In 2008 Peru’s energy policy was confronted by a perfect storm. Five years of accelerating economic growth and the commissioning of major mining projects led to a surge in demand for petroleum products and electricity. The pipeline from the Camisea gas field to Lima, completed in 2004, was already operating at capacity, something it had not been expected to do until 2014. The price of oil was surging to $120 per barrel and, to make matters worse, a drought was affecting production at the nation’s hydroelectric dams. The government responded rapidly with efforts to promote hydrocarbons exploration, develop midstream infrastructure and diversify the energy matrix through new thermal and renewable energy generation.

In 2016 the government faces a different energy scenario. Falling commodity prices coupled with anti-mining protests have led to the delay of major copper and gold projects. As a result, demand for energy has not reached forecast levels. Several major generation projects are set to come on-line in 2016 and 2017. As such, the country faces a period of oversupply estimated to last until at least 2021. Meanwhile, at prices of under $38 a barrel, appetite for oil exploration in the country’s remote regions has dwindled. The challenge facing the Ministry of Energy and Mines (Ministerio de Energía y Minas, MINEM) is how to optimally leverage the country’s abundant energy resources.

Reserves & Production

The Camisea gas field, located in the jungle of central Peru, was discovered by Royal Dutch Shell in 1984. This was a seminal moment for the Peruvian energy industry. The project’s possible reserves of 11trn cu feet of gas catapulted Peru to be among the continent’s major gas players. According to the “BP Statistical Review of World Energy 2015”, by the end of 2014 Peru had total proven reserves of 15trn cu feet, just behind Brazil with 16trn cu feet, but far below Venezuela’s massive reserves of 197.1trn cu feet. Peru’s natural gas production pre-Camisea was negligible, but by 2014 the country was producing 1.3bn cu feet per day. The project has allowed Peru to develop gas-fuelled power stations that supply 50% of the nation’s electricity demand.


However, even with new thermal generation, the scale of gas reserves at Camisea far outstrips domestic consumption. According to BP’s report, Peru has a reserves-to-production ratio of 33 years, the highest on the continent after Venezuela. Given this abundance, in the early 2000s the government moved to become an energy exporter through the construction of a 4.4m-tonnes-per-annum liquid natural gas (LNG) train built and operated by Peru LNG, a consortium led by US firm Hunt Oil. Inaugurated in 2010 after a $3.8bn investment, the project exports 70% of its output to Mexico, where Peru LNG has a 15-year contract with the Federal Electricity Commission. The remaining 30% is sold on the international spot market.

Looking To New Projects

There could be more to come, however. The Camisea consortium, led by Argentine firm Pluspetrol is investing $500m in the development of nearby Block 88, which has gas reserves of 10trn cu feet, output from which would be transported through the Southern Peru Gas Pipeline (Gasoducto Sur Peruano, GSP). Meanwhile, international companies are investing heavily in the exploration of three neighbouring prospects – blocks 57, 58 and 76.

Once again, production from these blocks is expected to exceed demand from the country’s southern thermal power stations, and a second LNG train, which would be used to export to Peru’s energy-hungry southern neighbour is currently under consideration. “The GSP is a step in the right direction since it will not only increase the distribution capacity of the country’s energy sector, but it will also make it much cheaper to export gas to Chile,” Alberto Pérez Morón, general manager of utility firm Grupo Distriluz Peru, told OBG.

The added bonus of the Camisea project has been its endowment of associated natural gas liquids (NGLs), of which the project has proven and probable reserves of over 908m barrels. The project currently produces over 100,000 barrels per day (bpd) of NGLs, which are transported through a second pipeline out of the Malvinas processing station to Pluspetrol’s cracking plant in Pisco, in the Ica region. When the project was conceived, it was assumed that the liquid petroleum gas (LPG) would have to be exported. However, the popularity of converting to LPG among taxi and commercial vehicle drivers to since 2006 has seen consumption soar. Between 2007 and 2014 annual sales of LPG doubled from 9.6m barrels to 18.2m barrels.


