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Oxford Business Group

Oxford Business Group

Oxford Business Group (OBG) is a global publishing, research and consultancy firm, which publishes economic intelligence on the markets of the Middle East, Africa, Asia…

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Peru Looks To Boost Energy Investment With Legislative Reform

Peru’s Congress is to consider legislation reforming the hydrocarbons sector, with the updated law forecast to increase investment in the sector, while reinforcing environmental protection and community rights.

In June the legislature’s Energy and Mines Committee endorsed a series of amendments to the Organic Law of Hydrocarbons, forwarding the draft to Congress for final ratification. The new law, some eight months in the works, updates legislation in force since 1993.

Currently, Peru produces less than 20% of its daily oil requirement, with output having fallen to 41,000 barrels per day (bpd), leaving a shortfall of some 200,000 bpd to be met by imports. Peru spends an estimated $5bn annually on foreign hydrocarbons supplies to meet its energy needs.

By enacting legislation supporting new investments, Peru aims to bridge much of this production gap. The regulator PeruPetro has forecast up to $6.5bn worth of new investments could be made in the medium term, which would see production rise to 100,000 bpd by 2023.

Proposed amendments to ease investment

One of the key amendments aims to see the terms of contracts standardised to 40 years for all production leases, along with a 10-year exploration period, rather than the previous contract period of 30 years for oil and 40 for gas, and an exploratory stage of seven years with a further three to be granted in exceptional cases. The contractor would also be entitled to apply for an additional 20-year contract by submitting a new investment plan seven years before the initial end date.

Another reform set out in the proposal is an overhaul of PeruPetro, which is to be rebranded as the Peruvian Hydrocarbons Agency. The agency will be given increased powers to negotiate licensing agreements and to fast-track approval processes with other state bodies.

Regulations covering royalties would also become more flexible by reflecting the challenges faced by leaseholders in developing specific lots, with consideration given to the geological conditions of the block.

By offering an increased take for extractors developing blocks in more investment-intensive areas, the legislation will open up new deposits by incentivising survey, test drilling and upstream operations.

Related: A Bearish September For Oil

A revision to the structure of tax incentives is also being proposed to take account of the increasingly sophisticated technology used by oil companies. According to Beatriz de la Vega, Peru energy leader and partner at international consultancy EY, the legislation contains enhanced tax exemptions on the importation of capital goods, with more equipment to be covered in the updated law during the entire exploration stage, and admission of this equipment extended from four to five years.

“The legislation intends to create a more dynamic list of exempted items that is updated as technological evolutions occur in the sector,” she told OBG.

While the law promotes increased flexibility to keep pace with changes in the sector, it also offers investors consistency in contractual terms. “It has been specified that when you enter into a contract with PeruPetro, there is a tax stability benefit at the date on which the contract begins,” de la Vega told OBG.

Promoting protection for local groups and the environment

As well as increasing the attractiveness of the sector for potential investors, the law also strengthens the sustainability of the industry by protecting local people and the environment.

One way it seeks to achieve this is by reorganising the consultation process with native communities in areas with potential for hydrocarbons extraction so that agreement is sought prior to land being offered for tender or contract. The legislation returns this responsibility to PeruPetro from the Ministry of Energy and Mines, strengthening the regulator’s hand.

From an environmental perspective, the reformed legislation mandates that leaseholders plant three times the forest coverage felled during exploratory and extraction operations, while 0.25% of oil production revenue must be transferred into Peru’s Environmental Remediation Fund, set up in 2015 to direct funds to areas affected by hydrocarbons extraction.

Legislation has industry support as investors seek security

The new legislation has the backing of industry umbrella group, National Society of Mining, Petroleum and Energy (Sociedad Nacional de Minería, Petróleo y Energía, SNMPE).

The reformed regulations will guarantee the sustainability and competitiveness of the sector and serve to attract investments, SNMPE’s general manager, Pablo de la Flor, said mid-July.

“We hope that Congress will approve the new law soon, because Peru needs its hydrocarbons sector to compete on equal terms with other countries in the region to attract investments in exploration and exploitation,” De la Flor said after the reformed legislation cleared the committee stage.

Related: Say Goodbye To Cheap Oil… For Now

While both domestic and foreign energy firms are looking to the new legislation to open up opportunities in the sector, they will also be hoping the reforms clarify regulatory oversight powers and the role of the government in policing the industry.

In late May the government of President Martin Vizcarra cancelled an agreement to grant UK-based firm Tullow five offshore contracts, saying due diligence with regard to consulting with local communities and surveying potential environmental impact of the projects had not been conducted.

The reinforced environmental and community input clauses of the new legislation should provide greater clarity and remove the potential for direct government intervention in the leasing process by strengthening the role of the regulator.

By Oxford Business Group

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