Reduction of gas flaring in Ecuador and Peru

Final report

This report was prepared by Carbon Limits AS.

Project title: Reduction of gas flaring in Ecuador and Peru

Client: Federal Institute for Geosciences and Natural Resources (BGR) Project leader: Torleif Haugland Project members: Valentin Vandenbussche, Mariel Juarez Finalized: 09/10/2017 (draft)

Øvre Vollgate 6 Carbon Limits is a consulting company with long standing experi-ence in supporting energy efficiency measures in NO-0158 Oslo the industry. In particular, our team works in Norway close collaboration with industries, government, and public bodies to identify and address inefficiencies in the carbonlimits.no use of and through this achieve reductions in Registration/VAT no.: NO 988 457 930 emissions and other air .

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Table of contents

Table of contents...... 2 List of figures ...... 3 List of tables ...... 4 1 Introduction ...... 5 2 Ecuador ...... 8 2.1 Oil and gas production and flaring situation ...... 8 2.2 Stakeholders ...... 11 2.3 Framework conditions ...... 13 2.4 Initiatives to reduce flaring ...... 14 2.5 Barriers to flaring reduction ...... 16 2.6 Opportunities for further flare reduction in Ecuador ...... 19 3 Peru ...... 22 3.1 Oil and gas production and flaring situation ...... 22 3.2 Stakeholders ...... 26 3.3 Framework conditions ...... 28 3.4 Initiatives to reduce flaring ...... 29 3.5 Barriers to flaring reduction ...... 30 3.6 Opportunities for further flare reduction in Peru ...... 32 4 Conclusions – possibilities for German DC in both countries ...... 34 4.1 The rationale for engaging in flare reduction efforts ...... 34 4.2 Recommended follow up in Ecuador ...... 35 4.3 Recommended follow up in Peru ...... 36 Appendix 1 – Abbreviations list ...... 37 Appendix 2 – Literature and sources ...... 38 Appendix 3 – Maps and further documentation for Ecuador ...... 41 Appendix 4 – Maps and further documentation for Peru ...... 43 Appendix 5 – Additional information about flaring ...... 45

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List of figures

Figure 1: Left: Global flaring of associated gas and crude oil production (1996-2016). Right: Change in the volumes of gas flared in the top 8 countries (2012-2016) ...... 6 Figure 2: Flare volume and flare intensity by country (2016) ...... 6 Figure 3: Oil and gas fields in Ecuador ...... 8 Figure 4: Left: Oil production and consumption in Ecuador. Right: Gas production and consumption in Ecuador. 1980-2016. Source: BP, 2017 ...... 8 Figure 5: Fate of the associated gas in Ecuador, NGL production from associated gas is included ...... 9 Figure 6: Left: Flare volumes and oil production in Ecuador [includes upstream and downstream flaring]. Right: Split between associated gas and downstream flares, 2015 ...... 9 Figure 7: Size distribution of flares and number of flares in each category (2015), associated gas flares only ...... 10 Figure 8: Distribution of the volumes flared, by company (2015) based on satellite data, associated gas flares only ...... 10

Figure 9: GHG emissions from flaring of associated gas in Ecuador, split between CO2 and CH4...... 11 Figure 10: emissions from flaring in Ecuador ...... 11 Figure 11: production figures per company, as reported by ARCH for 2016 ...... 12

Figure 12: CO2 savings from the project. Source: Petroamazonas EP ...... 15 Figure 13: Satellite view of the Oriente Basin (centre) and detailed view on two areas. Left: remote flare sites located south of the Basin. Right: flare sites in the centre of the Basin ...... 16 Figure 14: Installation of a gas collection line at an unknown location in the Oriente Basin (Petroamazonas EP, 2016)...... 17 Figure 15: Fuels and other power sources for the operations of Petroamazonas (Petroamazonas EP, 2016)...... 18 Figure 16: Oil and gas regions and blocks in Peru ...... 22 Figure 17: Left: Oil production and consumption in Peru. Right: Gas production and consumption in Peru. 1980-2016. Source: BP, 2017 ...... 22 Figure 18: Use and disposal of associated gas in Peru...... 23 Figure 19: Left: Flare volumes and oil production in Peru in BCM per annum [includes upstream and downstream flaring]. Right: Split between associated gas and other flares, 2015 ...... 23 Figure 20: Flare volumes for the three flare sites offshore Northern Peru ...... 24 Figure 21: Size distribution of flares and number of flares in each category (2015), associated gas flares only ...... 25 Figure 22: Distribution of the volumes flared, by company (2015), associated gas flares only, satellite data ...... 25

Figure 23: GHG emissions from flaring of associated gas in Peru, split between CO2 and CH4...... 25 Figure 24: Black carbon emissions from flaring of associated gas in Peru...... 26 Figure 25: Organigram of the main institutions related to flaring in Peru...... 27 Figure 26: Hydrocarbon production figures per company, as reported by PERUPETRO for 2016 ...... 27

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Figure 27: Illustration of some of the associated sites in Peru. Left: offshore Tumbes Basin. Center: Talara Basin. Right: Marañon Basin...... 31 Figure 28: Geographical flare distribution illustrated from satellite estimates (2015) ...... 41 Figure 29: Geographical flare distribution illustrated from satellite estimates (2015) ...... 43

List of tables

Table 1 Sample of projects ready for investment within the OGE&EE program ...... 20 Table 2 Flaring levels in each region ...... 42 Table 3 Flaring levels in each region ...... 44

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1 Introduction

This report summarizes the findings from the project assignment “The Potentials of German Development Cooperation in the Area of Gas Flaring”, conducted by Carbon Limits for the German Federal Institute for Geosciences and Natural Resources (BGR). The main objective of the study is to determine whether and how the German Development Cooperation can contribute to reduced flaring and venting of associated gas in Ecuador and Peru. From the perspective of international climate change mitigation, the study also includes some generic and brief considerations on the cost-efficiency of using public funds in support of flare reduction. Flaring and venting take place when gas is not used for productive/energy purposes, due to lack of market outlets or for safety reasons. A distinction is made between associated and non-associated gas flaring. Associated gas is gas produced as a by-product of the production of crude oil and was historically considered as a product. Non-associated gas reserves, on the other hand, are developed primarily to produce gas. Associated gas flaring and the flaring of non-associated gas have different causes and solutions, and the main focus of this report is associated gas. Flaring can occur at production sites (upstream), or refineries or processing plants (downstream). This report focuses on upstream flaring. Gas flaring and venting represent a waste of resources and have negative environmental impacts. Utilization of otherwise flared and vented gas has an economic value being used for productive purposes and significantly reduces emissions of greenhouse gases when gas substitutes more polluting fuels. Local from flaring can have negative public health effects and reduce agricultural yields. Globally, it is estimated that 160 BCM of gas was flared in 2016 (GGFR, 2017a). This represents ca. 1.2% of the world GHG emissions (World Resource Institute, 2017), or 2 times the annual natural gas consumption of Germany (BP, 2017). Gas flaring is therefore a global issue that is being addressed at three main levels. First, private and public companies around the world have increased focus on flaring from their own operations. With the development of gas markets and infrastructures, gas is no longer considered as a waste but as a valuable resource that can increase companies’ profits. Flaring also represents direct costs for operations in countries where there is a tax or other penalties to flaring or related emissions. Second, national authorities are increasingly formulating and implementing policies and regulations to tackle the flare problem, albeit with mixed results. Initially this emerged from a broad recognition of flaring as a resource waste, while over the last few years climate change considerations have come to the forefront. Third, gas flaring has over the past 10 to 15 years attracted much attention with international organizations (governmental and non-governmental) and has been addressed in both bilateral and multilateral development cooperation. Important initiatives are the Global Gas Flaring Reduction Partnership (GGFR), formed in 2003, managed by the World Bank and with 18 governments and 13 international oil companies as partners. Linked to the GGFR, the "Zero by 2030" initiative was launched in 2015, with 25 governments, 31 oil companies and 15 development institutions having endorsed the target and made other commitments under the initiative (see Appendix 5 for further information). Despite all of this, the global level of flaring has remained virtually stable since 2010, after a decline for a decade before that. It should be noted however that crude oil production has steadily increased so that the flare intensity (flaring per unit of oil production) has gone down. Over the 20 years period from 1996 to 2016 the global flare intensity was reduced by 32%.

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Figure 1: Left: Global flaring of associated gas and crude oil production (1996-2016). Right: Change in the volumes of gas flared in the top 8 countries (2012-2016)

Note: The flare data in these figures are only upstream directly related to crude oil production, total 147 BCM in 2016. A relatively small number of countries account for the major part of global flaring. Russia, Iraq and Iran, currently account for 40% of global flaring, having been top flare countries for decades. In the period 2012-2016:  Flaring has increased in almost all countries in the top 8, except for USA and Nigeria.  The flare intensity has increased most in Iran, Venezuela, Algeria, and Mexico.

The flare levels as presented in Figure 2 are estimated from satellite images and for some countries (notably Russia, Kazakhstan) these estimates are considerably above nationally reported data (see Appendix 5 for more information on uncertainties). The two countries studied in this report have relatively low flare levels and also flare intensity rates that are significantly below the average of the top 20 flaring countries (see Figure 2). On the other hand, Algeria (covered in the other study commissioned by BGR) is among the top ten flare countries, and has a flare intensity almost twice higher than average. Figure 2: Flare volume and flare intensity by country (2016)

Causes for this diversity in flare levels and flare intensities are complex and cover site and region specific geological and technical factors as well as company awareness, strategies, political

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characteristics and regulatory conditions. Whether international development cooperation can play a catalytic role in flare reduction efforts can only be assessed on the basis of a good understanding of current drivers and barriers to these efforts and the contexts where these drivers and barriers exist. In this study we will primarily refer to five categories of drivers/barriers: 1. Technical and geographical: Typically, a large number of flare sites with low volume of associated gas production is an important barrier. In some countries, the sites are also scattered across remote locations away from gas infrastructure or local markets. In addition, difficult terrain can make it a challenge to build gas gathering lines. By the same token, technological improvement is a powerful driver because it opens new opportunities for monetization of gas. Another driver is the availability of new infrastructure developed for other purposes (i.e. highways, expansion of power grids). 2. Structural barriers. Different ownership to product/flare sites and gas infrastructure, including processing facilities and transport lines, often hinder gas being brought to markets. On the other hand, the availability of public-private financing schemes (commonly used in other sectors of the economy) that could allow State Owned Entities to leverage private sector investment constitutes a potential driver which is worth exploring. 3. Economic and financial. This refers to economies-of-scale and external economic parameters such as gas and power prices, as well as taxes and other public schemes, which may impact the financial viability of associated gas investments. Low-price periods hinder investment in non-critical operations, whereas high-price periods may be more auspicious for flare reduction initiatives. Similarly, lower cost of financing (achievable with blended financing, for example) could translate into higher profitability for existing projects that currently show IRRs below the hurdle rates of companies for capital allocations, triggering their implementation. 4. Regulatory. The absence of regulations on flaring or weak and/or inconsistent enforcement mechanism can be an important barrier. Unrealistic and broad-based targets and prescriptive approaches can also hinder efforts for flare reduction. Symmetrically, enhanced regulatory capabilities could speed up the achievement of solutions that translate into lower associated gas waste. 5. Awareness, priority and policy. Companies may not always have knowledge about viable gas utilization options or may, even when the investments are profitable, rather prioritize larger investments targeted at crude production increases. Absence of flare reduction as a policy target is a barrier because of the effort and political capital the policy maker must devote to reverse the situation. Policies that are directly or indirectly aligned with the objective of flare reduction (i.e. NDCs, fuel switch objectives in energy matrices) are drivers for increased gas utilization.