The country is less abundant in oil, however. In the early 1990s the opening of the oil sector to private investment and the establishment of state energy sector regulator Perúpetro led to increased exploration in the country’s hydrocarbons basins. Between 1994 and 2014 the country’s proven reserves doubled from 800m barrels to 1.6bn barrels, but this figure is well below other major South American countries, including its smaller northern neighbour Ecuador with 8bn barrels. Production has declined slightly over the same period. In 1994 Peru produced 128,000 bpd, by 2014 that figure was 110,000 bpd, according to BP’s figures.


Under Peru’s 1993 Organic Hydrocarbons Law, oil and gas deposits are state property and may be explored and exploited under a licensing agreement with Perúpetro, the state entity in charge of awarding and supervising oil blocks. Exploration contracts are periodically auctioned and last for seven years, during which time the licence holder must make a minimum investment that varies between contracts. If a commercial discovery is made, the company must provide an initial development plan to Perúpetro, whereby the contract can be converted into an exploration contract with a deadline of 30 years for oil projects and 40 years for non-associated gas projects.

Under these terms, interest in Peruvian oil projects peaked in the 2000s. The number of blocks under exploration and production contracts grew from 17 in 2003 to 87 in 2009, but that figure had slipped to 66 by July 2015. The prospect of sustained low oil prices has dented appetite for exploration projects across the globe. “Since exploration requires a vast amount of resources and its profitability is calculated based on the present value of the output, lower commodity prices are acting as the main disincentive to invest in the exploration and development of new fields,” Pérez told OBG. The situation is further complicated in Peru by the fact that some of the country’s most promising hydrocarbons reserves are deepin the Amazon rainforest, where limited infrastructure and environmental commitments increase costs. The Camisea project was developed using an offshore-inland model that avoided building roads to the site, bringing in equipment and manpower by helicopter or by barge from Manaus, Brazil.

To The North

Given the challenges of working in the rainforest, exploration firms have focused their efforts in the north-west of the country. Historically, the region’s Talara basin has accounted for a majority of wildcat wells in Peru. In 2015, 76 development wells were drilled in the basin, compared to just five in the rest of the country, and in December of that year Perúpetro signed two exploration contracts in the basin with local firm Graña y Montero Petrolera.

However, the north-west is a bright spot in a generally bleak exploration outlook, with 2D seismic acquisition, which covered over 5000 km during 2009-11, dropping to 677 km in 2014. Equally dramatic has been the drop-off in the number of development wells drilled. Between 2007 and 2012, oil companies drilled an annual average of 190 development wells. In the first nine months of 2015 just 65 were drilled. In total, exploration spending fell by more than half from $947m in 2012 to $344m in 2014. With interest in exploration dwindling, in August 2015 Perúpetro postponed a bidding round for seven blocks in the rainforest having failed to attract bids from oil firms.

Force Majeure

Similar to projects in the mining sector, oil companies face challenges acquiring environmental permits and securing social licences, or approval from the communities that will be affected. By late 2015, 30 hydrocarbons blocks were at a standstill for various reasons, including 12 for issues relating to environmental permitting and 11 for social issues.

In March 2014 Eleodoro Mayoraga, former head of MINEM, said the government would introduce a series of reforms to speed up the licensing process, including dismissing the requirement of environmental studies for certain oil exploration projects and an improved process of consultation with local communities. By late 2015, however, no such package of reforms had been announced.

Pluspetrol has been the target of several protests. In February 2015 the firm announced it would return its Pichanaki exploration project to MINEM following local opposition. The firm also faced protests in Loreto, where locals have demanded Block 192 be turned over to state-run oil firm Petróleos del Perú (PetroPerú) (see analysis).


