ANÁLISIS QUINCENAL: Transparency and Extractives Update from Latin America
By Carlos Monge, RWI Latin America Regional Coordinator
With Claudia Viale and George Bedoya
August 11th – 25th, 2009 |
Español |
Heated debate in Peru over how to ensure that Camisea gas supplies can cover increasing domestic demand.
Several analysts and members of the business sector have claimed that Peru's gas exports to Mexico will leave the domestic energy market short on supply. Faced with this situation, the Minister of Energy and Mines, Pedro Sanchez, said he is in conversations with the Camisea Consortium (made up of Pluspetrol, Hunt Oil, SK, Sonatrach, Techpetrol y Repsol YPF) to reach an agreement that will not leave the Peruvian market without gas.
The Camisea Consortium extracts natural gas and liquid hydrocarbons from Block 88 and Block 56 in the Cusco Region. Block 88 is the core of the project, since it has by far the largest amount of proven hydrocarbon reserves of about 8.8 trillion cubic feet (TCF). Furthermore, those are the reserves that initially ensured supply to the domestic market for a permanent horizon of 20 years, according to Law 27133 for the Promotion of Development in the Natural Gas Industry. However, in 2003, this guarantee was eliminated by Supreme Decree 031-2003-EM, which amended the law to say only that future demand would be covered "for a minimum period established in the contract." This means that a supply guarantee was no longer mandated by Law, but negotiated in each contract.
In 2004, Peru's Minister of Energy and Mines, Jaime Quijandría, re-confirmed that only the oil reserves from Block 56 would be exported, while reserves from Block 88 would be kept for the internal market. However, soon after that, when the Camisea Consortium signed the contract to exploit Block 56, the Peruvian government allowed them to also take 1.4 TCF from Block 88 in order to fulfill the export contract with Mexico. This was formalized in June 2005, through Law 28552, which eliminated the requirement to ensure domestic market supply from the contracts for both Block 88 and 56. Finally in 2006, with Supreme Decree 006-2006, the contract for Block 88 was also renegotiated to allow export of its reserves.
In sum, all of these changes in the contracts compromised the future supply to the domestic market by allowing significant amounts of gas to be exported. Furthermore, these modifications have resulted in a series of irregularities, which led even the President Alan Garcia himself to state the urgency of investigating these changes and those involved, during his most recent address to the nation.
Some industry figures help to clarify the situation as it now stands: Official projections show domestic consumption will be 6.1 TCF during the 2007-2026 period, 50% more than what the Ministry of Energy and Mines estimated in its 2005-2014 Energy Plan. Domestic consumption needs, when combined with the 4.1 TCF committed in the export contract, add up to 10.2 TCF. But the international certification firm Gaffney-Cline has said that currently reserve stand at only 8.795 TCF.
Faced with this situation, the Minister of Energy and Mines, Pedro Sanchez, assured the public that the domestic market supply was guaranteed. But his statement was based on the expectation that new investments and further exploration will increase Camisea's proven reserves to 14.1 TCF. Therefore, the domestic market would no longer be guaranteed by Block 88, but by the prospects of new findings.
The government continues to seek solutions to this issue. Among them, it is considering renegotiating the contracts with the Camisea Consortium to ensure domestic demand is satisfied. Other alternatives would be nationalizing the resources, a proposal raised by Hugo Gonzales, President of the Cusco Region, or rescinding the contract to give way to a new bidding process with new conditions.
Bolivia proposes amending gas contracts with Brazil and Argentina.
Since January of 2009, demand for Bolivia’s natural gas from its main trading partners, Brazil and Argentina, has been very volatile, fluctuating between 20 and 31 million cubic meters per day (MMmcd), for Brazil, and between 2.7 and 7 MMmcd for Argentina. Low demand in the past few months has generated a drop in domestic production of liquid hydrocarbons, such as gasoline and oil, and a drop in the country's revenue. In response, the Bolivian Government, through the Ministry of Hydrocarbons and the state-owned oil company Yacimientos Petroleros Fiscales Bolivianos (YPFB), has asked the Brazilian and Argentinean governments to modify their gas purchase contracts.