The occurrence of such barriers in Ecuador and Peru will be the central theme of this study and in turn lead to an assessment of the relevance of external development cooperation to reduce the barriers, and specifically the possible role of German Development Cooperation. This requires a review and analysis of geological, techno-economic, institutional and regulatory/political aspects which determine the conditions for flare reduction investments. This review and analysis is presented separately for Ecuador and Peru in Chapter 2 and Chapter 3 of this report. Chapter 4 then summarises key findings and presents key considerations which are important related to a decision to engage in flare reduction efforts, in particular those that represent potential drivers for flare reduction efforts. This is followed by recommendations for follow up activities in Ecuador and Peru.

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2 Ecuador

2.1 Oil and gas production and flaring situation

Ecuador produces mostly oil, in the Oriente Basin The production in Ecuador is dominated by oil, which accounts for 92% of the domestic energy production. Ecuador’s proven crude oil reserves are currently assessed to be about 8.0 billion barrels (BP, 2017), stable since 2014. This places Ecuador with the third largest oil reserves in the South and Central-Americas region, next to Brazil, and far behind Venezuela (0.5%, 0.7% and 17.6% of the world reserves, respectively). Proven natural gas reserves are more limited, at around 212 billion cubic feet (bcf) (EIA, 2017), and Ecuador has a small natural gas market. Oil reserves are primarily in the Oriente Basin, located in the Amazon. Gas is produced in the Tumbes Basin, south-west Ecuador, at the offshore Amistad field. Figure 3: Oil and gas fields in Ecuador

The country is exporting increasing amounts of oil to China. At the same time, Ecuador is a net importer of refined oil products such as gasoline, diesel and LPG, mainly from the United States and from China. Figure 4: Left: Oil production and consumption in Ecuador. Right: Gas production1 and consumption in Ecuador. 1980-2016. Source: BP, 2017

Ecuador continues developing oil resources in the Oriente Basin, including from the Ishpingo- Tambococha-Tiputini (ITT) fields close to the Yasuní National Park. Oil exploration and production in this area were subject to a moratorium until 2013, but activities started up again a few years ago (The

1 Note: although not reported in the BP Statistical Review, Ecuador produces all the gas it consumes.

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Guardian, 2016). Oil production in Ecuador is expected to plateau over the next few years, and potentially decrease by 2020 (Trading Economics, 2017).

Most associated gas is flared The Ministry Coordinator of Strategic Sectors (2016) reports official statistics on the oil and gas sector, including data on associated gas. The statistics show that the majority of associated gas is flared (expressed as “non-utilized” in the document); 56% on average for the period 2012-2016. About 22% of the associated gas has been used for power generation in the oil and gas sector. There is no re- injection of associated gas in Ecuador. Figure 5: Fate of the associated gas in Ecuador, NGL production from associated gas is included

Flaring has been increasing over the past 5 years, there are large uncertainties In addition to statistics from the Ministry Coordinator of Strategic Sectors, the NOAA VIIRS Global Gas Flaring Observed from Space project (GGFR, 2017a) provides another source of data. NOAA estimates indicate that the flare level has increased from 0.8 to 1.2 BCM over the past five years. As a whole, the satellite estimates suggest that Ecuador had the 27th highest flare level in the world in 2015 (in volume of gas flared). The country ranks number 28 in terms of oil production. It is below average when it comes to flare intensity (gas flared per unit of oil produced), being at the same level as Russia, Mexico and Peru (in 2015) but higher than Saudi Arabia, China and Canada. Figure 6: Left: Flare volumes and oil production in Ecuador [includes upstream and downstream flaring]. Right: Split between associated gas and downstream flares, 2015

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The correlation between reported numbers and the satellite estimates is rather good for the period 2012-2014, although the reported data are 22 to 37% below satellite estimates. There is a larger gap between the two sources for 2015 (42%). The exact causes for the discrepancies are not known to the authors of this report, but it is most likely the combination of two factors: i) underreporting by companies, ii) flares identified and estimated from satellite images which are not flaring associated gas. In addition methods for converting satellite data to estimated volumes of flaring have its uncertainty level (±9.5% as reported by NOAA). The latter factor can contribute to larger or smaller discrepancies. Since the country produces mostly oil, almost all flaring is associated gas upstream, and downstream flaring accounts only for 3% of the total. The satellite images identified 69 flare sites in 2015 (versus 71 in 2014). 11 different companies were operating the relevant fields, based on an overview of the licences in Ecuador from the Ministry of Environment. Most of the flaring (99% in 2015) happens in the Oriente Basin since this is where all of the oil is produced. It should be noted that although non- associated gas is produced in the Tumbes Basin, no flaring was detected in that area in 2015. A detailed map is provided in Appendix 3. A limited number of flare sites are responsible for the majority of the flaring Only 9 sites out of 66 are responsible for almost 40% of the volumes of gas flared in 2015. Figure 7: Size distribution of flares and number of flares in each category (2015), associated gas flares only

Petroamazonas is by far the company flaring the most, with 1 BCM (92% of the total volume). Each of the other companies flares 2% or less of the total volume. Figure 8: Distribution of the volumes flared, by company (2015) based on satellite data, associated gas flares only

Flaring represents ca. 4% of the national GHG emissions GHG emission factors were calculated based on the composition of the associated gas in Ecuador (Petroamazonas, 2017 and DGH, 2005). Emissions based on gas volumes from satellite estimates are

presented in the figure below. The emissions range from ca. 2.74 MtCO2e in 2012 to 3.95 MtCO2e in 2016.

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Figure 9: GHG emissions from flaring of associated gas in Ecuador, split between CO2 and CH4.

Based on the national inventory of GHG emissions in 2010,

the country emitted ca. 91.5MtCO2e and absorbed 16MtCO2 (Ministry of Environment, 2016). The breakdown is presented in the figure to the right. The calculated emissions from flaring of associated gas represent ca. 4% of the national emissions in 2010. Within the energy sector, flaring represents ca. 8% of the emissions. This is higher than the world average. From a climate mitigation strategy perspective there are reasons to believe that flare reduction actions are among the options with the lowest abatement costs since many investments in capture and use of associated gas are reported to have only a pay back of a few years (see section 2.4 below). Black carbon emissions are estimated based on the flare gas volumes and an emission factor for BC2. That emission factor is calculated based on the estimated higher heating value of the gas flared. Emissions increased from 1 200 tBC in 2012 to 1 707 tBC in 2016.

Figure 10: Black carbon emissions from flaring in Ecuador

2.2 Stakeholders

The Ministry of Hydrocarbons is the main institution in the sector The Ministry of Hydrocarbons is responsible for planning, managing and evaluating the sector's regulations and policies. The ministry was formed in 2015 as a result of the division of the former Ministry of Non-Renewable Natural Resources into two entities: the Ministry of Hydrocarbons and the Ministry of Mines.

2 Conrad B.M., Johnson M.R., 2017. Field Measurements of Black Carbon Yields from Gas Flaring. DOI: 10.1021/acs.est.6b03690

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The Hydrocarbons Secretariat (Secretaría de Hidrocarburos del Ecuador, SHE) reports to the Ministry of Hydrocarbons. SHE is responsible for the management of the oil contracts with public and private companies, including national oil companies (NOCs) and international oil companies (IOCs). In some cases, the activities are subject to special provisions by the Ministry of Environment. The Hydrocarbons Regulation and Control Agency (Agencia de Regulación y Control Hidrocarburífero, ARCH) also reports to the Ministry of Hydrocarbons, and is in charge of regulating technical and operational activities. Among the main objectives for ARCH is contributing to the efficient use of the hydrocarbon resources in each segment of the industry. The Ministry of Environment monitors and audits the environmental management of industrial activities. The Undersecretary of Climate Change (Subsecretaría de Cambio Climático, SCC) serves as the coordinating and facilitating unit of climate finance mechanisms, among other responsibilities. Petroamazonas EP dominates the upstream segment Petroamazonas EP is the state-owned company created in 2007 in order to manage production and focus on exploration of hydrocarbons on behalf of the state of Ecuador. The company is in charge of the large majority of the hydrocarbons production in the country. The company is not a commercial enterprise in a traditional sense but is more of an instrument for the purpose of the authorities broader policy objectives for the oil and gas sector. Petroecuador is the state-owned company in charge of transportation, storage, refining and commercialisation of hydrocarbons. There were 14 companies operating in the upstream hydrocarbon industry in Ecuador in 2016, according to production figures from the ARCH. Petroamazonas EP is the dominant player with 78% of crude oil production. Other companies are international, such as Andes Petroleum (6% of the production, owned by CNPC and SINOPEC), Repsol YPF (4%), SIPEC (2,5%, subsidiary of China Petroleum & Chemical Corporation), AGIP (2%), and PetroOriental (2%, owned by CNPC and SINOPEC). Figure 11: Hydrocarbon production figures per company, as reported by ARCH for 2016

The World Bank and the Inter-American Development Bank have dialogue and cooperation with the authorities Both the World Bank (primarily through GGFR) and the Inter-American Development Bank have dialogue and cooperation with the authorities of Ecuador on flaring issues. The engagement process of the Inter-American Development Bank in a large investment program for gas capture and utilization in the Amazon (the “OGE&EE” program) is probably the most important and relevant for issues being discussed in the report (see further discussion of the OGE&EE program below). NGOs and communities are active on the topic of oil exploration and production

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CIP-Ecosocial (2009) reports that there are two main types of actors in the ecological movement in Ecuador: NGOs on the one side, and social organisations on the other side which are linked to indigenous organisations. The involvement of NGOs and local communities in Ecuador is linked to several social and environmental aspects of the petroleum sector. The main topics seem to be the development of petroleum activities in preserved areas (as in the Yasuní area), the social impacts of petroleum activities on the local communities, and the protection of the environment. Flaring is addressed in the latter, even though the main focus is on the preservation of biodiversity, and protection against ground and water contaminations. Petroamazonas declares supporting the local communities, but it is unknown to which degree the initiatives are generalised or anecdotic. GIZ is also involved with the communities in the Amazon region, through the ProCamBío II program for the conservation of forests and biodiversity, as well as for mitigation of and adaptation to climate change.

2.3 Framework conditions

Resources are owned by the state, and service contracts prevail since 2010 The principal law regulating the petroleum activities is the Law on Hydrocarbons, from 1978, although it has been revised since, including as part of a major reform in 2010. Hydrocarbons resources in Ecuador are exclusively owned by the state. However, the country allows foreign oil and natural gas companies to invest in the sector through bidding rounds for technical service contracts. Before the reform of the Hydrocarbons Law in 2010, the companies could hold Production Sharing Agreements (PSA), but in 2010, all enterprises had the obligation to migrate to services contracts for exploration and production of hydrocarbons. Service contracts require the contractor to invest the capitals and use the necessary equipment to carry out exploration and production activities. When resources are produced the contractor is entitled a payment per barrel of net oil produced and delivered to the State. This compensation is contractually fixed. Exploration contracts last up to four years. Production contracts can last up to 20 years, renewable by SHE. For contracts related to natural gas, the production period can last up to 25 years3. is not addressed in Ecuador There is no mention of gas venting in the regulations. During the interview, Petroamazonas declared that there is no venting at their operations. Gas flaring is allowed under certain circumstances Associated gas is regulated under article 11 of the Hydrocarbon Operation Rules (Reglamento de Operaciones Hidrocarburiferas, Ministerial Agreement No. 389, 2015). The natural gas produced in association with oil production belongs to the state. It can be used locally for production-related energy purposes local or for re-injection. According to the regulations, an authorisation is required for this use and the contractor needs to pay fees established by the Ministry of Hydrocarbons. However, the interviewees at the Ministry mentioned that this is not applied. Companies do not pay fees for using the gas nor when flaring it. SHE may also require the contractors to deliver associated gas to the state-owned Petroecuador, which is in charge of mid- and downstream activities. Petroecuador then uses the gas for producing LPG, for generating electricity, or for commercialisation. The regulations mention compensation for the costs linked to collection and transport of the gas to Petroecuador. The level of compensation is not stated in the regulations, and was not clarified during the interviews.

