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Bloom is off mining, energy sectors in Peru
Journal of Commerce / September 10, 1998

By Larry Luxner

LIMA -- Peru's all-important energy and mining sector has been shaken by a double whammy: record low gold and copper prices sparked by the Asian financial crisis, and the collapse of Camisea -- Peru's single largest foreign investment project.

Hans Flury, president of the 162-member National Mining, Petroleum and Energy Society, says Peru's mining sector will see a 20% drop in revenue this year.

"Mineral prices are too low, and the industry is suffering from that," says Flury, who's also legal vice-president at Southern Peru Copper Corp. "We blame the Asian crisis, because it's the only tangible thing to blame. Companies will have less income, meaning less income tax for the government. Exploration has been postponed because of reduced budgets, and most of the big mining projects are on hold."

That includes the $2.2 billion Antamina copper project, owned by three Canadian companies: Rio Algom (37.5%); Noranda Inc. (37.5%) and Teck Corp. (25%). Flury says Antamina, located 270 kilometers north of Lima, will be one of the first projects to benefit from Peru's new 18% deferred tax credit, recently approved by the Fujimori government to spur foreign investment in the mining sector.

Peru -- which recently surpassed Brazil as South America's leading gold producer -- is already home to the continent's largest gold mine, Yanacocha, a joint venture between Newmont Gold Co. and Peru's Buenaventura S.A. Yanacocha has proven and probable reserves exceeding six million ounces. And last year, Southern Peru announced it would invest $1.8 billion by 2005 to boost copper production and modernize its facilities.

But the real big question mark is what'll happen with Peru's $3 billion Camisea gas project, which President Alberto Fujimori once called "the contract of the century."

After sinking $250 million into their proposed gas development, energy giants Shell and Mobil decided in July not to go forward with their venture to exploit 10.8 trillion cubic feet of natural gas and 725 million barrels of liquefied gas -- more than seven times Peru's previously known hydrocarbon reserves.

"We are all disappointed," said Alan Hunt, general manager of Shell Prospecting and Development Peru. "Over the past two years, we have all worked hard to overcome the complex technical, environmental and commercial challenges which would enable the Camisea project to become a reality. We regret that it was not possible to resolve issues that prevent the progression of the project at the current time and the realization of the substantial benefits available."

The Camisea area is located 500 kilometers east of Lima, across the Andes in the Ucayali basin in the department of Cuzco. The move by Shell (57.5%) and Mobil (42.5%) to shelve Camisea -- which would have brought lower-cost gas to the Peruvian market -- came despite a Feb. 1 government decree extending Peru's excise-tax exemption on natural gas until 2005.

"If Peru would allow exports of gas to Bolivia, it would pay. But the contract didn't permit gas to be exported," says a U.S. official. "There is no gas distribution, and Peru doesn't like vertical integration."

In late August, Peruvian officials announced a road show to relaunch the Camisea project. Says Mr. Flury: "Camisea is very important for Peru, and it has to happen sooner or later. The government is saying that before the end of next year, they'll have someone to take it over."

Mr. Fujimori himself seems optimistic, insisting that his government remains committed to seeing Camisea through.

"It won't be very difficult to bring in investors back into the project," the president said during a Sep. 1 interview in Lima. "We're now in a more favorable position than when we signed the concession with Shell. Studies have shown even greater proven and probable reserves. This project will be maintained. The risks of an investor of this nature are less than before. There's also the possibility of utilizing gas in Lima and the coast, and the opportunity of establishing a petrochemical industry. I think that for a potential investors, the project is viable. In any case, we think it's still attractive."

Meanwhile, Spanish gas conglomerate Repsol says it'll invest $575 million in Peru over the next seven years -- and that figure doesn't include exploration expenditures. This year alone, Repsol will spend $100 million in infrastructure and equipment. The company's $1.2 billion business portfolio is dominated by Refineria La Pampilla, which accounts for 70% of Repsol's Peruvian sales and 47% of the local gasoline market. Its other business ventures include Corpetrol, which manages the company's service-station business, and Solgas, a liquefied petroleum gas producer with 40% of the local market. Repsol may also invest in a petrochemical plant in Pisco, 250 kilometers south of Lima.

Separately, Cepri Petroperu -- a government agency formed to promote private investment in state-run Petroperu -- plans to sell the Oleoducto Nor Peruano. This 1,110-kilometer-long pipeline, built between 1975 and 1978, begins near the jungle town of San Jose de Samuro, near Iquitos, and ends at the port of Bayovar, in the department of Piura.

Bayovar has a 113-meter freight platform, with the capacity to load 250,000-ton oil tankers at a rate of 100,000 barrels an hour. The pipeline's diameter varies from 16 to 24 inches, while design capacity ranges from 75,000 to 210,000 barrels.

According to the U.S. Embassy in Lima, "the pipeline is the only way Petroperu can transport oil produced in the jungle to the coast; therefore it is considered and accepted as a monopoly."

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