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China Optimistic on Peru Outlook, but Other Investors Wary

Bottom Line: China’s optimism as it enters final talks to acquire Petrobras’ assets in Peru is not shared yet with other potential foreign investors as the country fails to make good on promises to streamline the permit process and concessions lay dormant.

Analysis: China National Petroleum Corporation (CNPC) is in final negotiations to purchase Petrobras' approximately $2 billion in assets in Peru. The Petrobras offerings include concessions at Bloc X in Piura (where a CNPC subsidiary already operates at Bloc VI and VII), Bloc 58 in the Amazon near the Camisea Project (where there are proven gas reserves at the Urubamba 1X and Picha 2X wells), and a partial stake in nearby Bloc 57, operated by Repsol. The move comes amid Petrobras' sales of assets to finance deep-water exploration off the Brazilian coast and Peru’s effort to draw energy investors. The National Mining, Petroleum and Energy Society (SNMPE) trade association is pressuring Peru to streamline its permit process so that foreign companies can secure all necessary paperwork to start exploration in about one year.

At the same time we are witnessing major delays in contracts for gas projects in south Peru. The Nodo Energético del Sur project encompasses the construction of two thermal power plants in Mollendo (Arequipa) and Ilo (Moquegua), which will each add 500 mW in electric production. In discussing the project, Minister of Energy and Mines Jorge Merino highlighted that not only will the energy nodes produce additional electricity; they also have the benefit of creating redundancy during the construction of the Gasoducto Sur Peruano in the same region. The projected cost of the two plants is at least US$600 million, to be covered by the federal government and investors, not the states. An auction of the concession was planned for 15 November, but that date was pushed back to 29 November after several interested parties requested more time to evaluate the project. Initially the plants will operate with diesel when they start up in 2015, until the Gasoducto Sur Peruano (GSP, Southern Peruvian Gas Pipeline) is complete, when the plants will shift to natural gas use.

The bidding for the US$2.75 billion gas pipeline was also postponed, and is now set for 17 February 2014. Peru says at least 40 parties have expressed interest in that historic project, even as the government-run ProInversión agency continues to modify plans. During a North American expo about the project on 25 October, the delegation from Peru added a 220-kilometer section of 36-inch pipeline between Cusco and Ayacucho that will run parallel to the existing Central Pipeline.

Recommendation: Although President Ollanta Humala signaled his willingness to reduce permit bureaucracy in May 2013, officials have failed to make the system more efficient. SNMPE predicts that outside investment in mining and hydrocarbons will be 30 percent less in 2013 than it was in 2012, even though government officials continue to say they hope to have bureaucratic reforms in place by years end. Until then, nearly half (29 out of 75) gas and oil concessions are stalled awaiting final approval to explore or develop existing blocs.

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