3 Article 23 of the Hydrocarbons Law

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Further, the Environmental Rules for Hydrocarbon Activities (Reglamento Ambiental de Actividades Hidrobarburiferas, Executive Decree 1215, 2010) also addresses gas flaring. The text stipulates that associated gas has to be used in priority for re-injection and enhanced recovery. Otherwise a techno- economic analysis should determine the best use of the gas, preferably for . According to the text, a techno-economic justification must be provided to the Hydrocarbons Secretariat when none of the above solutions are feasible. The operator must ensure that the flaring conditions are optimal to ensure a complete of the gas4. These are functional requirements, and the regulations do not stipulate technical requirements for the flare characteristics. In addition, the operator must minimise the consequences of flaring on the local environment (soil, vegetation, fauna). Flaring is not directly monitored. Flared volumes are calculated based on the production figures and the volumes of gas used for power production (or liquids production). Gas flowrates in general are either measured with sensors or estimated based on GOR and other production characteristics. The companies report the production and consumption figures to the Ministry of Hydrocarbons.

2.4 Initiatives to reduce flaring

The two main initiatives for flare reduction in Ecuador are: . the use of associated gas for power generation in the Oriente Basin, and . the production of LPG from associated gas.

Use of associated gas for power generation in the Oriente Basin The main initiative on flare reduction in Ecuador is the Petroamazonas EP program for the use of associated gas for power generation in the Amazon area (Oriente Basin). The program is called “Optimization of Electrical Generation and Energy Efficiency in the interconnected oil system” (OGE&EE). It consists of a number of distinct projects and gas utilization options, including power generation from associated gas and using the electricity at the production sites. This will allow replacing the traditional use of diesel with gas that would be otherwise flared. The program also includes projects for connecting the power system to the national interconnected system, which allows providing power to the local communities and also providing the system with hydropower. This program is considered important at the national level. It is mentioned in Ecuador’s Intended Nationally Determined Contribution (INDC), and within the Nationally Appropriate Mitigation Actions (NAMAs) in the country biennial update report (Ministry of Environment, 2016). In addition, it is also mentioned as the third objective in the Ministry of Hydrocarbons strategic plan 2016-2017. Technically, the program includes more than 120 individual projects for the capture and handling of associated gas, its transportation infrastructure, power generation facilities, waste-heat recovery units, and the required substations and power distribution facilities. Many of these projects are ready for investment. The overall investment required for the entire program is almost USD 1.2 billion. As of September 2017, USD 672 million had already been invested (58%). At the time of this writing, the savings have already exceeded the investments made in the program. The savings are not re-invested in the OGE&EE program, but accrue directly to the State, as reduced costs of fuel (diesel) for operations carried out by Petroamazonas. There is evidence that many of the projects which have been implemented have had a payback time of less than 5 years. The financial viability of projects not yet financed and implemented is not known to the authors of this report. At its current state of implementation, the program allows using ca. 20% of the associated gas that would otherwise be flared. In addition, 27MW of hydropower are now being used to support the oil and gas production activities. Projects not yet funded or implemented will further increase the volumes of

4 Note: an incomplete combustion of the flare gas releases and other gases directly to the atmosphere. Methane is a much more forceful GHG than CO2, and it is therefore better for the climate to burn the methane.

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associated gas used. It is also expected that electrical interconnection projects will significantly increase the use of hydropower for oil production in the area. The expected emission reductions from the project are two-fold:

 use of gas instead of diesel, up to 672 kt CO2 saved per year from 2020 on, and

 use of hydropower energy from the national grid instead of diesel, up to 1 191 kt CO2 saved per year from 2022 on.

Figure 12: CO2 savings from the project. Source: Petroamazonas EP

Petroamazonas mentioned that private oil companies, such as Repsol and Andes Petroleum, are also using some of the associated gas for power production. It is unknown to which degree these companies make use of the associated gas. Production of LPG from associated gas This project aims at increasing the domestic LPG production in Ecuador from associated gas. Ecuador is reliant on imports for most of its LPG consumption: in 2015, 86% of the LPG consumed was imported (Ministry Coordinator of Strategic Sectors, 2016). Most of the consumption is within the residential sector. LPG is locally produced at two oil refineries (Esmeraldas and La Libertad), and at the industrial complex in Shushufindi, which was not used to its full potential (Escuela Politecnica Nacional, 2013). By collecting rich associated gas from the Oriente Basin and transporting it to Shushufindi complex, Ecuador could decrease its reliance on imports, and improve the gas utilization. Part of the OGE&EE program mentioned above relies on an agreement between Petroamazonas and Petroecuador, where Petroamazonas uses the waste gas and excess gas from the production of LPG at the Shushufindi complex. In 2007, Petroindustrial listed 12 collection stations, of which 7 were already in operation, and 5 were potential projects at that time. The company estimated that ca. 11 MMcf/d of gas were collected at the 7 existing installation, and that an additional 13.9 MMcf/d could be collected from 5 new projects. Statistics from the Ministry Coordinator of Strategic Sectors (2016) show that national production of LPG increased in the period 2007-2012, but has decreased since then. This decrease is due to a fall of the production at the Esmeralda refinery, linked to an upgrade of the refinery. It is expected that the production will increase again once the upgrade work is completed. As a side note, Ecuador also has a project of providing electrical induction cooking plates to some of its inhabitants, in an effort to reduce its reliance on imports for LPG (Ministry of Environment, 2016), however, the national consumption of LPG keeps on increasing. Petroamazonas EP commitment to Zero Routing Flaring by 2030 Petroamazonas was the 6th oil and gas company to endorse the “Zero Routine Flaring by 2030” (ZRF) initiative, out of a current total of 27 companies. Petroamazonas states that the initiative is a good

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match for the company’s OGE&EE program since both initiatives have similar objectives. Clearly Petroamazonas has the capability to report on flaring and actions as required by the initiative. Still, it would give flare reduction efforts further momentum if also the Government of Ecuador endorsed ZRF. More information on the Zero Routine Flaring initiative is provided in Appendix 5. Flaring reduction at Repsol In their year-end report for the Sustainability Plan 2015, Repsol indicates a reduction of 23% of the volume of gas flared at their operations in block 16 for 2015. They mention that this reduction is the result of “operational optimization” but do not provide additional information. Collect data on venting In Ecuador’s plan for improving the national inventory of greenhouse gas emissions, the Ministry of Environment mentions an improvement point related to gas venting in the energy sector (2016). The improvement consists in collecting data related to volumes of gas vented, which would allow a follow- up and an improvement, similarly to what is done for flaring. There is currently no information available on venting from the oil and gas industry in Ecuador.

2.5 Barriers to flaring reduction

Technical and geographical barriers The geographical barriers are important in Ecuador since most of the associated gas flaring happens in the Oriente Basin, in the Amazon jungle. The political and geographical situation in the Oriente Basin makes the difficult. The region close to the border is politically unstable with the presence of rebel groups. Security is a serious issue and trucks have to be accompanied by military escort. Transportation of fuel is considered extremely risky due to the attractiveness of the product transported, and transport by night is not possible. As illustrated in the figure below, some of the flare sites are located in remote jungle areas, with mediocre road access. Other sites are located in a combination of rural and jungle terrain (right side on the figure below). Figure 13: Satellite view of the Oriente Basin (centre) and detailed view on two areas. Left: remote flare sites located south of the Basin. Right: flare sites in the centre of the Basin

The construction and operation of the gas collection and power transmission infrastructure may disturb the local environment in areas where no other infrastructure is present. This may lead to a barrier for the gas utilization projects if the disturbance is not accepted by local populations or by the authorities. It should however be noted that the OGE&EE project by Petroamazonas was subject to a detailed Environmental Impact Assessment in 2014 where both the environmental and social impacts were assessed and managed (Petroamazonas, 2014).

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67 flare sites were detected by satellite in this area in 2015. Most sites are located 3 to 5 kilometres from each other, but some sites are more remote, up to 30 to 50 kilometres away from other installations. Distances between sites and low volumes make it challenging to collect and gather the associated gas. There was until recently no gas collection infrastructure in the area. However, some gas collection and power lines were installed as part of the Petroamazonas OGE&EE project (see also section 2.4). The picture below illustrates the installation of the gas collection lines. Figure 14: Installation of a gas collection line at an unknown location in the Oriente Basin (Petroamazonas EP, 2016).

Technical constrains are also important in Ecuador, as flared volumes of associated gas at each site are relatively limited and with fluctuations in production over time, which can make local solutions unattractive (Petroamazonas, 2016). This causes limitations in the sizing of power generators, which has to take into account the future decline in gas production at the flare sites. The composition of the

associated gas also varies over time: on some fields the gas contains significant amounts of CO2, with concentrations varying between 10 and 40% for single flare locations over the course of a day. In

addition to those variations, the CO2 content itself is a challenge since transport and combustion

equipment may be sensitive to the gas composition. Indeed, the CO2 in the gas may freeze depending on the pressure and temperature conditions, or may lead to in the equipment. Selection of more resistant equipment may drive the costs up and make solutions less financially attractive. One of Petroamazonas projects under the OGE&EE program (not yet implemented) consists in transporting the gas in trucks instead of pipelines. This “virtual pipeline” solution was technically validated by Carbon Limits in 2015. It allows overcoming some of the limitations linked to gas volumes and infrastructure. The emissions from gas compression, transport and heating where included in the assessment of greenhouse gas savings. Petroamazonas chose to use a mix of crude oil and gas as fuel for some of the generators, for more flexibility over time. This was a technical challenge at the beginning of the program, which was since overcome. Structural barriers The Hydrocarbon Operation Rules states that the associated gas belongs to the state. The contractors therefore have weak if any incentives to seek explore gas utilization options and monetization of the gas. An authorisation is required for Petroamazonas and contractors to use the associated gas which is provided by the State of Ecuador, through Petroecuador. When the gas is used for LPG production, Petroamazonas reached an agreement with Petroecuador for using the waste gas (remaining after LPG separation). In addition, there is no fee applied when flaring the gas, although this should be implemented according to regulations.

Reduction of gas flaring in Ecuador and Peru 17

Economic barriers Savings on the fuel costs (diesel) was already an incentive for implementing flare gas utilization projects at the beginning of the OGE&EE program more than ten years ago. At that time diesel was subsidised, except for private companies. In 2013 the subsidies on diesel were removed for the entire hydrocarbons sector, which increased even more the incentive to replace diesel with gas or crude. According to PowerLatinAmerica, the petroleum sector consumed more than 950 000 m3 of diesel for its operations in 2014. Diesel used to be the main source of power for operations in the Oriente Basin, until Petroamazonas started using more gas and crude than diesel around 2015-2016. Figure 15: Fuels and other power sources for the operations of Petroamazonas (Petroamazonas EP, 2016).