During the privatisation process in the 1990s, PetroPerú sold off its upstream assets, leaving the firm with the major Talara refinery, three smaller refineries and a single midstream project, the Northern Peru Pipeline. The latter takes oil from the Loreto district to the Talara refinery on the north coast. With little new oil production coming on-line, there are no current plans to expand midstream oil infrastructure. Instead the focus is on maximising the potential of the Camisea gas fields and providing energy security to the south of Peru through the GSP. This $3.5bn investment, headed by Brazilian firm Odebrecht, will transport 500m cu feet per day through a 1200-km pipe to the south coast. In August 2015 the first pipes were soldered in the Cusco region and the project is expected to be completed in 2017.

In 2016 ProInversión, the state agency responsible for promoting investment, is also scheduled to award an LPG pipeline running from the Pisco cracking plant to Lima. At present LPG is shipped from Pisco to Callao port, but in mid-2015 strong waves prevented ships from docking at Callao, causing a shortage and pushing up prices for the growing numbers of people in Lima who fuel their vehicles with the product. The cost of LPG more than doubled to PEN3 ($0.96) per litre. The $250m project will provide much needed security of supply with a LPG production of 30,000 bpd.


Peru’s modest oil production is insufficient to meet domestic demand for petroleum products. In 2014 the country exported a total of 5.7m barrels of crude, but imported 30.5m barrels, primarily from the US. Spanish firm Repsol’s La Pampilla refinery, located to the north of Lima, accounted for three-quarters of demand. The Spanish oil company is one of the leading distributors in the country, with 374 gas stations operating under its brand. “In the last five years, the Peruvian automotive park has grown at an average rate of 7%, closing 2015 with some 2.5m units, 500,000 more than in 2011,” Carlos Gonzales, general manager of Primax, told OBG. “Such growth has significantly increased the demand for fuels over the same time period.”

In early 2013 Repsol announced its intention to sell the refinery as part of its divestment policy, which saw it sell its minority stake in Peru LNG, along with other Latin American assets. However, the company later reversed its decision and, with the fall in oil prices, its refining business has proved more profitable than its upstream activities. Profits from the firm’s global refining business, of which Peru plays a significant part, rose 115% in the first half of 2015 over the same period in 2014.

Meanwhile, PetroPerú is busy overhauling the Talara refinery, expanding capacity from 65,000 bpd to 95,000 bpd, and upgrading processes to reduce sulphur content from 2000 parts per million (ppm) to 50 ppm. The initial work on the project was set to begin in late 2015 under the operation of Spanish turnkey contractor Técnicas Reunidas.

While refining projects are necessary to meet domestic demand for petroleum products, the primary goal of downstream activity is to add value to the country’s gas reserves. For several years the government has been in talks with Brazilian firm Braskem to build a 1m-tonne-per-annum ethane cracker in the Southern Energy Node project. However, the shale gas revolution has provided US petrochemicals firms with low-price feedstock. In order to compete, strong government support and incentives may be required and this is unlikely to happen until after the 2016 elections.


The 2004 arrival of the Camisea gas pipeline in Lima enabled the development of natural-gas-powered generation, gradually phasing out expensive diesel generation. Over the following 10 years, the installed capacity of thermal projects grew from under 2960 MW to 7750 MW. During the same period, hydroelectric installed capacity rose only slightly from 3056 MW to 4166 MW. Nevertheless, with maximum demand from Peru’s grid, the National Interconnected Electrical System (Sistema Eléctrico Interconectado Nacional, SEIN), reaching just 6275 MW in 2015, it is mostly older, diesel-fuelled generators that sit idle, while hydroelectric power accounts for 48% of production.

Demand has grown steadily at rates of around 7% in recent years, and in 2015 the country’s power stations produced 48,066 GWh, up from 45,550 GWh the previous year. In the first five months of 2015 production reached 18,143 GWh, up on 17,267 GWh during the same period in 2014.

New Projects

As the GSP winds its way south, construction has already begun at its final destination on the southern coast as part of the Southern Energy Node project. Two 500-MW, dual-core power stations in the towns of Mollendo and Ilo are expected to be completed in 2016 and 2017, respectively. The projects will initially burn diesel before switching to gas when the GSP arrives in 2018 or 2019. “This project is of the utmost importance to the development of the south of the country by providing industry with cheap and reliable energy,” Juan Carlos Novoa Carrasco, energy sector manager of the National Society of Mining, Petroleum and Energy, told OBG.

