several years.

In the southern part of the

country there are also plans to

build a pipeline to spread the

hydrocarbon wealth of the country.

The South Andean Pipeline project

was awarded to Kuntur, a Peruvian

company born specifically to

develop this project and controlled

by Latin Power III, an investment

fund managed by energy experts

Conduit Capital Partners of New York. Kuntur general manager,

Alejandro Segret, details that “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. As a

result, the projected figures went from around $1.3 billion to $2.5 -

$3 billion”. This pipeline will also be supplied by gas from the Cami-

sea fields , and will extend 1,085 kilometers to bring a new energy

source to the regions of Cusco, Arequipa, Moquegua and Puno.

The South Andean Pipeline project is a tall job, standing at 675

miles long and an original estimated cost of $1.4 billion, but not all

needs of the industry are of that magnitude. As a matter of fact,

it is some of the smaller and simpler odd-jobs that lack service

providers. Rafael Ford, corporate representative for Canadian junior

player Petrominerales, alludes to a shortage of service providers and

concluded that this might be the only drawback of operating in the

Peruvian market. “If you look at the long-term perspective for Peru,

you will see a lot of positive success waiting. If we get more service

companies locally that would be nice, but outside of that, Peru is a

very positive place to work”, he says.

To fill this gap Corporacion Petrolera (CORPESA) was created in

1992 as a one-man, one-truck operation. Today the company handles

everything from engineering and construction, to creating access

roads and providing logistics. “Today we are one of the most impor-

Douglas Reichenbach, Manager for the Andean Region, Geokinetics

Jason Saveedra Paredes, Executive Director of SIMA

Courtesy of SIMA Peru


Furthermore, SIMA is now implementing a modern ERP program that

aims to make us a more streamlined and efficient company”.

Just as important as marine transportation, Peru’s oil & gas

industry is entirely dependent on the network of rivers that extend

throughout the Amazon jungle where most exploration blocks

are located. H&O Ingenieros is a local company that specializes

in waterway engineering and navigability studies and has been

hired by the government and E&P companies alike to map out and

make the best of Peru’s rivers. “I never imagined seeing the kind of

growth that the country and the hydrocarbon industry are experienc-

ing today…now the game has changed and I have begun an entire

restructuring of the company that

will allow us to grow together with

the industry,” explains H&O owner

and general manager Fernando

Levano. “Our aim now is to take

on more private clients and to

expand our business serving the

hydrocarbon industry directly”, he

concludes. Their latest project is

ambitious beyond Peru’s national

borders. “Its aim is to determine

the viability of establishing a commercial route between Peru and

Brazil through these rivers and covers a total area of 3,500 km. The

ultimate aim would be to join the Pacific and Atlantic Oceans by

establishing reliable transit routes on these rivers”. That would cer-

tainly bring Peru closer to its ambitions of regional integration.

Fernando Levano Mendoza, General Manager of H&O Ingenieros

Courtesy of SIMA Peru

email: [email protected]

Oil&Gas Peru 2011

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