The use of crude oil for power generation is valued at zero cost in Ecuador (Petroamazonas, 2016), despite its high alternative value in the market. This is an important barrier to associated gas utilization and represents a loss of revenues from hydrocarbon operations. Petroamazonas and other companies will, as long as such conditions prevail continue to use crude oil for own use, with an ensuing economic loss both to the state and companies. The price of LPG is regulated and kept at a level below supply costs in Ecuador (Troncoso et al., 2017). As noted by GGFR in 2004, the low LPG price acts as a disincentive to Petroecuador to supply LPG to the local market, as the domestic price did not even cover costs for storage, bottling, wholesale, and retail transport. The difference between purchase price and costs have been somewhat reduced over the past few years (Center For Economic and Business Research, 2017). Although the government is promoting the use electricity for cooking instead of LPG (Ministerio de Electricidad y Energia Renovable, 2014), the use of LPG at the national level keeps on increasing (Ministry Coordinator of Strategic Sectors, 2016). Ecuador is therefore still reliant on ca. 85% imports of this fuel for its domestic consumption. A further reduction in subsidies could provide better incentives for Petroeucadors projects to use the associated gas for the production of LPG, however this has little public acceptance. It is therefore considered unlikely that subsidies will be removed in the near future. Prices for petroleum products and the lack of internal pricing for local use of crude oil represent important barriers to the utilization of associated gas and, beyond this, entail major economic losses to the state and the country as a whole.

Reduction of gas flaring in Ecuador and Peru 18

Regulatory barriers Although some regulations on flaring are in place in Ecuador, the feedback from interviews indicated that there are shortcomings in compliance by the industry and in enforcement by the authorities. The close relation between the state-owned Petroamazonas and the Ministry of Hydrocarbons could explain the fact that there is little emphasis on regulations. Therefore, key elements such as the fee on flared volumes of gas are present in the regulations but not implemented in practice. In terms of flaring reduction, the OGE&EE program is the priority for both Petroamazonas and the Ministry of Hydrocarbons, and this is where efforts are concentrated. It is unlikely that there will be a change in the regulations or in their enforcement before the OGE&EE program is completed. Awareness and priority barriers The interviews indicated that Petroamazonas is focusing on cost reductions since the fall of the oil price and the increase in diesel costs. Due to the fuel savings achieved, the OGE&EE program is well perceived in the company. As mentioned above, the program is now a priority for Petroamazonas and the Ministry of Hydrocarbons. As in many countries, the lack of an energy efficiency culture is also a barrier in the private and public companies. As mentioned by Petroamazonas (2016), energy efficiency implementation is not considered essential and has little impact on the company financials. Therefore, there is little focus put on saving energy, including optimising the use of flared gas. Successful energy efficiency projects are the ones where the whole company is engaged in the process and top management is supporting the initiative. Petroamazonas reports that most oil companies have not empowered a group of people, with resources and budget, to develop energy efficiency projects. In addition, Petroamazonas reports that the OGE&EE program leads to change in the operational culture, which is sometimes a challenge for operations personnel.

2.6 Opportunities for further flare reduction in Ecuador

Petroamazonas OGE&EE program Currently, the main opportunity for further flare reduction in Ecuador is linked to the OGE&EE program. During the interviews, both the Ministry of Hydrocarbons and Petroamazonas stressed their openness for foreign investments, including from the German Development Cooperation. A number of specific projects within the program are developed in terms of detailed technical feasibility work and techo-economic investment analysis. Petroamazonas states that they are ready for investments. A list of project, presented during the interview with the Ministry of Hydrocarbons is listed below.

Reduction of gas flaring in Ecuador and Peru 19

Table 1 Sample of projects ready for investment within the OGE&EE program Estimated CO Investments 2 Gas volume emissions Project name needed Scope [scfpd] reduction [USD million] [t CO2/year] MSAG Pilot Project Loading and unloading (Monetizing Stranded 3.6 622 500 11 154 station, multiphase Associated Gas) mobile container 4 x 1 MW + Gas handling Generation units, gas 9.46 1 058 933 21 024 system CPF Block 15 compressor Gas conditioning and 3 x 3 MW Gas power handling system, power 21.6 2 382 600 47 304 modules Block 61 generation, electrical distribution Gas conditioning and 3 MW Gas power generation handling system, power 7.2 794 200 15 768 Cuyabeno Phase 2 generation, electrical distribution Gas conditioning and 4 MW Gas power generation handling system, power 9.6 1 058 933 21 024 Sacha Central generation, electrical distribution Gas conditioning and 4 MW Gas power generation handling system, power 9.6 1 058 933 21 024 VHR generation, electrical distribution Gas conditioning and 7 MW Gas power generation handling system, power 16.8 1 853 133 36 792 Auca Sur 47 generation, electrical distribution Gas conditioning and 7 MW Gas power generation handling system, power 16.8 1 853 133 36 792 Aguarico generation, electrical distribution Support reforms which can reduce barriers to flaring Beyond the OGE&EE program, a broad set of institutional improvements and reforms to the framework conditions for gas capture and utilization can help the situation in Ecuador. Barriers to flare reduction efforts were summarized in section 2.5 and policy actions to remove such barriers are from an economic point of view a cost-efficient way of dealing with the flare problem. Many of the barriers are rooted in broader structural features with policy making, regulatory functions and commercial operation of the oil and gas sector. Changing such structures will take time and require political support and motivation at the national level. External institutions of development cooperation can only play a supporting role, primarily of a technical nature, and they would have to recognize that such processes take time. Nevertheless, there are also opportunities to engage in more targeted activities which can help reduce barriers, and specifically help improve regulations within the current broad structures. Examples of such potential activities are:  Analyzing the present situation (production, reserves and resources) and future potential of Ecuador’s natural gas production with special emphasis on associated gas from oil fields  Improvements to the current Technical Service Contracts in order to improve the economic incentives for contractors to capture and utilize associated gas  Establish rules and procedures for operating companies (including Petroamazonas) to monitor and report on flaring and venting of associated gas  Consider to establish a clear and transparent system for granting of flare permits, and predicable and impartial enforcement processes possibly including a flare fine

Reduction of gas flaring in Ecuador and Peru 20

 Consider changes the fuel prices operators are faced with, in order to enhance the economic incentives for gas capture and flare reduction  Improve the collection of flaring and venting data by the government  Support the utilization of financing solutions that could allow Petroamazonas to fund projects with internal resources (with the direct support of the government given their lack of capacity to take debt on their balance sheet) in order to accelerate the implementation of existing flaring reduction projects  Support the ability of the government to engage in structures that leverage private sector resources (i.e. through project finance or similar arrangements) in order to accelerate the design, preparation and implementation of flare reduction projects  Assess the attractiveness of flaring and venting reduction efforts to suppliers of blended financing, both local and international  Promote more transparency in the award of long term contracts and project finance solutions through open bidding processes

Reduction of gas flaring in Ecuador and Peru 21

3 Peru

3.1 Oil and gas production and flaring situation

Peru focuses more and more on gas, the oil production is decreasing Crude oil production peaked around 1980 at about 200 thousand barrels per day, dropped to half this level by turn of the century and has now recovered to about 150 thousand barrels per day. Proven crude oil reserves are currently assessed to be about 1.2 billion barrels (BP, 2017), much of it located onshore in the Amazon region. The country ranks number 6 in terms of oil reserves in the South and Central-Americas region. The main regions of oil production in Peru are: Talara (73%), Marañon (15%), Tumbes (7%), and Ucayali (6%). Gas reserves are estimated at 15 trillion cubic feet (Tcf) in 2015, fourth in the region after Venezuela, Mexico, and Brazil, according to EIA. Domestic gas deliveries to the market have increased from 0.06 bfc/d in 1980 to 1.4 bcf/d in 2016. The large majority of the gas and NGL production happens in the Ucayali Basin (97%) and the remaining gas is produced in the Talara Basin. The Madre de Dios Basin is believed to contain large reserves of gas, and although there has been exploration in this region over the past few years, there are currently no plans for producing the resources (El Comercio, 2017). Figure 16: Oil and gas regions and blocks in Peru

Peru is a net oil importer of both crude oil and products, as domestic petroleum consumption is increasing. Much of Peru’s crude oil imports come from Ecuador. With a relatively small domestic gas market, Peru exports about 50% of its gas production. LNG exports from the Pampa Melchorita terminal reached 610 MMcf/d in 2016, close to maximum capacity. In 2017, Peru exported LNG to Mexico, Europe, Taiwan and South Korea. Figure 17: Left: Oil production and consumption in Peru. Right: Gas production and consumption in Peru. 1980-2016. Source: BP, 2017

According to EIA (2017), oil exploration in Peru's Amazon rainforest is limited because of social conflicts and environmental permit delays. On the other hand, more and more gas resources are

Reduction of gas flaring in Ecuador and Peru 22

discovered in the Camisea area. It is likely that gas and NGL remain the main focus for future developments in the country, although there are delays on the construction of the gas infrastructure in the south of the country. Resources offshore in the north part of the country could be further developed: in September 2017, the company Anaderko Petroleum was granted exploration rights in blocks Z-61 to Z-63 (Andina, 2017). Most associated gas is re-injected or sold Perupetro reports official statistics on the oil and gas sector, including data on associated gas (2012- 2016). The statistics show that most associated gas is re-injected, sold, or used for power. According to this source of data, about 8% of the associated gas produced in the period 2012-2016 has been flared or vented, which in international comparison is relatively low. Figure 18: Use and disposal of associated gas in Peru

The figure shows data as reported to the producing companies to Perupetro, NGL production is not included. Flaring has varied a lot over the past 5 years, there are large uncertainties In addition to statistics from Perupetro, the NOAA VIIRS Global Gas Flaring Observed from Space project (GGFR, 2017) provides flaring data. The satellite estimates suggest that Peru had the 44th highest flare level in the world in 2015 (in volume of gas flared), it ranks number 38 in terms of oil production, and it is below average when it comes to flare intensity. Peru has a flare intensity at the same level as Russia, Mexico and Ecuador (in 2015) but higher than Saudi Arabia, China, and Canada. Figure 19: Left: Flare volumes and oil production in Peru in BCM per annum [includes upstream and downstream flaring]. Right: Split between associated gas and other flares, 2015

Reduction of gas flaring in Ecuador and Peru 23

The correlation between reported numbers and the satellite estimates is rather good for 2012-2014, with only 10 to 15% difference in volumes. However, there is a large gap between the two sources for 2015 and 2016. When looking into details for those two years, the gap is mostly due to discrepancies between satellite detection and reported numbers for three flare sites located offshore Northern Peru. According to the NOAA data, these are responsible for most of the associated gas flaring (75% in 2015-2016). The figure below shows the discrepancy for these three sites only. Figure 20: Flare volumes for the three flare sites offshore Northern Peru

The three flare sites are located on two fields being developed since 2007. Permits for extended well tests have been granted from 2009 until at least 2014 (Subsea IQ, 2017). This could be the reason for the relatively large amounts of gas being flared on those locations, although the installations have re- injection facilities. The flared amounts in 2015-2016 might also be linked to issues with the gas injection wells or the injection compressors, as there are no gas export facilities at those fields. However this does not explain the discrepancy between flaring detected by satellite and the reported data. In 2015 the majority of the flaring was from associated gas upstream (76%), followed by downstream flares (21%), and non-associated gas (3%). This is representative of Peru’s oil and gas sector, with both oil and gas production, and with several downstream sites, including LNG and NGL production. The satellite images identified 20 flare sites in 2015 (versus 22 in 2014). 11 different companies were operating the relevant fields or installations, based on an overview of the licences in Peru (PeruPetro, 2017). Flaring of associated gas in Peru happens in three main areas. The first is the northern coastline, within the Tumbes Basin (77% in 2015). The Talara Basin accounts for 16% of the associated gas flaring, and the remaining 7% of the flaring occurs at the Marañon Basin oil fields, in the Amazonian jungle. A detailed map is provided in Appendix 4. A limited amount of flare site are responsible for the majority of the flaring When looking at associated gas flares, only 4 flare sites out of 12 are responsible for more than 85% of the volumes of associated gas flared in 2015. Of those 4 flares, 3 are located in the Tumbes Basin, and one in the Talara Basin.

