Peru at a Hydrocarbons Crossroads

Analysts searching for leading indicators of Peru's political direction need look no further than the country's oil sector. Recent events have demonstrated that, like many of its neighbors, Peru is at a crossroads between sustainable democratic development and economic growth. The country's management of its hydrocarbon resources may well serve as a microcosm of things to come.

From the 1968 expropriation of the International Petroleum Company's assets in Peru under the left-wing military dictatorship of Juan Velasco Alvarado well into the 1990s, Peru's oil sector was concentrated in the hands of Petroperú, the state-owned oil firm. The company held a monopoly on all oil and gas industry activities. The limits of this model became apparent in the late 1980s as the firm's revenues declined and Peru became a net oil importer.

With the election of the conservative Alberto Fujimori in 1990, the sector changed dramatically. Fujimori shook up the firm's management and opened the country's resources to private firms. In 1993, Fujimori created Perupetro (henceforth the National Hydrocarbon Agency, NAH, to avoid confusion) a state-owned enterprise dedicated to the administration of oil and gas resources and the maintenance of contracts with private firms.

The neoliberal model of the Fujimori years, both broadly speaking and in the oil sector in particular, remains the dominant paradigm in Peru. Driven by the primary commodities export sector, it has brought tremendous economic growth coupled with social unrest stemming from environmental disputes, a broken political system, and an increasingly unequal and segmented distribution of wealth.

Inflection Point?

However, Peru may have arrived at an inflection point of sorts. With the seventh-largest crude oil reserves in Central and South America, the oil industry has become a locus of political contention. With a 172,000 barrel per day (bbl/d) rate of oil consumption and six refineries with a total distillation capacity of nearly 199,000 bbl/d, along with export commitments, Peru imports much of its oil. Thus, the future of the country's oil sector has implications for labor, environmentalists, government budgets, the trade balance and the exchange rate.  

 
The ostensibly center-left government of President Ollanta Humala (Peruvian Nationalist Party, since 2011) appears more than willing to continue with the fujimorist model, albeit with some modifications. On 15 October 2013, the NAH extended the length of five private oil concessions for an additional 10 years to incentivize exploration and production. More importantly, however, the NAH gave the green light to Petroperú to return to upstream oil production activities, which it has been blocked from pursuing since 1996. Petroperú is scheduled to announce by May 2014 the concessions in which it will maintain up to 25 percent participation alongside private operators. This development places the company, and the sector on a marginally more statist path in line with many developing countries.

With these recent announcements, pressure on the two firms from organized labor is beginning to mount. The Coalition of Petroperú Workers Unions announced on 11 November that it opposed the 10-year concession extension, claiming that private firms were failing to invest sufficiently in exploration activities and demanding that all the firms' assets be returned to Petroperú for exploitation. Furthermore, the head of the union demanded the re-integration of the NAH into Petroperú. This rhetoric, sure to elicit shudders from foreign investors, is nearly identical to the public statements from Argentina's Peronists prior to that country's nationalization of Spain's Repsol YPF in 2012.

Pressure isn't limited to the left, however. The Peruvian Hydrocarbons Society said plainly on 25 September that the current laws governing the sector are outdated and in need of major structural reforms. The group's president cited 29 contracts halted under force majeure, as well as US$2.5 billion in deferred investments due to delays in licensing and paperwork.

Where Things are Headed

Where, then, is Peru's oil sector headed, and what does it mean for the country? The 7 October results of the Universidad Católica's World Values Poll offer some interesting clues. At 51 percent, just over half of Peruvians favored an increased state role in the economy. Support for privatization peaked from 1996 to 2001, as the country reaped the benefits of the Fujimori administration's round of "shock-therapy" neoliberal reforms. After that point, however, support for privatization fell gradually each year. With a combined two-thirds of Peruvians claiming to be part of the lower-middle or working class, the country's rising economic inequality may lead to more pressure for moves similar to the re-entry of Petroperú into the country's upstream production market.

Peruvians' disappointment with the government of Ollanta Humala, which currently has a 26 percent approval rating, may stem more from poor governance and corruption scandals than Humala's failure to pursue left-leaning policies. Nevertheless, after the rather economically conservative governments of Alejandro Toledo (Possible Peru, 2001-2006) and Alan García (American Popular Revolutionary Alliance, 2006-2011), the country may have a pent-up desire for a center-left president in the vein of Brazil's Lula or Uruguay's José Mujica.

With most of the viable presidential contenders for 2016 marred by scandal and fecklessness, a theoretical opening exists for a competent-but-ideological candidate. Alberto Fujimori's daughter, Keiko Fujimori, who narrowly lost the 2011 presidential elections, is likely to run again. Whether voters accept her extension of the prevailing neoliberal model or seek a mirror-universe version of her father from the left is an open question. This author suspects that Peruvians may not yet know themselves.

This executive report was provided by Southern Pulse experts on Latin America for Oil & Energy Insider.