Issue: Research

Country: Bolivia, Peru

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The debate about exporting natural gas from Camisea instead of supplying the domestic market continues in Peru.

In early May, a report prepared for Peru's Supervisory Body for Investment in Energy and Mining, concluded that TGP, the company in charge of transporting natural gas from Camisea to the coast, could not use the country's existing gas pipelines to sell Camisea's gas on the international market. The rationale behind the decision was that the pipeline was built using resources that belonged to all Peruvians to transport gas from Block 88 of Camisea, and thus this gas should be used exclusively to supply the domestic market. The government of Peru, which supports exporting natural gas, requested the Payet, Rey and Cauvi legal firm, which authored the report, to further clarify their recommendations.

This situation re-ignited debate on the need to prioritize domestic supply over export profits, since of the 8.79 trillion cubic feet (tcf) of proven reserves in Camisea's Blocks 56 and 88, 4.08 tcf are set to be exported to Mexico and 4.71 tcf are committed to the domestic market. One of the main concerns about exporting this gas is the construction of the Andean Pipeline, which would take natural gas to the southern regions of Cusco, Arequipa, Puno, Moquegua and Tacna. This pipeline needs approximately five tcf to supply this area for five years; its construction has been postponed several times already because there are not enough reserves to guarantee this amount. The gas supply is also not adequate to guarantee the supply to other companies operating in Peru and new demand from households which have begun using natural gas as an energy source at a rate of an estimated 800 million cubic feet a day (mpcd).

In this context, Peruvian President Alan Garcia strongly argued that domestic demand for gas is guaranteed until 2016. He added that, with regards to export contracts signed by Peru LNG, "we intend to respect legal certainty and the rules of the game for investors," by amending the original legislation reserving all natural gas for the domestic market. The Minister of Energy and Mines, Pedro Sanchez, and Prime Minister Javier Velásquez both agreed with the President's position, indicating comprehensive government support for the export project.

The government's position provoked criticism from Juan Manuel Guillén, Hernán Fuentes, Hugo Gonzales, Jaime Rodriguez and Hugo Gonzales, the regional presidents of Arequipa, Puno, Cusco, Moquegua and Tacna respectively. The regional leaders expressed their strong opposition to natural gas exports, considering domestic supply for the South has not yet been ensured. They also requested that Congress review the export contract signed between the government and the Camisea Consortium. Social organizations in Cusco also reacted, expressing their concern and beginning a strike to protest the fact that gas from Camisea—which is located in Cusco—will arrive in Mexico before it does in the region where it is produced.

In this context, what options are there to stop Camisea gas exports? Experts in energy issues, such as Humberto Campodónico and Aurelio Ochoa argue that, although a strong political will is needed to prioritize the supply of domestic demand, Law 27133 on the Promotion and Development of the Natural Gas Industry also provides a legal framework to do so, as it guarantees the domestic supply without the need to renegotiate contracts with the Camisea Consortium and without harming its legal stability or losing credibility among investors. In that sense, it is important to note that the original contract signed in 2000 with Camisea did not allow exporting the gas from Block 88 and allocated all its reserves to the domestic market, although it was amended in 2004 to allow the export project.

Campodonico also points out that there are technical solutions to the debate, such as replacing the exports from Blocks 88 and 56 with gas reserves from other blocks, including Block 27. This gas however, would come at a higher price to buyers, which would make exports a less profitable option for investors. Another option he mentioned is buying gas from Peru LNG at the price they would receive after subtracting the transport costs to Mexico, so they do not export it. To defend the export project, the government indicated that, given an emergency situation of gas shortages, the General Law of Hydrocarbons stipulates that priority is given to the domestic market over export demands. Therefore, they argue that, even though they are authorizing the exports, if there are shortages, Peru LNG would reduce its export volume until domestic demand is guaranteed.

Peru has an important gas reserve in its territory and the country faces increasing domestic demand for cheap and clean energy, so it would be outrageous to begin to export this energy source without filling domestic demand. The government argues that this demand is guaranteed even with exports. However critics say it is not even guaranteed at the present time, and even if that demand was covered with reserves from other blocks, it would be a more expensive gas, and likely to hurt domestic consumers and benefit a single exporting firm.

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The oil spill in the Gulf of Mexico: consequences and perspectives for Latin America.

The explosion and sinking of BP's oil drilling platform Deep Water Horizon on April 20 caused the well, located at 1,500 meters under water, to contaminate the Gulf of Mexico with nearly 9.5 million liters of oil to date. The spill severely affected the maritime basin of the Gulf, which contains an ecosystem of great biodiversity.

The ecological disaster is still incalculable, as the oil spill continues to spread throughout the Caribbean coast and the U.S. states of Louisiana, Mississippi, Alabama and Florida, which have already been affected not only in terms of environmental damage but also with large economic losses in the fishing and tourism sectors.

The ecological disaster also has a grave political impact, as U.S. President Barack Obama halted the commencement of exploration and extraction activities of all new oil rigs on North American coasts. Additionally, U.S. government representatives said that from now on, oil contracts will not be granted without the necessary safeguards to prevent a crisis like the Deepwater spill. This is a dramatic shift for the U.S. government, which only a month earlier had announced a new strategy to achieve energy independence and security based precisely on the extraction of oil in coastal areas of the United States.