Reduction of gas flaring in Ecuador and Peru 24

Figure 21: Size distribution of flares and number of flares in each category (2015), associated gas flares only

In 2015 BPZ Exploracion & Produccion SRL was the company flaring the most in Peru, with 0.16 BCM (76% of the total volume). Other companies flaring significant amounts of associated gas in 2015 are: SAPET Development Peru INC and Pacific Stratus Energy Del Peru S.A.

Figure 22: Distribution of the volumes flared, by company (2015), associated gas flares only, satellite data

Note: BPZ Exploracion & Produccion SRL is no longer operating since 2015, BPZs fields are now operated by Zedd Energy Hold and Frontera Energy. Flaring represents a very small share of the national GHG emissions GHG emission factors were calculated based on the composition of the associated gas in Peru (OSINERGMIN, 2008). Greenhouse gas emissions based on both reported and satellite values are presented in the figure below, the difference is marked with a green colour and pattern. Emissions

range from ca. 350 000 tCO2eq in 2012 to ca. 290 000 tCO2eq in 2016, with a peak in 2014, and with large uncertainties since that year.

Figure 23: GHG emissions from flaring of associated gas in Peru, split between CO2 and CH4.

Reduction of gas flaring in Ecuador and Peru 25

Based on an inventory of Peru’s national greenhouse gas

emissions, the country emitted ca. 171.3MtCO2e in 2012 (Ministerio del Ambiente, 2013). The breakdown is presented in the figure to the right. The calculated emissions from flaring of associated gas in 2012 represent ca. 0.2% of the total national emissions. Within the energy sector, flaring represents ca. 1% of the emissions. Black carbon emissions are estimated based on the flare gas volumes and an emission factor for BC5. That emission factor is calculated based on the calculated higher heating value (HHV) of the gas flared. Emissions increased from ca. 35 tBC in 2012 to a peak at ca. 59 tBC in 2014, and then decreased to ca. 29 tBC in 2016. Note: there are large uncertainties due to the discrepancies between reported values and what is detected by satellite.

Figure 24: Black carbon emissions from flaring of associated gas in Peru.

3.2 Stakeholders

The Ministry of Energy and Mines is the main institution in the sector The Ministry of Energy and Mines6 (MINEM) is responsible for designing the hydrocarbons policy as well as for carrying out promotion and regulatory activities. In particular, the Hydrocarbons Directorate7 (DGH) keeps the rules and norms for the hydrocarbons sector updated, conceding authorizations and concessions to private investors. It is the DGH that reviews applications for flaring and venting permits and that grants them (see also section 3.3). The Directorate for Energy Efficiency8 coordinates the work on NDCs across sectors and therefore has an interest in flaring reduction in the hydrocarbons sector, although the directorate is not yet involved in this topic. During the interview, the directorate expressed their intention to follow-up on this issue in the future, in an NDC perspective. The Supervisory Agency for Private investment in Energy and Mining (OSINERGMIN) is in charge of overseeing the legal and technical aspects of the hydrocarbons activities carried out in the national territory. The institution carries out inspections of the technical and safety conditions of the productions sites on a regular basis. The Ministry of Environment9 (MINAM) is relatively new, created in 2008. The Environmental Assessment and Inspection Agency (OEFA) was created the same year and is in charge of inspections of the environmental conditions at production sites, including air quality and ground

5 Conrad B.M., Johnson M.R., 2017. Field Measurements of Black Carbon Yields from Gas Flaring. DOI: 10.1021/acs.est.6b03690 6 Ministerio de Energia y Minas - MINEM 7 Dirección General de Hidrocarburos – DGH 8 Dirección General de Eficiencia Energética 9 Ministerio del ambiente - MINAM

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pollution. In 2012 the National Environmental Certification Service for Sustainable Investments (SENACE) was created. It took over the responsibility for reviewing Environmental Impact Assessments from MINEM. The Directorate for Climate Change and Desertification10 at MINAM publishes national inventories of GHG emissions on a regular basis (2000, 2005, 2010, 2012), including emissions from gas flaring. Figure 25: Organigram of the main institutions related to flaring in Peru.

MINEM MINAM  Hydrocarbons Directorate  Directorate for Climate Change and  Directorate for Energy Efficiency Desertification

OSINERGMIN OEFA SENACE

Perupetro (PERUPETRO S.A.) is the state-owned company responsible for promoting the investment of hydrocarbons exploration and production in the country. As a state representative, this company negotiates, signs and supervises hydrocarbons contracts and technical evaluation agreements. Among other topics, Perupetro inspects the fiscal metering on gas production sites. It also reports annual statistics on the upstream oil and gas industry: production, own use, flaring, venting and re-injection. PETROPERU is the state-owned company dedicated to the transportation, refining and commercialization of hydrocarbons and its derivates. Pluspetrol dominates the upstream segment There were 15 companies operating in the upstream hydrocarbon industry in Peru in 2016, according to production figures from PERUPETRO. However, the segment is dominated by one main company, Pluspetrol, which produces more than 77% of all the hydrocarbons in the country. Pluspetrol is an international company present throughout the Americas, in Angola and in the Netherlands. Other leading upstream producers in Peru are Repsol (9%), CNPC (4%) and Savia (3%). Figure 26: Hydrocarbon production figures per company, as reported by PERUPETRO for 2016

There is currently little cooperation on the topic of gas flare reduction IDB is active in providing support to MINEM in their review of the Law of Hydrocarbons and related regulations, where flaring is a topic among others. The institution also works with regulatory and safety aspects of oil and gas pipelines (including flaring), in collaboration with US Department of Energy.

10 Dirección General de Cambio Climático y Desertificación - DGCCD

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GIZ is now in the second phase of the ProAmbiente program which purpose is to contribute to the national environmental goals: environmental management, biodiversity conservation and sustainable forest management. GIZ supported SENACE (part of the Ministry of Environment) in establishing a more structured approach to ensure consistency in the evaluation of Environmental Impact Assessments of hydrocarbons projects. Flaring is typically a topic addressed in EIAs, although it is not addressed explicitly in the manual that SENACE produced in cooperation with GIZ. Although Peru endorsed the Zero Routine Flaring 2030 initiative, there is currently no awareness of nor ownership to the initiative in the country (see also section 3.4).

3.3 Framework conditions

Peru has both licensing contracts and service contracts The Peruvian Hydrocarbons Law (No. 26221) establishes that the activities of exploration and production of hydrocarbons will be carried out in the form of licensing contracts (PSAs) or as service contracts (TSCs) between Perupetro and the contractor. These contracts are awarded by direct negotiation or by bidding rounds. For licensing contracts, Perupetro transfers to the contractor the property rights of the extracted hydrocarbons (both oil and gas), and the contractor pays a royalty in cash to the State. The contractor shall provide and be responsible for all technical and financial resources required for the execution of the operations. For service contracts, the contractor carries out exploration and production of hydrocarbons in the contract area and receives compensation depending on the volumes produced. The contractor is responsible for transporting the products from his contract area to the place where the parties agree. The contractor may re-inject the associated gas, use it for power production, flare it (requires a permit), or commercialise it. Exploration contracts last up to 7 years. Production contracts for oil last up to 30 years, including the exploration phase. For production of non-associated natural gas and condensate it is a total of 40 years including the exploration phase. Only emergency venting is allowed The decree 048-2009-EM, approved in 2009, stipulates that venting of natural gas is not permitted, unless under specific conditions: “The venting of natural gas is prohibited in all hydrocarbon activities, such activity constitutes an infraction sanctionable by OSINERGMIN11, with the exception of the inevitable venting in cases of contingency, emergency and operational venting, qualified as such by the Hydrocarbons Directorate (DGH), following a report from OSINERGMIN.” In case of venting for emergency purposes, the operator is required to report the location, volume, duration of the venting, and actions undertaken to limit it after the event took place. DGH and OSINERGMIN then determine if it qualifies as contingency or emergency. In case of venting for operational purposes (e.g. maintenance, start-up, shutdown), the operator is required to ask for authorisation prior to the operations, with a description of the reasons for the venting, why no alternative exists, volume and duration of the venting, and actions to prevent or limit further venting. Decree 048-2009-EM also provides a quantitative definition for venting: volumes of gas higher than 0.11 cubic feet per second (ca. 98 000 cubic meters per year). Finally, the decree requires all hydrocarbon activities to have facilities for the prevention of venting, or for the collection, re-injection, storage or flaring of the gas.

11 Osinergmin: Supervisory Agency for Private investment in Energy and Mining, see also section 3.2

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It is assumed that this regulation on venting was established for safety and resource management. Gas flaring is allowed but a permit is required Article 44 of the Organic Law for Hydrocarbons (law no. 26221, 1993) allows flaring in principle, provided an authorisation from the Ministry of Energy and Mines: “The natural gas which is not used in the operations may be marketed, reinjected into the reservoir, or both, by the Contractor. To the extent that the natural gas is not used, marketed or reinjected, the Contractor, after prior authorization by the Ministry of Energy and Mines, may flare the gas.” In practice, applications for authorisations are addressed to the Hydrocarbons Directorate (Dirección General de Hidrocarburos – DGH). DGH reviews the technical justification for the planned flaring, its timeline and the expected volumes. Flaring is allowed for maintenance, start-up, shutdown, and well testing operations. In principle, permits would not be issued for continuous operational flaring. If the flaring is considered necessary, DGH delivers an authorisation for gas flaring (Autorización para la quema de gas) (National Superintendence of Customs and Tax Administration, 2017). DGH also notifies OSINERGMIN and OEFA so that they can carry out inspections at the flare site. According to DGH, flare permits are limited in time and usually range from a few days to a few months only. Feedback from a private company producing hydrocarbons in Peru indicates that DGH is consistent in its assessments, and work according to transparent criteria. As a side note, excessive flaring and venting are considered as waste in the supreme decree D.S. 032-2002-EM, which was approved in 2002. The decree contains a glossary of terms for the Hydrocarbon Subsector, and the definition for waste (desperdicio) includes the following: “The unnecessary flaring of combustibles and the escape of hydrocarbons to the air from a productive well, in excess of the reasonable and necessary quantities for the efficient development of a reservoir or production of a well.” The companies are required to monitor and report the volumes of gas they flare Monitoring is done by the producing companies, using monitoring equipment such as ultrasonic sensors and/or measuring the pressure difference across a restriction orifice. The latter is standard equipment, although not recommended due to safety concerns. Some of the ultrasonic sensors are verified by Perupetro on a regular basis (fiscal metering). Companies report the flared volumes on a daily basis to OSINERGMIN and Perupetro, and also send a monthly summary to DGH. DGH carries out a follow-up, comparing the reported volumes to the permit conditions. If a company flares for emergency purposes (unplanned), they report the volumes and reasons for the flaring to the authorities (this was confirmed both by a private company and by DGH during interviews). Perupetro publicly reports the volumes of gas flared and vented in their annual statistics (see also reference list in Appendix 2: Perupetro 2012-2016).

