The oil and gas industry in Peru traditionally has been concentrated in production from oil fields on the north coast as well as from fields located in the jungle. This allowed Peru to export oil, as well as to supply its local market needs for fuel. Due to different economic and regulatory reasons and conditions (price regulations, limitations to foreign direct investment, among others), however, this resulted in the reduction of reserves and production of oil in Peru.
Even though certain discoveries were made, economic and regulatory conditions were not adequate for the viability of the development of these new reserves. Consequently, with decreasing reserves and with an under-explored territory, Peru became a net importer of oil.
In the mid 1990s, with the intention of promoting investment and to attract upstream players and increase the existing oil and gas reserves, the Peruvian government issued a new Hydrocarbons Law that introduced a new regime oriented to establish a regulatory framework suitable for the investment required in the oil industry which is subject to several risks.
In that sense, the new legal framework eliminated any restrictions to foreign direct investment in the upstream and downstream activities. It adopted a licence regime through which the Peruvian government granted upstream companies the right to explore and produce oil and gas. The licensees also had the right to export their production and to freely establish the price.
The licence agreement also included provisions that stabilised the tax regime, and limited the possibility of the Peruvian government unilaterally modifying the conditions agreed with the licensees. The new regime also limited the activities of the Peruvian National Oil Company, Petroperu, that abandoned upstream activities and focused on the operation of the refineries under its control.
The regime introduced by the Hydrocarbons Law had important results. Certain regulations had been issued in order to facilitate the investment required for the development of a natural gas industry that did not exist in Peru. Now natural gas is being used in Peru as a fuel for producing electricity, in certain industries as well as for transportation. In 2010 a liquefied natural gas facility started operations and is now supplying LNG to Europe, Asia and North America.
The new administration lead by president Humala has faced new challenges in the oil and gas industry. It has announced an intention to increase the natural gas consumption within the local market. This includes the use of natural gas in houses and, more importantly, its industrialisation.
There are several projects looking at developing petrochemical plants that will produce fertilisers, explosives and plastics. In order to achieve this goal, further exploration for oil and gas reserves is required, and new pipelines will be required for the transportation of natural gas to cities and to the industrial facilities to be developed.
President Humala's administration has also announced the return of Petroperu to upstream activities. Petroperu´s management is considering the possibility of participating in production activities, as well as in the petrochemical projects that are being considered.
In order to achieve these objectives the Peruvian Government must identify the existing regulatory, social and environmental hurdles that will need to be considered by the different projects of the country's growing natural gas industry.
Eduardo Guevara Dodds
© 2021 Euromoney Institutional Investor PLC. For help please see our FAQs.