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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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Can Peru's Oil Industry Recover From A Disastrous 2020?

Peru’s oil industry is in crisis, with 2020 being one of its worst years on record. It was a year marred by the harsh fallout from the COVID-19 pandemic, violent protests, and political instability. By November 2020, Peru’s peak industry body; the National Society of Mining, Petroleum, and Energy, had released a statement (Spanish) claiming the national petroleum industry was in crisis. In that statement, the group pushed for the national government of Lima to resolve the many crises which were impacting petroleum industry operations. Those issues could not have occurred at a worse time. Peru was hit particularly hard by the COVID-19 pandemic, despite being one of the first countries in South America to implement a total lockdown. Aside from the tremendous human cost of the pandemic, with Peru having the fifth-highest number of cases in Latin America, the economy took a big hit. The International Monetary Fund estimated for 2020 that Peru’s gross domestic production shrank by almost 14%, the worst decline in Latin America after Venezuela. This coupled with ongoing political instability hit Peru particularly hard, magnifying the fallout from the pandemic while sharply exacerbating the gap between the country’s rich and poor. That underscores why the national government in Lima is focused on kickstarting the economy and reinvigorating the oil industry.

The impact of the pandemic, heightened political instability and social conflict on Peru’s hydrocarbon sector has been significant, causing production as well as exploration and development activities to decline. By June 2020, data from Peru’s Ministry of Energy and Mines showed that crude oil production had fallen to a multi-year low of 29,940 barrels daily. Natural gas output which was 832,775 cubic feet daily for the same period was 5% higher than the pandemic low hit in April 2020. During December 2020 Peru pumped 31,624 barrels of crude oil per day, while natural gas liquids came to 90,979 barrels and natural gas was almost 1.4 million cubic feet, which saw total hydrocarbon output of 357,347 barrels of oil equivalent daily which was 6% lower than a month earlier and 1% less than for the equivalent period in 2019. When combined with the latest Baker Hughes rig count showing that there are no active drill rigs in Peru, it indicates that there is some way to go before Peru’s hydrocarbon sector recovers.

The November 2020 appointment of caretaker President Francisco Sagastia finally brought Peru’s political crisis to an end. That event, which led to the appointment of three presidents in a week during November 2020, nationwide protests, and the deaths of demonstrators was an ill-timed disaster for the Andean country. Peru will go to the polls in April 2021 to elect a president from the 22 candidates vying for the top job in a country where tensions between the executive and legislative branches of government remain heightened. 

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Aside from the pandemic and political instability in Lima, a key issue impacting Peru’s hydrocarbon sector is its lack of social license and the considerable opposition of local communities in the country’s Amazon to the petroleum industry. Peru’s Amazon, where deeply impoverished indigenous communities are opposed to the oil industry is responsible for a notable proportion of the country’s hydrocarbon reserves and production. The significant opposition of local indigenous communities to the petroleum industry was magnified by the pandemic which only worsened the vast socioeconomic gulf between Peru’s rich and poor. According to data from hydrocarbon regulator Perupetro 48% of Peru’s 344.5 million barrels of proven oil reserves is in the Amazon. Prior to the COVID-19 pandemic and production disruptions caused by violent protests, oilfield invasions and attacks on infrastructure almost half of Peru’s total oil production came from the Amazon. Data from Peru’s energy ministry indicates that hydrocarbon output has yet to recover to pre-pandemic levels. During December 2020, the Andean country pumped on average 31,624 barrels of crude oil daily, 90,979 barrels of natural gas liquids and 234,744 barrels of natural gas which were 33.5%, 1%, and 7% lower year over year respectively. The primary reasons for this are production shut-ins caused by community blockades and protests, infrastructure outages, and a chronic lack of investment, with protests and heightened geopolitical risk deterring international energy companies.

To kickstart the hydrocarbon sector and unlock the wealth contained in Peru’s considerable petroleum resources, Lima and the hydrocarbon regulator have embarked on a strategy aimed at boosting investment as well as production. A key stumbling block for attracting investment and reactivating the hydrocarbon sector has been ongoing conflict and violent protests by indigenous communities against the petroleum industry. During 2020 protests disrupted the operation of Peru’s ONP pipeline, which connects oilfields in the Amazon to the Pacific coast, for 85 days. Canadian oil producer PetroTal was forced to shutter operations at its Bretana oilfield in the northeastern department of Loreto after violent clashes between protestors and authorities in August 2020. To stem the protests, so that the ONP pipeline and PetroTal could recommence operations, Lima agreed to provide greater financial assistance to local communities through a $1.7 billion aid package to be spent over six years. Frontera Energy suspended production and declared force majeure at its Peru Block 192 during early 2020 because of community action and withdrew from the operation. Similar events saw Geopark and Pluspetrol declare force majeure and announce they were withdrawing from Blocks 64 and 8 respectively. Peru’s top producing oilfields until the end of 2018 were in Block 192 and Block 8 thus the cessation of operations at those blocks had a sharp impact on Peru’s crude oil output. Perupetro announced last month it planned to find new operators for those blocks as part of Lima’s strategy to boost oil production.

Peru’s hydrocarbon regulator also announced that during 2021 it will hold its first bid round in 10-years, offering 10 oil blocks, six on the north coast and four in the Amazon, during 2021. These plans, the petroleum industry, and government hopes will allow Peru to return to full production of 60,000 to 70,000 barrels of crude oil daily, numbers not seen since before the pandemic. In fact, 2020 crude oil production averaged 39,738 barrels daily, a 25% decrease compared to a year earlier and a multi-decade low. Annual natural gas liquids and natural gas output also fell sharply declining by 7% and 20% year over year respectively. As a result, total hydrocarbon output only reached 299,163 barrels of oil equivalent daily, its lowest level since 2010.

Low proven oil reserves, declining production, and a lack of adequate refining capacity are all contributing to ever-rising imports of petroleum, fuels, and other related products to meet domestic fuel demand. This is weighing on Peru’s balance of trade and economy, which with the increased fallout from the pandemic makes now the time for Lima to focus on increasing energy self-sufficiency. Those developments underscore the urgency with which Lima must successfully implement strategies to stabilize the oil industry, substantially reduce conflict, which is best achieved by expanding its social license, and promoting foreign investment.

By Matthew Smith for Oilprice.com

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