3.4 Initiatives to reduce flaring

There is currently no gas infrastructure in northern Peru BPZ Energy (2011) mentions a proposal for a Northern gas pipeline from Tumbes to Talara and further south. This pipeline could allow reducing flaring at the offshore fields in the Tumbes area (0,10 BCM in 2016, decreasing from 0,16 BCM in 2015), and potentially also at some of the Talara fields. There is no further information available on the status of this project. There have also been discussions between Peru and Ecuador for sending Peruvian gas north to produce power in Ecuador. It is unclear to the authors of this report if the discussions are still ongoing.

Reduction of gas flaring in Ecuador and Peru 29

A gas infrastructure is being developed in south Peru Peru is developing gas and NGL infrastructures in the southern part of the country as part of the development of the gas resources in the Camisea area. Only non-associated gas is produced in the region, and it contributed to 21% of all the gas flared in the country in 2015. A first phase included the construction of a gas pipeline and an NGL pipeline towards the coast south-west of the Camisea area. The gas pipeline supplies an LNG plant located on the coastline and operated by PeruLNG12. The plant has been in operation since 2010. A gas pipeline (Gasoducto Sur Peruano) construction started in 2014 in order to supply power plants and other consumers in the southern part of the country. A corruption case was revealed, involving the Brazilian construction company Odebrecht which was in charge of part of the project (PeruReports, 2017). At the time of writing, the project is on hold at ca. 30% completion. This limits the capacity for gas export from the Camisea fields, and part of the gas is re-injected after NGL separation. Peru endorsed the “Zero Routine Flaring by 2030” initiative, but is not actively following up yet Peru has endorsed the “Zero Routine Flaring by 2030” initiative. During the interviews at the Ministry of Energy and Mines there did not seem to be awareness and ownership about the initiative within the Hydrocarbons Directorate nor the Energy Efficiency Directorate. The interviews revealed that responsibilities are not set for following up on the initiative and ensuring that Peru meets its reporting commitments starting 2017. In reality, the competence and responsibility on flaring issues are spread across ministries and directorates: - DGH has the technical and regulatory knowledge about flaring, - the Energy Efficiency Directorate has the climate and energy knowledge, and coordinates establishment of NDCs across sectors (the initiative could be a candidate for an NDC), - the Ministry of Environment is in charge of questions related to climate at the national level.

There may be a need for capacity-building on the aspects linked to climate impacts of flaring and flaring reduction initiatives (see also section 3.6). More information about the Zero Routine Flaring initiative is provided in Appendix 5. Other initiatives

 IDB is providing support to the Ministry of Energy and Mines in their review of the Law of Hydrocarbons and related regulations (reglamentos). Flaring is a topic within the regulations for exploration and production and for environmental protection, both of which are also being reviewed.  In addition, IDB and the US Department of Energy organize a workshop for government agencies on regulatory and safety aspects of oil and gas pipelines in Peru. This workshop will take place on Nov. 2-3 2017 and flaring was included as part of the agenda.  GIZ supported SENACE in Peru for establishing a manual for a consistent review of Environmental Impact Assessments in the hydrocarbons sector. This could allow for a closer follow-up of flaring as a topic during the project phase of new production installations.

3.5 Barriers to flaring reduction

Peru has specific technical and geographical barriers Associated gas is flared in three distinctive areas in Peru, and each has specific technical and geographical challenges. In the Tumbes Basin, offshore Peru, there are three flare sites and each site corresponds to an offshore production installation on the Corvina and Albacora fields. These fields contribute some 70%

12 Consortium of Hunt Oil Company (50%), SK Energy (20%), Shell (20%), and Marubeni (10%)

Reduction of gas flaring in Ecuador and Peru 30

of all associated gas flaring in Peru, according to satellite data. There are no facilities at the fields to bring the gas to onshore demand centers. On the other side of the border, at the Ecuadorian Amistead field in the Tumbes Basin, gas is being exported to an onshore power plant. A few years ago there were plans for developing a gas export pipeline from the Corvina and Albacora fields, but it appears to have been stopped (see also section 3.4). This could be linked to the fact that the operator of those fields filed for bankruptcy in late 2015. In the Talara Basin, on the coastline north-west Peru, there are 9 associated gas flare sites, responsible for 16% of the flaring in 2015. Those sites are located between 8 and 35 km from the Talara refinery, in an arid area. The refinery is currently being modernised for additional processing and conversion units, as well as a co-generation plant. There is very little information available about the infrastructure in the area. Reporting from Perupetro (2016) shows that all fields use gas for power production, and half of them re-inject and/or export the associated gas. Flaring is reported for most of the fields. Companies such as Petrobras and CNPC have been implementing projects for collecting the gas and re-injecting it or producing power. Based on available information on the associated gas composition in the area, there are no technical barriers linked to the gas composition (Osinergmin, 2008). Finally, there are 5 flare sites in the Marañon Basin, close to the border to Ecuador in the Amazon jungle. The sites are located between 16 and 100 km from each other. Some of the logistical and geographical challenges faced in the Oriente Basin in Ecuador are also found in the Marañon Basin in Peru. Transportation is a challenge and there is no gas infrastructure in the area. In addition, there are far fewer production sites in Peru compared to Ecuador, the flares are relatively small, and all of them are located in dense jungle. Finally, the local political situation is a challenge, with protests from the indigenous populations against the oil sector in the area. Figure 27: Illustration of some of the associated gas flare sites in Peru. Left: offshore Tumbes Basin. Center: Talara Basin. Right: Marañon Basin.

Structural and organisational barriers Regulations and institutions are in place in Peru to allow for an adequate follow-up of flaring and venting activities from a safety and technical perspective. However, the topic is not addressed from a climate point of view, which could be explained by the fact that flaring is a very small contributor to the national emissions. There seems to be a lack of awareness and capacity on the climate aspects of gas flaring and venting and of the oil and gas sector in general. The current organisational divide between the Hydrocarbons Directorate and the Energy Efficiency Directorate with the former focusing on safety and operations and the latter on climate and energy efficiency knowledge implies that there may be a need for more contact and collaboration in relation to flare reduction efforts. Two ongoing initiatives could allow for more focus on the climate impacts of gas flaring and the need for further flare reduction: - Peru endorsed the Zero Routine Flaring initiative and will need to establish responsibilities for the follow-up of commitment to the initiative.

Reduction of gas flaring in Ecuador and Peru 31

- The Ministry of Energy and Mines is coordinating an initiative to establish NDCs across industrial sectors, establishing and NDC on gas flaring reduction may participate in setting focus on the topic.

The personnel in the Ministries rotates on a regular basis, which has benefits for cooperation across organisations, such as the increased ownership of the Environmental Ministry on EIAs. This is also a barrier, since competence and follow-up are sometimes lost in the transition. Economic barriers The interviews and an evaluation of current regulations leave the impression that further economic incentives to flare reduction might be effective. The interviewees mentioned that a fee on flaring was once considered, but not implemented. There is only a small fee linked to permit applications, but it is not significant. Production statistics and interviews showed that most of the associated gas is re- injected or sold, and that companies are already using the gas for power production. It is unknown to what degree diesel, crude or other fuels are also used for power production in the sector. There are no subsidies on diesel or other fuels in Peru. Since there is a lack of gas infrastructure in the north of the country, market outlets for the associated gas are very limited and gas is not considered as a valuable product. Regulatory barriers From a regulatory perspective, the adequate elements of permitting, monitoring and reporting are in place for addressing both flaring and venting of associated gas. Interviews show that the regulations are, by and large, complied with and enforced. Relevant institutions are generally active both during the permitting and follow-up of operations. Questions remain around the situation in the north on what seems to be relatively large flare volumes not being reported. It is not clear whether these are temporary problems related to well testing and/or ownership changes to the concessions, or whether there are longer term problems with utilization of the gas. One uncertainty remains: to which degree is flaring tolerated in specific operational conditions, such as the offshore production north of Peru. This aspect could become more and more important as the authorities have recently approved exploration on three additional offshore blocks in the north. In addition, currently the Ministry of Energy and Mines is the one regulating and following-up on gas flaring and venting. The Ministry of Environment has only limited ownership on the topic, through the review of EIAs, and through the topic of air quality.

3.6 Opportunities for further flare reduction in Peru

Capacity building on the climate effects of gas flaring and the Zero Routine Flaring by 2030 initiative The lack of system and responsibilities for the follow-up of the Zero Routine Flaring by 2030 initiative could be an opportunity for the German Development Cooperation to support capacity building at the Ministry of Energy and Mines or the Ministry of Environment. GIZ already has a good working relationship with the Ministry of Environment, which could facilitate further cooperation. There is also commitment at the higher level to work on the issue, as indicated by the Vice Minister of Energy and Mines. The improvement opportunities could include: - Supporting the Ministry of Energy and Mines and the Ministry of Environment in assigning a focal point for the coordination of the work on Zero Routine Flaring initiative, - Capacity building on the effects of flaring on climate and of flare reduction initiatives, - Support for improved cooperation on the topic of flaring between the Hydrocarbons Directorate, the Directorate of Energy Efficiency, and the Ministry of Environment.

Reduction of gas flaring in Ecuador and Peru 32

Review of the regulations Although there is already a good utilization rate of associated gas in Peru, it may be feasible to further improve it by revising the regulations on flaring for more reduction incentives. In particular, it could be considered to implement a fee on the flared volumes, which would provide an economic incentive for implementing further utilization projects.

Reduction of gas flaring in Ecuador and Peru 33

4 Conclusions – possibilities for German DC in both countries

4.1 The rationale for engaging in flare reduction efforts

It follows from the analysis above that flaring of associated gas represents a significant resource waste, with large emissions of greenhouse gases and pollutants which create ecological and public health problems. With regards to climate mitigation flare reductions are typically very effective in terms of emission reductions relative to the money spent on investments. For example, projects under the OGE&EE program for the utilization of flare gas for power generation in Ecuador create on average 38 13 tonnes CO2e of emission reductions per US$ spent , while a solar and power investments are well

below this level, typically in the range 10 to 20 tonnes CO2e of emission reduced per US$ spent. Further, it can be concluded that there is globally a large potential to undertake flare reduction projects at low, and in many cases negative, abatements costs14. In Ecuador the OGE&EE investment program includes a large potential of such opportunities. It follows from this that companies and national government in flare countries should do more to achieve flare reductions. Clearly there are important barriers which may prevent action despite stated commitments by many countries and companies to address the problem pro-actively. For German Development Cooperation the question is whether it can “make a difference” for a problem which primarily requires action from national governments and oil companies. Should German Development Cooperation engage, it would be on the basis of an assessment of its possible contribution to eliminate barriers or enhance the drivers to flare reduction. This project assignment has sought to identify areas where international support of the sort offered by German Development Cooperation can make a difference. Three broad categories of support are envisaged: i) activities related to reform processes and building of institutional capacity to achieve flare reduction objectives; ii) activities aimed towards the design and preparation of flare reduction projects; and (iii) direct support to flare reduction projects. Engagement from German Development Cooperation is, as we understand it, largely motivated by climate change considerations. The success of a support program would therefore be measured by its ability to offer costs-efficient climate change mitigation results. As noted above, flare reduction investments can be very effective in terms of emission reductions per US$ spent, but this is of course not a sufficient condition for engaging. Emission reduction varies from project to project depending local circumstances and/or technologies being applied. To the extent that German development cooperation offers support to specific projects or investment programs it is important that both the short term and long term emission reduction impacts are considered. For example, projects that are perceived as being detrimental to a longer term low-carbon energy system transformation should be avoided. Detailed consideration should be given to the economic and financial context where flaring reduction activity takes place, in particular those aspects that affect “last mile” decisions from public and private agents. Finally, public fund cost efficiency should be carefully considered. Most of the specific projects reviewed as part of this assignment seem to be financially viable; many with a pay-back of five years or less. Concessional finance from public funds is therefore justified if they directly help remove barriers to project financing and implementation. It should be noted however, that international financing of this sort normally is in the form of a relative moderate co-financing in order to leverage funding from other sources. Indeed, multilateral development banks engaged in financing of flare reduction projects have as an explicit condition that the investments in question are “bankable”.