It should be noted that all the efforts of BP and the U.S. government are currently aimed at stopping the flow of oil, although both experts and the public continue to question their ability to achieve that goal. Until late May, BP and other firms involved acknowledged their responsibility for the accident by assuming the cleanup costs, which had then reached US$ 350 million, and are preparing to pay compensation of up to US$ 75 million (under current legislation) to those who suffered personal injury or business losses because of the spill.

Considering this crisis, experts say a greater level of control over the activities of offshore companies should be ensured by strengthening the capacities and independence of regulatory bodies. Indeed, this experience shows that it is not enough for companies to monitor platforms themselves, since BP has been accused of reducing safety costs to increase profits, while regulatory agencies have been cast as complacent to the corner-cutting methods of this company.

The Gulf oil spill has opened a public debate on the dangers created by growing oil demand and the surge of extractive activities needed to supply it, given the risk of ecological and economic disasters. It has also generated widespread awareness of the dangers of dependency on fossil fuels—including the issue of their contribution to climate change—and the need to promote the use of renewable sources of energy.

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Implications of rising international gold prices for Peru and Bolivia.

Due to the crisis in the European financial sector and in the context of high uncertainty about the economic outlook in the near future, gold has become a shelter for investors, driving its price upwards. Indeed, in mid-May, the price of gold exceeded US$ 1,240 an ounce on the international market—an increase of approximately 9% from January, given the weakness of both the euro and the dollar. What implications did this increase have for the Latin American countries such as Peru and Bolivia, whose economies depend on extractive activities, and particularly gold mining?

On May 12 in Peru, the partnership of Buenaventura and Gold Fields announced that they had discovered a major gold deposit in Chucapaca Ichuña in the district of the province General Sánchez Cerro, Moquegua, more than 4000 meters above sea level. Estimates suggest that these deposits contain about 5.6 million gold ounces and will require a US$ 750 million investment for the exploitation phase.

The recent discovery of the Moquegua gold deposit, together with higher prices in the international market, has re-opened the debate on the need to tax windfall profits and eliminate the current agreement based on mining companies so-called voluntary contributions, which are payments to the government based on a mining company's profits after mineral prices exceed their regular trend by a certain percentage. Indeed, economist Pedro Francke said that while the governments of Australia and Chile increased royalties to increase the government take of booming gold prices, the Peruvian government had no interest in applying similar measures. For its part, the mining sector argues that a windfall profit tax would change the rules of the game and cannot be applied because mining companies have tax stability contracts, as remarked the former president of the National Society of Mining, Petroleum and Energy, Augusto Baertl.

Peru's main export in 2009 was gold. Indeed, of the US$ 26,885 million total mining exports, gold accounted for 25%. But Peru is not only a major gold producer (ranked at sixth in the world), but also third in exploration, despite the high social unrest related to the mining sector. In fact, according to the Ombudsman's Office monthly report on conflicts, of the 260 social conflicts registered in April, half are classified as "socio-environmental" conflicts related to the extractive industries. Despite this expression of public discontent, the Deputy Minister of Energy and Mines, Fernando Gala, said that social conflicts related to the mining industry would not halt future mining investments and that by next year, there will be mining projects developed for an expected $ 14 billion across the country.

Meanwhile, in Bolivia, the government has acknowledged that it lacks the means to control the exploitation of gold in their deposits, mostly located north of the country and exploited by informal miners. The Minister of Mining, José Pimentel, clearly declared, "the exploitation of gold in Bolivia is out of control," when referring to both the artisanal mining activities and the export of informally-mined gold. Under these conditions, despite gold's high price, the government has not obtained higher revenues from gold mining activities.

To remedy this, in late May the Bolivian government announced the creation of the Bolivian Gold Company (EBO), with an investment of over US$ 1 billion, which will play a strategic role in the stages of exploitation and also in the commercialization of the country's gold. One of EBO's objectives will be to monitor and control mining companies operating illegally in the north of the country.

In summary, both countries are moving towards implementing a policy that promotes the exploitation of gold in a favorable context due to increased gold prices on the international market. In Peru, the debate focuses on the need for a windfall profit tax, while in the Bolivian case, the concern is focused on controlling the informal gold mining activity that does not generate revenues for the state.

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• April 30, 2010
• March 9, 2010
• February 4 —22, 2010
• January 20 —February 3, 2010
• January 4 —19, 2010
• November 25 —December 20, 2009
• October 27— November 10, 2009
• October 10— 24, 2009
• September 25— October 9, 2009
• September 10— 24, 2009
• August 26— September 9, 2009
• August 11— 25, 2009
• July 10— 25, 2009
• May 23 —June 9, 2009
• April 7— 21, 2009
• March 21 —April 6, 2009
• March 6 —20, 2009
• January 20 —February 3, 2009
• January 5— 19, 2009
• November 9 —November 24, 2008
• October 25 —November 8, 2008
• October 9 —October 24, 2008
• September 24 —October 8, 2008