In the case of Brazil, Bolivia considered setting 24 MMmcd as the maximum volume for exports, since Brazil has reduced its demand of Bolivian gas from 31 MMmcd, the level originally agreed in the contract, to a little over 20 MMmcd. This renegotiation with Brazil is particularly significant because this contract is one of the most beneficial for Bolivia, since it includes a "take or pay" clause, through which Brazil must pay for the amount of gas set in the contract, even if it does not consume it.
Meanwhile, variations in the demand from Argentina, led the Bolivian government to re-start past negotiations with state-owned Energía Argentina S.A (ENARSA), to implement a few changes to their gas contract signed in 2006. The goal is providing sufficient guarantees to Bolivian oil companies to ensure investment in exploration of new wells and increases in natural gas production. However, many analysts say another alternative would be to make direct contracts with Argentinean businesses for direct purchases of gas, and leave the Argentinean state-owned company out of the deal.
One additional aspect of this issue is that the fall in demand for gas both from Brazil and Argentina not resulted in a gas production decrease from 42 to 35 MMmcd, but that there is still a 7 MMmcd surplus available for other markets. Among these potential new markets are Uruguay, Chile, Argentina itself, and even the Bolivian domestic market. The first option would have novel geopolitical implications—especially for relations with Chile. The second option would reduce State revenue since gas prices in the domestic market are lower than international market rates.
Ecuador's service contracts with private companies set to expire.
Contract renegotiations between the Ecuadorian State and private oil companies that operate in the country have stalled new private investment and are also impacting ongoing production, which in turn affects public revenues. In response, the government has designed a final contract model which will set clear rules to promote investment in the sector, since the current contracts are only temporary and will expire in less than a month.
In April, 2006, amid increasing international oil prices, Ecuador issued Law 042, which established that windfall profits would be shared 50-50 by companies and the State. But soon afterwards, in October of 2007, an amendment to the law set the distribution percentages at 99% for the State and 1% for the companies. It also introduced the option for companies to move to a service type contract. This approach was aimed at forcing companies to renegotiate their contracts to regain Government sovereignty over resources through terms that had previously been limited by contract to participation in income. Naturally, the companies rejected the proposal and many of them even sued the Ecuadorian Government in international courts.
Finally, Andes Petroleum, Petrobras and Repsol agreed to sign temporary contracts, valid only for one year, establishing that the State would pay these companies for their services and take control of all of the oil rent. But, as the expiration of these contracts nears, companies have said they need a model contract that is clearer and gives them more guarantees and stability to keep investing and producing.
Indeed, private production has fallen 14% in the first semester of 2009 compared to the same period of 2008, from 44.6 million barrels to 38.3 million. This 6.3 million barrel decline has meant a loss of US$ 332.2 million for the Ecuadorian State.
The fact is that the temporary agreements between Correa’s government and Andes Petroleum, Petrobras and Repsol have effectively become a temporary suspension of foreign investments until a final agreement is reached. For example, Repsol generated 53,917 barrels a day during 2008, but this year estimates suggest production will only reach 44,000 a day, a 17% drop.
To explain this sharp fall in production, companies blamed the capacity of the wells, saying that to pump any more oil, they needed to make larger investments, for which the government should guarantee a clear set of rules.
The government's response has been to design a new long-term model contract that allows oil companies to invest in the sector and recover what they invested. This measure will guarantee a climate less hostile to investors, allowing them to jump start their investments and production again, while also generating more revenue for the State.
Thus, this negotiation is being conducted under conditions very different from the first process between March and June of 2008. Indeed, the first contract renegotiation began during a period of high prices and growing oil company profits, from which the State was trying to increase its take. However, with the current contraction in private production and the drop in international oil prices, the Ecuadorian State finds itself in a weaker negotiating position, since it needs to ensure a rise in production to sustain its revenues. In this light, the new emphasis on contracts that are friendlier to companies makes somewhat more sense.
Sources: Perú 21, El Comercio (Peru), Elcomercio.com (Ecuador), ElDeber.com.bo, ElDeberDigital.com, La Razón, La República (Peru), Folha Online
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