13 Capital expenditures and discounted operational expenditures 14 Implying that the revenues from sales of the captured and treated gas exceed the costs, at a commercial discount rate.

Reduction of gas flaring in Ecuador and Peru 34

4.2 Recommended follow up in Ecuador

As presented in Chapter 2 above there currently exist important barriers to flare reduction in Ecuador, but at the same time there is a very clear pipeline of projects, institutional commitment to use the associated gas and an experienced team working on flare reduction for the last 8 years. Hence, there is significant potential for flare reduction if barriers are removed. German development cooperation can engage both in supporting reforms and capacity building, supporting the design and preparation of flaring reduction projects or the introduction of new technologies, as well as through direct support projects under the OGE&EE program. The program includes a number of specific projects (see above) for which detailed techno-economic feasibility studies exist. Several projects can therefore be developed relatively quickly for demonstration purposes. The subsequent challenge is to have in place a finance mechanism structure in line with requirements from lenders (in particular German lenders), both to the government and to private sector sponsors. The Inter-American Development Bank has for quite some time worked with the relevant public institutions in Ecuador in the sector to establish a financing mechanism that would allow to attract private sector lending for projects of the OGE&EE program, including a Project Finance structure that allows both public and private sector entities to engage under a long term contractual framework. It is our understanding that political conditions (impending elections) were not conducive to the closing of the financial mechanism last year, but now at the beginning of a new administration it could be possible to reinvigorate this process and take advantage of the advances already achieved by the Inter-American Development Bank.

Therefore, if German Development Cooperation considers it relevant to engage in the OGE&EE program, for example by co-financing a pilot project, it is recommended that preparatory steps for this are taken in close consultation with the Inter-American Development, and desirable that a financing mechanism which can serve as a platform for German support is developed jointly in collaboration with the Inter-American Development and the Ecuadorian counterparts. Carbon Limits during meetings in Quito with the Ministry of Hydrocarbons and Petroamazonas presented a number of projects which might serve as pilot projects” for German support. Co-financing with private sector entities and the Inter-American Development could be a workable model for several of these projects. Before a project selection is made it is recommended that a thorough scrutiny is done into the environmental and social impacts of the projects, and further that there are high prospects of replicability which can be achieved from implementation of the pilot project.

As also noted in Chapter 2 many barriers to flare reductions in Ecuador are rooted in institutional and legal/regulatory framework which can only be solved through broad reform processes which will require time, political will and determination and should exceed the scope of the type of German development cooperation being considered in this report. Nevertheless, there are, within the current structure, specific areas of support which could contribute to reduction of barriers:  Analyzing the present situation (production, reserves and resources) and future potential of Ecuador’s natural gas production with special emphasis on associated gas from oil fields  Improvements to the current Technical Service Contracts in order to improve the economic incentives for contractors to capture and utilize associated gas  Establish rules and procedures for operating companies (including Petroamazonas) to monitor and report on flaring and venting of associated gas  Consider to establish a clear and transparent system for granting of flare permits, and predicable and impartial enforcement processes possible including a flare fine  Consider changes the fuel prices operators are faced with, in order to enhance the economic incentives for gas capture and flare reduction  Improve the collection of flaring and venting data by the government  Support the utilization of financing solutions that could allow Petroamazonas EP to fund projects with internal resources (with the direct support of the government given their lack of capacity to take debt on their balance sheet) in order to accelerate the implementation of existing flaring reduction projects

Reduction of gas flaring in Ecuador and Peru 35

 Support the ability of the government to engage in structures that leverage private sector resources (i.e. through\ project finance or similar arrangements) in order to accelerate the design, preparation and implementation of flaring reduction projects  Assess the attractiveness of flaring and venting reduction efforts to suppliers of blended financing, both local and international  Promote more transparency in the award of long term contracts and project finance solutions through open bidding processes

In the process of selecting specific areas of support we would recommend German Development Cooperation to seek advice and possibly cooperate with the Inter-American Development Bank, and also inform the GGFR of the World Bank, who manages the Zero Routine Flaring initiative, about a possible engagement. The regional presence of the Inter-American Development Bank can make them an effective partner for specific deployment of German cooperation in Ecuador. To the extent that co- financing of specific projects is considered, cooperation with the private sector arm of the Inter- American Development Bank (the recently revamped Inter-American Investment Corporation) is relevant. The Inter-American Investment Corporation evaluated last year the project finance structure for the flaring reduction projects in Ecuador.

4.3 Recommended follow up in Peru

The possible scope for cooperation with Peru is considered to be smaller than for Ecuador. The country has a relatively well developed system of flare regulation which seems to be managed well in terms of compliance and enforcement. Flaring is limited to a small number of sites and it has not been identified that international support is relevant for these.

However, as noted in section 3.6 above, there is a lack of clear responsibility for follow-up on the commitments the country has made by endorsing the Zero Routine Flaring by 2030 initiative and, unlike the situation in Ecuador, flare reduction efforts seems not be incorporated in climate policies and reporting requirements under the Paris Agreement. There might therefore be a need for institutional/capacity building support in the form of:

 Assistance to the Ministry of Energy and Mines and the Ministry of Environment in assigning a focal point for the coordination of the work on Zero Routine Flaring initiative,  Integrate climate change consideration into flare reduction regulations, notably by addressing more pro-actively the problem with relatively high volumes of direct emission of methane by oil and gas companies. Support for improved cooperation between the Hydrocarbons Directorate, the Directorate of Energy Efficiency, and the Ministry of Environment is relevant in this context.

It is noted that GIZ has an ongoing support with the Ministry of Environment. This may serve as a platform for further cooperation as listed here.

Reduction of gas flaring in Ecuador and Peru 36

Appendix 1 – Abbreviations list

Abbreviations APG ARCH Hydrocarbons Regulation and Control Agency (of Ecuador) BBL/D Barrel per day BCF Billion Cubic Feet (10^9 cubic feet, ca. 0,028 x 10^9 Sm3) BCM Billion Cubic Meter (10^9 Sm3) DGH Hydrocarbons Directorate (of Peru) GHG Greenhouse Gas GOR Gas to oil ratio IOC International Oil Company LNG (methane, ) LPG (, ) NDC Nationally Determined Contributions (to the Paris Agreement on climate) NGL Natural Gas Liquids (most of the gas content from the well, except methane) NGO Non-Governmental Organisation NOC National Oil Company PSA Production Sharing Agreement SHE Hydrocarbons Secretariat (of Ecuador) TCF Trillion cubic feet (10^12 cf, ca. 28x10^9 Sm3) TSC Technical Service Contract

Terminology and constituents of natural gas:

Reduction of gas flaring in Ecuador and Peru 37

Appendix 2 – Literature and sources

BP, 2017. Statistical Review of the World Energy, 2016 data GGFR, 2017a. GGFR dashboard on flaring volumes across the world. Available at: http://dataviz.worldbank.org/views/GGFRDashboard06_30_2017/GasFlaring?%3Aembed=y&%3Asho wShareOptions=true&%3Adisplay_count=no&%3AshowVizHome=no GGFR, 2017b. GGFR flaring data. Available at: http://www.worldbank.org/en/programs/gasflaringreduction#7 IEA, 2017a. Germany Final Consumption Energy Balance, 2013 data. Available at: http://www.iea.org/Sankey/#?c=Germany&s=Final%20consumption World Resource Institute, 2017. CAIT Climate Data Explorer. Available at: http://cait.wri.org

Ecuador Center For Economic and Business Research, 2017. Boletin Estadistico del Sector de Hidrocarburos Observatorio de Energia y Minas (in Spanish). Available at: http://www.observatorioenergiayminas.com/archivos/boletin/petroleoaldia07.pdf Ecuadors Ministry of Environment, 2016. Primer Informe Bienal de Actualización del Ecuador a la Convención Marco de las Naciones Unidas sobre el Cambio Climático (in Spanish). Escuela Politecnica Nacional, 2013. Estimacion del perjuicio al estado causado por el subsidio otorgado al consumo del gas licuado de petroleo o GLP en el Ecuador (in Spanish). Available at: http://bibdigital.epn.edu.ec/handle/15000/6741 GGFR, 2004. Flared Gas Utilization Strategy – Opportunities for Small-Scale Uses of Gas. Available at: http://documents.worldbank.org/curated/en/193801468779650307/pdf/295520Flared0G1on0Strategy0 1public1.pdf The Guardian, 2016. Oil drilling underway beneath Ecuador's Yasuní national park. Available at: https://www.theguardian.com/environment/2016/oct/26/oil-drilling-underway-beneath-ecuadors-yasuni- national-park The Financial Post, 2013. How China took control of Ecuador's oil. Available at: http://business.financialpost.com/investing/how-china-took-control-of-ecuadors-oil-2/wcm/f5f64773- 845f-4cf6-b4a0-467bcf736615 Ministerio Coordinador de Sectores Estrageticos, 2015. Balance Energetico Nacional (in Spanish). Available at: http://www.sectoresestrategicos.gob.ec/wp- content/uploads/downloads/2016/01/Resumen-Balance-Energe%CC%81tico-20151.pdf Ministerio Coordinador de Sectores Estrageticos, 2016. Balance Energetico Nacional (in Spanish). Available at: http://www.sectoresestrategicos.gob.ec/wp- content/uploads/downloads/2017/04/BALANCE-ENERGETICO-2016-PARTE-1.pdf Ministerio de Electricidad y Energia Renovable, 2014. Informe – Rendicion de Cuentas (in Spanish). Available at: http://www.energia.gob.ec/wp-content/uploads/2015/04/Informe_Rendicio%CC%81n-de- Cuentas-2014_vf.pdf Ministerio de Hidrocarburos – Plan Estrategico 2016-2017 (in Spanish). Available at: http://www.hidrocarburos.gob.ec/wp-content/uploads/2016/12/PLAN-ESTRATEGICO- INSTITUCIONAL-2016-2017.pdf

