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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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Civil Unrest Could Crush Peru’s Oil Ambitions


Peru has been one of the hardest-hit Latin American countries by the COVID-19 pandemic despite being one of the first to impose a strict lockdown to prevent the virus from spreading. The severe economic fallout for Peru is highlighted by the International Monetary Fund predicting the economy will shrink by almost 14% during 2020. That is a worrying development when the central government’s weak fiscal position and the high level of informal employment in the Andean country are considered. Civil unrest poses a major threat to Peru’s oil industry, with most of the Andean country’s oil reserves located onshore in the Amazon. This has long seen it targeted by disgruntled indigenous activists and local communities with protests and blockades. During early August 2020, protesters took over a pumping station operated by national oil company PetroPeru one day after recommencing operations following a two months shutdown.  They also attempted to seize control of block 95 in the Marañon Basin containing the Bretana oil field operated by microcap Canadian upstream oil producer PetroTal forcing the company to shut-in production. 


Source: PetroTal Investor Presentation August 2020.

Civil dissent flared up because of ongoing disputes over equitable access to resources, with a lack of economic and medical aid in Amazonian communities being magnified by the COVID-19 pandemic. In the violent clashes between protestors and security forces, 3 indigenous Amazon residents died while 17 people including police were injured. PetroTal was not able to restart the field until 28 September 2020, sharply impacting its oil production and earnings.

Related: Hedge Funds Boost Bullish Oil Bets More worrying is that despite the protests coming to an end for at least the time being, there are considerable tensions between Peru’s Amazonian communities and the central government. A key source of the conflict is the oil industry and its Amazon operations. A report titled The Shadow of Oil claims between 2000 and 2019 there have been 474 oil spills in the Peruvian Amazon, causing considerable environmental damage. Most of those spills can be attributed to national oil company PetroPeru and the NorPeruano Pipeline, which connects oilfields in Peru’s Amazon to the Bayóvar terminal on the Pacific Coast. The report claims that 65% of those oil spills can be blamed upon operational faults, such as corrosion and poor maintenance, rather than acts of sabotage as alleged by Peru’s government. The impact of those spills on the local environment has become a rallying point for local indigenous communities already angered by decades of government mistreatment. Those tensions are being fanned by the COVID-19 pandemic, which has exposed the fault lines in Peruvian society and the stark division between the urban rich and deeply impoverished rural poor. While the protests came to an end in late-September 2020 there are still considerable simmering hostilities among local communities that could flare up at any time. These events have led to an increased perception of risk and are deterring investment from international energy companies.

Despite mining being a key driver of Peru’s economy, responsible for around 10% of gross domestic product, Lima is starting to recognize the country’s oil potential. In 2018, it was determined that Peru had proven oil reserves of 1.2 billion barrels. Those are some of the lowest among oil-producing countries in South America, but the consensus view is Peru possesses considerable oil potential. The Andean country’s primary onshore oil basin is the Marañon Basin in Northeastern Amazonian Peru. It is a southern extension of the Oriente Basin in neighboring Ecuador and is estimated to hold oil reserves of up to 1.9 billion barrels, exceeding Peru’s documented proven oil reserves at the end of 2018. The largest oil field in the basin is the Corrientes field operated by national oil company PetroPeru. The harsh impact of the COVID-19 pandemic on Peru, with the IMF predicting that GDP will contract by an unbelievable 14%, has made Lima realize it needs to expand the country’s economic base.

Peru’s considerable petroleum potential could significantly boost the country’s economic growth. In October, Peru’s Ministry of Energy and Mines announced a series of proposals aimed at boosting investment in the underdeveloped hydrocarbon sector. These changes form an important part of Lima’s overall plan to reactivate Peru’s economy, after the considerable impact of COVID-19 and measures implemented to slow the spread of the virus on growth and development. The proposed measures include changes to regulation and royalties intended to make Peru’s petroleum industry more competitive, efficient, and transparent while moving toward making the country more energy self-sufficient. If Lima can develop Peru’s oil potential, it will reduce the country’s reliance upon copper which is responsible for almost a third of exports by value and up to 10% of GDP. The actions being taken by Lima, however, may not be enough to attract the desired level of investment, technology, and skilled labor from offshore energy companies.

Related: Washington Greenlights Conoco Oil Project In Alaska

Aside from the significant degree of community dissent surrounding Peru’s oil industry, notably in the Amazon, high breakeven costs are affecting investment in an operating environment where oil prices are weak. The Andean country’s breakeven costs per barrel for onshore Amazon production are estimated to average around $38 per barrel, which is higher than other Latin American jurisdictions such as offshore Guyana where production in ExxonMobil’s Stabroek Block breaks even at $35 per barrel. In fact, Peru’s onshore breakeven price is around $1 a barrel greater than the current Brent price, indicating that the country will struggle to attract investment from international energy companies for as long as oil prices remain significantly weaker.

Another deterrent to international investment is the main oil produced in Peru known as Loreto, is a heavy sour crude with a low API gravity of around 19 degrees and high sulfur content of just over 1%. That makes it more difficult and expensive to refine than lighter sweeter crude oils from offshore Guyana and Brazil. Sweet crude oil is growing in popularity, especially among Asian refiners, because of the ongoing push for extremely low sulfur content fuels as part of the fight against global warming and countries meeting their Paris agreement on climate change obligations. Even more attractive for international energy majors is geopolitical risk in offshore Guyana and Brazil falling. For those reasons, both neighboring jurisdictions are more attractive international energy companies. These developments make it difficult to see how Peru can attract the required investment to develop its oil industry until oil prices undergo a significant and sustained recovery.

By Matthew Smith for Oilprice.com


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