Peru Oil Investing

Brian Hicks

Written By Brian Hicks

Posted October 31, 2013

There’s a reason why you’re not hearing much about Peruvian oil investment, and that is because production has been going down the drain for a number of years.

Peru started off in 1980 with a crude oil production rate of up to 200,000 bpd, but this trended downward to a little over 60,000 bpd in 2012.

But the good news is that a number of oil companies are still hopeful of Peru’s potential, and all the nation needs is a little more foreign investment to increase output.

oil drillingLocal chapters of oil companies including Spain’s Repsol (OTC: REPYY), Brazil’s Petrobras (NYSE: PBR), and Colombia’s Ecopetrol (NYSE: EC) have created a consortium called the Peruvian Hydrocarbons Society – designed to encourage the Peruvian government to make the necessary changes in revamping the nation’s energy sector.

But this group can only do so much, since it is the government’s job to create a lucrative investment atmosphere for oil companies.

Royal Dutch Shell (NYSE: RDS-A) has had a presence in Peru. And Exxon Mobil (NYSE: XOM) is interested in Peruvian assets that the government will have up for auction.

Peru is considered the seventh largest holder of crude reserves in Latin America, with 579 million barrels, according to estimates from the Energy Information Administration. It also has the fourth largest natural gas reserves in Latin America, containing 12.7 trillion cubic feet.

Peru does have a liquefied natural gas export plant called Melchorita, which could be a major asset going forward, since LNG is a valued commodity in Asian markets. Repsol and other companies have investment stakes in this plant – exporting to such countries as Spain, South Korea, and Japan.

Although production of liquids increased to 160,000 bpd in 2012, of which more than half were NGLs, Peru still relies heavily on imports from countries like the U.S.

But major oil companies are not willing to give up on Peruvian oil interests. Most notably, China National Petroleum Company is close to purchasing Peruvian assets from Petrobras for roughly $2 billion, as Bloomberg reported.

Chinese oil companies have been prowling all over South America for oil interests, Peru included. Petrobras has had three separate assets in the nation since 1996.

The state-run Brazilian firm is considered the most indebted public company. Petrobras underwent a 40 percent dip in the third quarter and is looking to raise $237 billion in capital to finance energy projects until 2017.

Petrobras also wants to finance its 40 percent stake in Brazil’s offshore Libra field – considered the largest discovery in the nation’s history.

The deal with CNPC is mostly being conducted behind closed doors, and it is expected to close next month. The agreement will shine more light on Peru, but there are some drawbacks to dealing in the region.

Peruvian Amazon

Peru certainly has a long way to go to become a major exporter in South America. But there are a couple specific things the government needs to work through: relations with indigenous peoples and constructing sound policy for drilling in the Amazon.

A 2011 law dictates that the government must convene with indigenous groups before engaging in any sort of operations in the Amazon. While the law will help ease tensions, it will slow down the process of getting projects and auctions off the ground. This year, for example, Peru delayed an auction of 27 blocks due to the 2011 law. However, state-run company Perupetro could hold auctions concentrated on the coast instead of the Amazon.

The law is well-intended, particularly given the country’s tumultuous history between the government and indigenous groups over oil projects and other matters.

In 2009, 23 police officers and 10 natives were killed when protests grew out of hand. And there are allegations that the government threw extra bodies in the river to hide the true number of people killed.

Given this history and the controversy of working in the Amazon, Peru will have to work out serious political and social issues before the nation becomes a stable atmosphere for more foreign involvement.

Is Peru Worth the Risk?

Peru is certainly worth keeping an eye on, but there are other lucrative hotspots in South America that show more promise.

A number of governments throughout South America are beginning to loosen tight restrictions on foreign energy investment.

Brazil auctioned off portions of the Libra to outside investors, which could yield a 9 to 15 percent rate of return for the winners. And Argentina has the same open-door policy for its Vaca Muerta shale field – containing 661 billion barrels of oil and 1,181 trillion cubic feet of natural gas.

In fact, Argentina is one of the top shale centers on the planet, and it may be closer to joining North America as a commercial shale producer. Even Mexico, with its long history of tight energy control, may open up state-controlled company Pemex to foreign collaboration.

The new policies by these governments aren’t to every investor’s liking, and many think the new measures don’t go far enough. But they are positive steps that could lead to further investment in these nations in the future.

If you’re looking for the safest bet in Latin America, go with Colombia – a country that actively encourages direct foreign investment.

Although the Peruvian government hopes to attract more investment, there just isn’t much incentive that will lure more companies to the Incan nation at the moment.

Other surrounding nations are getting the most attention when it comes to gaining investment power, and Peru is slowly falling further behind.

But perhaps Peru’s time will come in the future.

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