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New Wave Of Peruvian Energy Nationalism Could Destroy Its Oil Industry

Even before the COVID crisis struck South America, the continent’s nations held overwhelmingly negative views about their respective governments’ economic performance. According to the reputable public opinion survey Latinobarometro, only 16% of the entire region’s populace considered their economic performance to be satisfactory before the onset of the pandemic. For obvious reasons, straining countries’ healthcare systems, destroying jobs and decimating demand for various goods will only exacerbate popular discontent with how things are going both economically and politically, alerting analysts to the possibility of another Pink Tide (initially the Hugo Chavez-inspired rejection of neoliberal dogma in favour of state socialism, with a various levels of leftist zeal). 

If the new tide ever happens, it would germinate from a set of parameters very different from those of the mid-2000s: COVID has stunted hopes for another commodity boom, the United States is largely disinterested in how Latin American countries are faring provided they do not trigger other socio-political challenges to America (i.e. the farther out the less interest there would be in how nations cope with the consequences of COVID) and China will also be much less inclined to inflate comradely economies with asset purchases and pre-financing deals. Thus, facing a juxtaposition of little international interest/intervention and increasingly worsening fiscal balances, the Pink Tide might in fact become a Red one. In one Latin American country, a recent presidential election shows that such seemingly farfetched visions of the future might not be that outlandish. 

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Peru’s presidential elections took place on April 11, five months after the impeachment of Martin Vizcarra (for alleged cases of corruption). The ballot had no evident favourite, still, not many Peru-watchers could have estimated that Pedro Castillo, a primary school teacher and union leader from the rather impoverished region of Cajamarca on the Ecuadorian border, would win the 1st round. He did so, garnering more than 19% of the votes and leaving behind several heavy-hitting politicians, including Keiko Fujimori (the daughter of former President Alberto Fujimori, currently behind bars), Hernando de Soto (a neoliberal economist) and Ollanta Humala (former President of Peru). Becoming the frontrunner in the presidential race, Castillo will face-off with Fujimori in the second round of elections on June 06.

Before we set on to deconstruct the prospects of Peru’s oil and gas industry, it would be politic to assess how and why could a far-left candidate overpower professional politicians from Lima’s couloirs of power. First, it needs to be noted that Peru has the second-worst per capita COVID death rate from all of Latin America (1 716 deaths per million citizens, with almost 56 000 deaths in total). Second, most of the center-to-right presidential elections were hard to vote for – apart from the association with her incarcerated father Keiko Fujimori herself was serving a sentence for money laundering as recently as 2019, Hernando de Soto was Alberto Fujimori’s lead economic advisor and thus responsible for the austerity measures and market deregulation that has pauperized Peru’s poorer regions. 

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Against such a background it is perhaps more understandable how a rural candidate who only a month ago polled 5% nationwide surge to national prominence – radical solutions usually spring up in times of universal disorderliness. This is also corroborated by the fact that albeit voting is mandatory in Peru, almost 30% of voters did not turn up at the ballot box and another 19% spoiled their voting slip. Be as it may for readers of OilPrice, the main question arising from the above would be: what would Pedro Castillo’s win translate into in terms of energy policy? The election program of Pedro Castillo explicitly states the revision of Peru’s 1993 Constitution, with the aim of maximizing the state’s revenues from the nation’s plentiful strategic resources. 

The “resource recovery” would trigger the renationalization of natural gas and oil fields, though providing for a compensation to respective acreage holders. It is an open question whether all Peruvian hydrocarbon deposits are to be considered as strategic or some might be considered to be “conventional” and thus left with their current owners. The department of Cajamarca that Castillo hails from wields ample gold reserves so perhaps the task of nationalizing mining rights would take precedence over oil and gas, being closer to heart and easier to present politically. Moreover, Peru is certainly no Latin American heavyweight in terms of its crude production – traditionally crude output would hover around 50kbpd. This has dropped even lower, to 34kbpd in March 2021, in recent months as the 3 largest Peruvian oilfields remained closed on the back of indigenous protests

Were Pedro Castillo to win the 2nd round of presidential elections, he might still lack the clout to put the idea of energy nationalization into practice. Although his Peru Libre party is poised to take 37 seats in the concurrent general election (out of 150), all the political parties that rank from 2nd to 5th are right-wing and if combined can form a supermajority that could easily derail the presumed president’s vision for Peru. Moreover, if Castillo cannot garner the support of at least one more political party apart from the centre-left Juntos por El Peru, he could be subjected to the same impeachment process that has debilitated so President Vizcarra’s tenure. Thus, Peru’s immediate political future will be most probably fragmented, with an increasingly palpable segregation of interests along urban-rural lines. 

Talks of a Peruvian Evo Morales or Hugo Chavez notwithstanding, Pedro Castillo lacks the nationwide support that could aid him in consolidating power over a longer term. The capital Lima is still firmly liberal and were it for a different set of rivals Castillo could have fared much worse than he did. For international investors this might be good news, at the same time there is one factor of risk that keeps on increasing in importance - local communities, be they indigenous or otherwise. The extent to which every new project will be assessed to when it comes to water or soil pollution, infrastructure build-up or simply revenue allocation is almost certain to increase over time. 

By Viktor Katona for Oilprice.com

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