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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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Peru’s Political Crisis Is Weighing On Its Energy Industry

  • Peru’s promising petroleum potential is being threatened as a political crisis embroils the country.
  • Peru’s oil production has declined sharply since the 1990s, with nearby Colombia and Ecuador garnering the energy investment once destined for the impoverished Andean country. 
  • With fossil fuels providing 72% of all energy used in Peru, it is key for the national government to promote the development of the hydrocarbon sector to prevent an energy crisis.

Peru’s long-running political crisis has erupted into violence. Scandal embroiled leftist president Pedro Castillo, who sought to upend the conservative establishment and decades of neoliberal economic policy, was ousted from office after attempting to dissolve congress in an attempted coup. Shortly after Castillo was arrested while fleeing to the Mexican embassy for asylum, he was charged with conspiracy and rebellion. After Castillo’s deputy Dina Boluarte was sworn in as president, demonstrations swept across Peru, claiming at least 21 lives and disrupting the Andean nation’s economy. Roadblocks, vandalism and looting are widespread while police stations, prosecutors and tax offices have been torched. Protesters, many of whom are from poor rural and Indigenous communities, are furious over leftist Castillo’s removal from offic by a Congress long seen as only representing the interests of Peru’s wealthy minority. These events will impact Peru’s beaten-down hydrocarbon sector, which for over a decade has been embroiled in a series of crises that worsened when Castillo took office and threatened nationalization.

Peru’s oil production has declined sharply since the 1990s, with nearby Colombia and Ecuador garnering the energy investment once destined for the impoverished Andean country. This is despite Peru’s considerable petroleum potential. Data from government licensing agency Perupetro shows an estimated (Spanish) 422 million barrels of proven and probable reserves along with 14 billion barrels of oil resources. During November 2022, Peru pumped an average of 37,875 barrels per day, which, while 13% higher than the 33,379 barrels daily produced a month earlier, was flat compared to a year earlier. For that period, natural gas output rose for the fourth consecutive month to a record 45 million cubic meters per day, a healthy 6.8% higher month over month. Production for the first 11 months of 2022 reached an average of 37.4 cubic meters per day compared to 31.6 million cubic meters daily for the same period a year earlier. 

Stronger natural gas production is an especially important development. Not only is natural gas the transitional fossil fuel of choice for a global economy trying to rapidly decarbonize, but it plays a key role in Peru’s energy mix with it being an important fuel for the Andean country’s households. This is allowing Peru to take advantage of Europe’s energy crisis and the resultant higher natural gas prices by ramping up liquefied natural gas exports. According to Perupetro (Spanish), there were 46 LNG cargoes exported during the first 11 months of 2022, of which 28 were destined for Europe. This is compared to 32 cargoes for the same period in 2021 when only 14 shipments of LNG were sent to Europe. Growing natural gas production is also a crucial development for Peru because the fossil fuel provides 29% of all energy consumed domestically, with only oil being a more important source accounting for 43% of the Andean country's energy needs. 

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The outlook for Peru’s embattled hydrocarbon sector is bleak despite the Andean country's considerable petroleum potential. A disintegrating social license, notably in Peru’s Amazon, where a sizable portion of oil reserves and production are located, is weighing heavily on industry operations. Protests, blockades, oilfield invasions and the frequent sabotage of the 100,000 barrel per day Norperuano pipeline, which connects the northern Amazon oilfields to the port of Bayovar, invariably leads to production outages. There is a long history of industry operations in the Amazon causing environmental degradation, further accelerating the deterioration of its social license and further demonstrations. The severity of oil spills and other environmentally damaging incidents in the Amazon is evident from Peru’s Environmental Evaluation and Enforcement Agency (OEFA -Spanish initials) issuing 73 disciplinary notices and 72 fines concerning the operation of blocks 192 and 64 over the last decade. 

Community anger toward Peru’s oil industry was magnified by a January 2022 oil spill off the country’s northern coast. A ruptured undersea pipeline from the Repsol-owned La Pampilla refinery discharged over 10,000 barrels of crude oil into the Pacific Ocean, creating a 40 square-mile slick that tarred 25 beaches and endangered three maritime reserves. In response, Peru’s Consumer Protection Agency invoked legal action against Repsol, seeking $4.5 billion in damages. The crisis in Peru’s northern Amazon, because of a lack of social license, is so severe that energy companies are abandoning oil blocks in the region. Among them are Block 192, which was handed back to the government by Canadian junior Frontera Energy, while Chilean driller GeoPark withdrew from Block 64. Operations are suspended indefinitely on Block 8 where Pluspetrol Norte is the operator. 

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With fossil fuels providing 72% of all energy used in Peru, it is key for the national government to promote the development of the hydrocarbon sector to prevent an energy crisis. This is particularly the case because Peru’s oil production only accounts for a seventh of the petroleum consumed domestically, forcing the country to rely on imports. Peru sources most of its oil from neighboring Ecuador. The U.S., which exported $400 million of petroleum derivatives to Peru in 2021, is the primary source of refined products. Political ructions in Ecuador over the last three years have sharply impacted that tiny South American country’s oil production. During June 2022, anti-government demonstrations forced state-controlled Petroecuador to declare force majeure and cease petroleum exports. That highlights the vulnerability of Peru’s oil supply to disruptions beyond Lima’s control. When coupled with weak domestic production and regular outages because of community protests, it underscores the insecurity of the supply of economically crucial fossil fuels and the risk of an energy crisis.

The latest developments in Peru’s long-running political crisis will roil the country’s post-pandemic economic recovery, which has been struggling to maintain momentum since 2021. Gross domestic product for 2022 is expected to expand by a modest 2.7%, is below the pre-pandemic average of 3%, and the Andean country’s hydrocarbon sector is incapable of providing an anticipated boost. If an energy crisis emerges because of falling fossil fuel production and imports, then the economy will falter, with GDP growth falling further. For those reasons, Lima must bolster energy security, to avoid a looming energy crisis, by expanding petroleum industry operations, proven oil reserves and production. That simply cannot occur until the current political crisis is resolved and anti-government demonstrations subside.

By Matthew Smith for Oilprice.com

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