With a few days to go before the national election, gas policy is at the center of the Peruvian political conversation. The focus is on contracts signed by the Peruvian government and a consortium in 2004 regarding Camisea, the country’s largest natural gas reserve.
Shell discovered Block 56, with reserve estimates of 2.75 trillion cubic feet, in 2000. At that time, the government determined that the gas from this block would only be exported. In 2004, Shell withdrew. The company was denied use of the pipeline intended for the Camisea Consortium, which was the only one in the area. But the Camisea Consortium, already operating in blocks 55, 57 and 58, had exclusive rights over the pipeline in a deal with the government. Building a new pipeline meant that the cost of production was not justified by the quantity of reserves in the block.
Block 56 reserves then reverted to the Peruvian government, which held an invitational bidding round to select a new operator. Four international companies were called. Among them was the Camisea Consortium, which easily won because its preexisting access to the pipeline gave it an economic advantage that enabled it to produce a more attractive bid.
From this point the value chain from Block 56 included other three other players. Peru LNG, owned by the same shareholders as Camisea Consortium, liquefies the gas from the Camisea fields in the Pampa Melchorita plant. Peru LNG, at the same time, has a contract with Repsol, which acted as offtaker from 2004 to 2012. The third actor is Mexico’s Federal Electricity Commission (CFE), the purchaser of the gas. The relationship between the offtaker and CFE is regulated by another contract in which the Peruvian government does not participate.
Along with these contracts, it was determined that a royalty of 30 percent and 38 percent would be applied to the exported gas. While at first glance it seemed a better deal than the other blocks’ five percent royalty, Repsol and CFE agreed on a particular export price well below the international market margins.
Repsol was also re-exporting cheap Peruvian gas from Mexico, effectively giving the company revenues without paying royalties that would have otherwise gone to Peru. Peru sought international arbitration, and in May 2015, the International Center for the Settlement of Investment Disputes ruled in its favor, forcing Repsol to pay about $64 million in royalties and unpaid interest.
Thus we come to the 2016 presidential campaign. Two of the top four candidates are proposing the renegotiation of gas contracts, especially for Block 56. Alfredo Barnechea and Veronika Mendoza, representatives of parties of the center and left, respectively, agree that gas contracts should be renegotiated if original contract stipulations harm the state. Both candidates refer to the conditions of disadvantage reflected in royalties and the price agreed with Mexico’s CFE.
The differences between the two proposals lie in the ownership of the gas. For Barnechea’s party, Accion Popular, the problem lies in royalties: they do not reflect international prices and offer no opportunity for readjustment depending on production rates and prices. His party argues that beyond increasing royalties, contracts should include an adjustment to international price margins. Cases of re-exporting, like the one of Repsol in Mexico, should be prevented, Accion Popular argues, with clearer preventative clauses.
Mendoza’s party, Frente Amplio, agrees and goes further. It argues that the problem lies in the National Hydrocarbons Law, which states the company that extracts the gas is its owner. This prevents the state, for example, from prioritizing alternative markets that offer better prices for the gas. Frente Amplio aims to move from licensing agreements (in which extractive companies are owners) to service contracts (where the Peruvian government is the owner).
Other parties oppose renegotiating the contracts. Here we find more conservative parties such as Peruanos por el Kambio, led by Pedro Pablo Kuczynski (who as Minister of Energy and Mines of the government of Alejandro Toledo signed the block 56 contract), and Fuerza Popular, led by Keiko Fujimori. Both parties agree to respect contracts already signed and work to promote the mass adoption of natural gas in households by building better infrastructure. A range of experts concur, and advocate predictability in a volatile sector.
Each model has different outcomes and represents opposing views regarding the role of the government in the hydrocarbon sector. The leftist stance de-prioritizes investors’ predictability in order to place the building blocks of an energy policy governed by public interest. This has ramifications for a broader reform of the country’s industrial policy, as it gives the government freedom to plan internal uses for energy.
But renegotiation of contracts always imposes costs on investors. The government should aim to control damages that could potentially generate distrust among investors. But with falling prices governments have very poor leverage to get better fiscal terms from companies.
While experts and politicians argue, it is true that Camisea contracts have already been reviewed on more than one occasion. In 2015, regulatory agency Perupetro managed to reverse a clause which allocated a portion of Camisea’s Block 88 gas for export. The government also said it aims to address the issue of Block 56’s gas price problem.
As is so often the case in the recent political history of Latin America, exploitation of national resources has taken center stage. One silver lining here is that all Camisea contracts are public. This has allowed a sharpening of the focus on extractives and made the debate surrounding the gas much more substantive during the campaign.
Alonso Hidalgo is a Latin America program assistant with NRGI.