The concession for a third thermal project, a 200-MW operation connecting to the GSP in the Cusco department is expected to be awarded in the first quarter of 2016. This third project, named Quillabamba, is likely to be the last thermal project offered for the foreseeable future. In the long term the focus will shift back to hydroelectric projects. In September 2015 Statkraft completed its 172-MW Cheves Hydro Plant, located 130 km north of Lima, while a 205.8-MW hydro project in the Puno department is scheduled to be awarded in mid-2016. But the growth in supply has outstripped demand and Peru is expected to experience a surplus until at least 2021. Transmission: As generation has increased, MINEM has focused on improving connectivity. Between 2005 and 2015 electricity coverage increased from under 60% to over 90% of the population. The coast is strung with transmission lines from north to south, leaving just remote mountain and jungle regions unconnected to the SEIN. In June 2014 a consortium led by Spanish firm Isolux Corsán won a contract to build a 630-km, 220-KV transmission line from Moyobamba to the Amazonian port city of Iquitos. When completed in 2018, Peru’s last major urban centre will be connected to the grid. The 150-MW supply should also allow Iquitos’ 500,000 residents to move away from diesel generation and spur industrial development through low-cost energy. In parallel with the development of the Southern Energy Node, MINEM is looking to significantly improve coverage in the south. ProInversión awarded a contract for a 129-km transmission line linking Tacna to the grid at Moquegua in December 2015.


In Lima, by far the biggest centre of energy demand, the market is dominated by two private players, Luz del Sur and Edelnor, which each have their own districts within the city. A third private company, ElectroDunas, distributes in the southern city of Ica. Aside from these three private players, the rest of the market is made up of stateowned firms controlled by the Fondo Nacional de Financiamiento del la Actividad Empresarial del Estado. Some, such as Distriluz in the north, are well funded and targets for privatisation in the future. However, a lack of financing means that long-term investment plans are hard to implement.


In late 2015 the Peruvian energy sector faced a number of challenges of varying urgency. The most pressing was the prospect of El Niño, which is expected to last into mid-2016. The climactic phenomenon causes droughts in the south of the country, affecting generation from hydroelectric projects while simultaneously blighting the north of the country with floods and landslides, putting transmission lines at risk. Fortunately the industry has taken preventative measures. “In 2015 many generation and distribution companies made additional investments to avoid the worst impacts of El Niño,” said Novoa.

However, to tackle the other challenges, policy reform was required. Following congressional approval, in July 2015 the government entered a 90-day period of executive power for key areas, including the regulation of electrical generation and distribution. In September 2015 the government announced the creation of a fund designed to provide financing to distribution projects approved by the Supervising Organisation of Investment in Energy and Mining. The real challenge will be to push through the necessary reforms to allow Peru to export electricity to its neighbours. The country’s existing energy policy has so far blocked such projects, and with the exception of a low-capacity transmission line to Ecuador for use in emergencies, electricity generated in Peru stays within the country. The priority would be to build a 500-MW line to Ecuador and establish connections to Chile, where miners in the north of the country often pay up to $280 per MWh. In Peru the average spot price for electricity in 2014 was $24.60 per MWh. In the long term electricity exports to power-hungry Brazil could also be an option, but major transmission projects can take years to build and legal reforms need to be put in place quickly if the country is to take advantage of its energy surplus before 2021. “The export of electricity is an area of major potential for Peru, but it needs to be structured so that domestic demand is always met first,” said Novoa.


By harnessing its hydro and gas resources, Peru has developed a robust and diversified energy mix. Cheap and plentiful power is one of the key comparative advantages for the country’s mining and industrial sectors. Excess capacity also means that future energy-intensive mining projects can be developed without the need for additional generation capacity. However, in 2016 the push to facilitate the export of electricity should open up plans for major transmission projects and provide a new source of revenue for Peru.