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Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest. Disclaimer: views set…

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Can Peru’s Oil Industry Survive This Crisis?

Indigenous protests have taken over Peru, threatening to undermine the Latin American nation’s burgeoning upstream industry. To many it would come as a surprise that Peru has any substantial amounts of oil production, especially on the back of sizeable crude and product imports to the country growing higher and higher. Yet below the surface, Peru’s problems mirror those of many other Latin American countries – combining sustainable development in fragile biodiverse zones with hydrocarbon reserves that are still available in places that are either nature reserves or of spiritual importance to indigenous populaces. Peru has become a battlefield between economic interests and social rights – a battle zone stained by blood as to date at least 3 indigenous protesters were killed in skirmishes with the enforcement authorities.

Latin America’s travails with the corona virus have triggered various responses from respective governments and Peru has been one of the most peculiar cases. Despite a swift lockdown announced on March 15, a week after Peru has reported its first case, Peru has been overwhelmed by the pandemic, having the second-highest COVID mortality rate globally after Belgium. As the Peruvian government introduced stringent health measures, production from faraway regions was shut down temporarily, in the hope that it can be restarted as soon as the COVID-19 gets more manageable. Technically Peru’s fields need not have shut down completely, however the national oil company PetroPeru has suspended all transportation on its 100kbpd Northern Crude pipeline that brings oil from the country’s northern states to the Pacific Ocean port of Bayovar.

Peru’s total crude production has averaged 60kbpd before the COVID-induced market slump, dropping to half of that by June 2020. The Chinese national oil company CNPC remains the largest producer in Peru yet its assets, being located next to the Ecuadorian frontier, rarely make it to the front pages as they lie within reasonably well-documented oil plays. Yet it is in Peru’s jungle-covered state of Loreto which moved into the forefront of the nation’s oil industry. Following the corona-induced demand slump Petrotal has temporarily laid off all but essential personnel at the 40 MMbbls Bretaña field in early May, indicating that by August most curtailments would be eased, either fully or partially. When in the first days of August the Calgary-based company tried to restart the field, mayhem ensued.

Within 24 hours of Bretaña’s restart the indigenous protestors took over a pumping station, forcing the producer to halt production. The conflict quickly escalated into complete chaos, both sides accusing the other of opening fire, what is beyond controversy, however, is the completely unnecessary death toll – 3 indigenous protesters from the Kukama community have been shot by security forces. Their allegations of the Peruvian government failing the COVID-19 pandemic and disregarding the environmental damage caused by oil production in the Amazon jungle have remained unanswered. Despite a lack of publicly articulated commitments, the government of Peru has managed to find common ground with the protesters and would restart the Northern Oil Pipeline by the end of August. Related: Saudi Energy Ministry To Help Build $500 Billion Smart City

Where does this leave Peru’s prospects for further drilling in the Amazon? In the specific case of Block 95 which hosts the Bretaña field, it seems that the authorities have persuaded/coaxed the indigenous protesters into a period of lull. The Bretaña cargoes are now finding their way to buyers (the 19 API and 0.5 sulphur grade is currently assessed at an approximately -1 per barrel discount to ICE Brent) and it seems that the indigenous peoples’ rights to live in an oil-free environment will be flung aside as all parties concerned want to maximize their revenues, now that the oil price is well above their production costs of ~25 per barrel. Moreover, if the case of neighboring Ecuador is to suggest anything, then Peru’s overall oil prospects would tilt heavily towards the economic side.

Ecuador’s failed Yasuni-ITT initiative remains a poignant reminder that the dilemmas Latin American nations have been facing so far wielded very little progress on the environmentalists’ side. In 2007 then-President of Ecuador Rafael Correa has called on the international community to garner $3.6 billion in payments, in return of which Quito would perpetually suspend all oil development activities in the Ishpingo-Tambococha-Tiputini (ITT) National Reserve in the Amazon, Ecuador’s most oil-prolific new frontier which coincidentally turned out to be one of the most biodiverse corners of our planet. Were the initiative to work, it could ensure that indigenous peoples would not be confronted with the risk of oil spills and deforestation for industrial purposes – the plan’s only weakness lied in its reliance on international investors caring about the environment to such an extent as to financially back the ambitious initiative.

The Yasuni-ITT trust fund was open for almost 3 years and eventually collected less than 5% of the required sum. This in turn has prompted Ecuadorian authorities to start looking at their oil reserves in the Amazon and starting from 2016, the ITT national park has started witnessing drilling. Needless to say, cases of oil spills (such as the one this April when a landslide has damaged an oil-transporting pipeline and crude started to pour into the Coca river, a source of drinking water for indigenous communities. The Ecuadorian failure to keep the environment out of harm’s way and to safeguard the interests of its own people who happened to live in the wrong place will loom large in upcoming legal battles, of which Peru will not be the last. Hence, the resolution of the current political impasse in Peru is doubly important – it can either confirm a negative trend of disregard or mark a first-ever Latin American victory of social rights over economic development when it comes to oil.                 

By Viktor Katona for Oilprice.com

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