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Petroamazonas, 2014. Estudio de impacto y plan de manejo ambiental OGE&EE (in Spanish). Available at: http://www.petroamazonas.gob.ec/wp-content/uploads/downloads/2014/04/Cap- 7_Evaluacin-de-impactos-OGEEE.pdf Petroamazonas EP, 2016. Optimization of power generation and energy efficiency, presentation at the NAMA Market Place LAC Carbon Forum, Panama, 2016. Available at: https://unfccc.int/files/focus/mitigation/application/pdf/laccf-nama-ogeee-ecuador.pdf Petroamazonas, 2017. Composition of the associated gas at block 18. Provided by Petroamazonas by email. PowerLatinAmerica, 2015. Alcance iniciativa publica-privada cambio matriz energetica proyecto OGE&EE (in spanish). Available at: http://www.olade.org/wp- content/uploads/2015/10/BerendVanDenBerg.pdf Repsol, 2015. Sustainability Plan 2015 – Year-end report. Available at: https://imagenes.repsol.com/es_en/Informe_cierre_2015_Ecuador_en_tcm11-734202.pdf Trading Economics, 2017. Ecuador Crude Oil Production Forecast. Available at: https://tradingeconomics.com/ecuador/crude-oil-production/forecast Troncoso, K., Soares da Silva, A., 2017. LPG fuel subsidies in Latin America and the use of solid fuels to cook. Energy Policy. Available at: https://static1.squarespace.com/static/5633c4c2e4b05a5c7831fbb5/t/593069865016e17d26c06b1f/14 96344966795/CCAC+study+on+subsidies+for+promoting+LPG+in+Americas.pdf

Peru Andina, 2017. Peru approves 3 contracts with Anadarko to explore hydrocarbons offshore (in Spanish). Available at: http://andina.pe/agencia/noticia-peru-aprueba-3-contratos-anadarko-para- explorar-hidrocarburos-el-mar-683399.aspx BP, 2017. Statistical Review of the World Energy, 2016 data BPZ Energy EP, 2011. Presentation at the Raymond James’ 32nd Annual Institutional Investor Conference. Available at: https://www.sec.gov/Archives/edgar/data/1023734/000110465911013664/a11-7762_1ex99d1.htm EIA, 2017. Country Analysis for Peru, 2015 data El Comercio, 2017. Natural gas: Hunt Oil confirms to MEM that it will leave block 76 (in Spanish). Available at: http://elcomercio.pe/peru/gas-natural-hunt-oil-confirma-mem-devolvera-lote-76-416281 GGFR, 2017. GGFR dashboard on flaring volumes across the world. Available at: http://dataviz.worldbank.org/views/GGFRDashboard06_30_2017/GasFlaring?%3Aembed=y&%3Asho wShareOptions=true&%3Adisplay_count=no&%3AshowVizHome=no IEA, 2017. Country Energy Balance, 2014 data Ministerio del Ambiente, 2013. Inventario Nacional de Gases de Efecto Invernadero (INGEI) (in Spanish). Available at: http://infocarbono.minam.gob.pe/wp-content/uploads/2016/03/2012.pdf National Superintendence of Customs and Tax Administration, 2017. Special Permits and / or Permits of other sectors (in Spanish). Available at: http://www.sunat.gob.pe/exportaFacil/pasos/paso7.pdf Oil and Gas journal, 2015. Petroperu advances Talara refinery modernization. Available at: http://www.ogj.com/articles/2015/05/petroperu-advances-talara-refinery-modernization.html OSINERGMIN, 2008. Operación de plantas de procesamiento de gas natural, 2008 (in Spanish). Available at:

Reduction of gas flaring in Ecuador and Peru 39

http://gasnatural.osinerg.gob.pe/contenidos/uploads/GFGN/Operacion_Plantas_Procesamiento_de_G as_Natural.pdf OSINERGMIN, 2017. La industria de los hidrocarburos liquidos en el PeruLa industria de los hidrocarburos liquidos en el Peru, feb. 2017 (in Spanish). Available at: http://www.osinergmin.gob.pe/seccion/centro_documental/Institucional/Estudios_Economicos/Libros/Li bro-industria-hidrocarburos-liquidos-Peru.pdf PeruPetro 2012-2016. Estadística Petrolera (in Spanish). Available at: https://www.perupetro.com.pe/wps/wcm/connect/Perupetro/site/Informacion%20Relevante/Estadistica s/Estadistica%20Petrolera PeruPetro, 2017. Map of petroleum blocks in Peru. Available at: http://www.perupetro.com.pe/wps/wcm/connect/perupetro/site/Informacion%20Relevante/Mapa%20de %20Lotes/Mapa%20de%20Lotes PeruReports, 2017. Peru scraps Southern Gas Pipeline contract in Odebrecht fallout. Available at: https://perureports.com/2017/01/23/peru-scraps-southern-gas-pipeline-contract-odebrecht-fallout/ Repsol, 2017. Peru – Presentation (in Spanish). Available at: https://www.repsol.com/pe_es/corporacion/complejos/refineria-la- pampilla/conoce_refineria_pampilla/presentacion/ Subsea IQ, 2017 – Offshore field development projects - Albacora. Available at: http://www.subseaiq.com/data/Project.aspx?project_id=550 Subsea IQ, 2017 – Offshore field development projects – Corvina. Available at: http://www.subseaiq.com/data/Project.aspx?project_id=447

Reduction of gas flaring in Ecuador and Peru 40

Appendix 3 – Maps and further documentation for Ecuador

Flaring sites The satellite images identified 69 flare sites in 2015 (vs 71 in 2014). The size of each bubble indicates the estimated volume of gas flared. Figure 28: Geographical flare distribution illustrated from satellite estimates (2015)

Most of the flaring in Ecuador happens in the Oriente Basin, with 99% of the volumes flared in 2015. The remaining of the flaring happens at a refinery and at an NGL plant on the coastline (1% of the flared volume in 2015). It should be noted that although non-associated gas is produced in the Tumbes Basin, no flaring was detected in that area in 2015.

Reduction of gas flaring in Ecuador and Peru 41

Table 2 Flaring levels in each region Installations on Oriente Basin Tumbes Basin coastline Associated gas, and Type of gas Non-associated gas Downstream one downstream site Share of flare total flaring 98.7% 0% 1.3% (2015) Development from 2012 to Increasing none Decreasing 2015

Reduction of gas flaring in Ecuador and Peru 42

Appendix 4 – Maps and further documentation for Peru

Flaring sites The satellite images identified 20 flare sites in 2015 (vs 22 in 2014). The size of each bubble indicates the estimated volume of gas flared. Figure 29: Geographical flare distribution illustrated from satellite estimates (2015)

Note: The Southern Peru gas pipeline is presented entirely on the map although only 30% is currently completed.

Reduction of gas flaring in Ecuador and Peru 43

Flaring in Peru happens in four main areas. The first is the northern coastline, within the Tumbes and Talara basins which account for 58% and 14%, respectively, of the volumes flared in 2015. Those basins consist of offshore oil and gas fields in Tumbes, and onshore oil fields in Talara. The second is the Marañon Basin oil fields, in the Amazonian jungle (6% of the gas). The third area with flaring is the Ucayali Basin with the Camisea gas fields, located in the southern-central part of the country, with 21% of the volumes flared in Peru. The gas flared in this region is non-associated gas. The last area with flaring is the receiving installations on the coastline around Lima. Those installations account for 2% of the volumes flared in 2015.

Table 3 Flaring levels in each region Coasline: Tumbes Installations on Marañon Ucayali Basin and Talara basins coastline Basin Associated gas, Non-associated Associated Type of gas and one Downstream gas gas downstream site Share of flare total 71.3% 21.1% 1.9% 5.6% flaring (2015) Development from Increasing Increasing Increasing Decreasing 2012 to 2015

Reduction of gas flaring in Ecuador and Peru 44

Appendix 5 – Additional information about flaring

Uncertainties related to satellite estimates of flare gas volumes It should be noted that there may be discrepancies between official sources and satellite estimates. These can be explained by three broad factors, as identified in the Flaring in Four Countries Study15:  Uncertainties in national statistics. National statistics are based on reports from oil and gas companies which not always measure gas that goes to flares, but rather makes estimates of associated gas production and flaring, based on gas-to-oil ratios and other (indirect) parameters. Given that flaring is subject to regulations and penalties, there may also be a tendency that flaring is systematically underreported.  Uncertainties in converting data from satellites to flare volumes. Conversion factors used by NOAA, which are not calibrated specifically for Egypt, may overstate flare volumes. The fact that satellite images are not continuous measurements but “snapshots” represents a possible source of error.  Satellite images may include more than flaring of associated gas. Although this may not be so much of a problem in Ecuador because flare sites mostly are at locations without other sources of light. In general there are some challenges in distinguishing flaring of associated gas from flaring of non-associated gas at gas processing plants or refineries.

Environmental impacts of gas flaring Gas flaring is a source of greenhouse gases and other air pollutants. The main emissions from flaring

are: CO2, methane, black carbon (particulates), and pollutants such as NOX and SOX.

CO2 is the main greenhouse gas emitted from the combustion of associated gas at flares. Methane is also released since the combustion is often incomplete. In general, a 98% combustion efficiency is assumed. This means that about 2% of the associated gas is not combusted and is released to the

atmosphere. When compared to CO2, methane has a higher , but lasts a shorter time in the atmosphere. When looking at a 100 years perspective, it is considered that a ton of

methane is equivalent to 25 tons of CO2. Black carbon (BC) is a component of particulate matter. It is formed through the incomplete combustion of gas at the flare. BC has an effect on both human health and climate. It is considered carcinogenic and a key component contributing to the adverse health effects associated with PM2.516. It also contributes to global warming and has been identified as likely the second-most important 17 atmospheric direct radiative forcer (after CO2) .

NOX ( oxides) and SOX (sulphur oxides) are two air pollutants. NOX contributes to the

formation of smog and acid rain, as well as tropospheric . SOX also contributes to acid rain, but also has effects on the respiratory system in humans.

15 Associated Petroleum Gas Flaring Study for Russia, Kazakhstan, Turkmenistan and Azerbaijan. http://www.ebrd.com/downloads/sector/sei/ap-gas-flaring-study-final-report.pdf 16 Conrad B.M., Johnson M.R., 2017. Field Measurements of Black Carbon Yields from Gas Flaring. DOI: 10.1021/acs.est.6b03690 17 Jacobson, M. Z. Short-term effects of controlling fossil-fuel soot, biofuel soot and gases, and methane on climate, Arctic ice, and air pollution health. J. Geophys. Res. 2010, 115 (D14209), 1−24.

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Zero Routine Flaring by 2030 Initiative The World Bank launched the "Zero Routine Flaring by 2030" initiative in 2015. The initiative brings together governments, oil companies, and development institutions who agree to cooperate to eliminate routine flaring no later than 2030. To date, 25 governments, 31 oil companies and 15 development institutions have endorsed the initiative. Some governments and companies also set more ambitious targets for flaring reduction, towards 2020. For governments, the endorsement means that they will provide a legal, regulatory, investment, and operating environment that is conducive to upstream investments and to the development of viable markets for utilization of the gas and the infrastructure necessary to deliver the gas to these markets. This is meant to give companies the confidence and incentive as a basis for investing in flare elimination solutions. Governments commit to require, and stipulate in their new prospect offers, that field development plans for new oil fields incorporate sustainable utilization or conservation of the field’s associated gas without routine flaring. Furthermore, governments commit to make every effort to ensure that routine flaring at existing oil fields ends as soon as possible, and no later than 2030. For oil companies, the endorsement means that they will develop new oil fields incorporating sustainable utilization or conservation of the field’s associated gas without routine flaring, and that they will implement economically viable solutions to eliminate legacy flaring (i.e. from existing fields) as soon as possible and no later than 2030. In addition, oil companies will publicly report their flaring and progress on an annual basis, starting 2017. According to the UN Climate Initiatives Platform, there is no funding involved in the “Zero Routine Flaring by 2030” initiative. Endorsers are responsible for their own commitment to the initiative. More information is available at: www.worldbank.org/en/programs/zero-routine-flaring-by-2030

Reduction of gas flaring in Ecuador and Peru 46