Peru’s oil & gas investment guide 2018 / 2019 June 2018 About this oil & gas investment guide
The oil & gas industry in Peru has evolved from an industry in decline to a major contributor to economic growth in Peru. From 1995 to 2014, investment in this sector increased from US$147 million to US$1.19 billion, or an increase of 800%. For years 2018-2019, it is expected that US$2.0 billion will be invested in around 16 oil & gas projects, which represents 11.1% of all the investments to be made in 2018-2019. Among other key factors in the success of this industry is its enormous potential. Currently, Peru has the potential and reserves to produce more than 150 thousand barrels of oil across the country (including both onshore and offshore blocks). Synergies created between production from the Camisea Project and other industries (energy, mining, industrial, among others), have also contributed to an increase in this potential. Moreover, the increasing demand of electricity in Peru during the last twenty years due to the development of mining and industrial projects,
2 and the growth of its main cities, has also served information regarding Gas to Power and other to better position primary fossil fuels such as oil sources of energy (i. e. renewables). In light of & gas in the country’s energy structure. However, this, an overview of the energy sector, investment this situation is going to evolve in the coming conditions, and opportunities are also detailed. years. Furthermore, this guide offers a wide range of The 2014-2025 National Energy Plan highlighted information, from a macroeconomic perspective the need to diversify the sources of energy (overview of Peru’s political structure, business production due to trends of investment in clean environment and favorable investment promotion energy in the global market. conditions) to specific key indicators, regulatory requirements, growth potential and also some In this context, this oil & gas investment guide information regarding topics currently discussed is structured to help investors broadly evaluate by experts in the field of oil & gas. Peru’s oil & gas sector investment conditions and provide them a general updated landscape of the Regarding the oil & gas and energy market, industry. In that sense, we have included various we have included a description of terms and aspects usually taken into consideration by applicate fiscal regime, considering major investors from around the world before making government taxes, royalties and other similar critical decisions on the development of new oil & levies, as well as an overview of the customs, gas operations. labor, environmental, anti-corruption and accounting regulations that should also be Pursuant to the future scenario in which non- taken into account when starting a business and conventional sources of energy will take an developing activities in Peru connected with important place in the national energy matrix, these markets. this year, the guide has included relevant
3 Why Peru? What oil & gas investors should know “The difference between good investment decisions and bad investment decisions is the right information at the right time”
4 This oil & gas guide was the first, and still is the first, handbook of its kind. Since its first edition (2014), the objective of this document has been its use as a guide and tool in the process of evaluating the oil & gas landscape in Peru to ensure that foreign investors have the most recent and accurate information to start and develop their operations in Peru on a long-term basis.
With this guide, EY demonstrates its Paulo commitment to contribute to Peru’s progress, Pantigoso through our support for business ventures, Country Managing growth and success. We provide readers with the most recent information on the country’s Partner shining economic performance, as well as important technical information on how to establish businesses in Peru. At EY we are committed to contributing towards attracting investment that can increase the prosperity of our economy, and we are sure that the oil & gas industry has the potential to provide such growth.
We invite you to contact us with your questions and we wish you all the best with your oil & gas investment opportunities in Peru.
Contact information
5 Peru’s longstanding tradition as an oil producing country dates back to the end of the 19th century, when the northern region of the country hosted the very first oil well drilling in South America. It should be noted that this region is still producing hydrocarbons. More recently, Camisea, a major project regarding one of the most important natural gas reservoirs in the region, started production in 2004. This project boosted the Peruvian economy in every aspect by providing a reliable source of cheap and eco- friendly energy, diversifying the energy matrix and making of Peru an exporter of liquefied natural gas since 2010. Peru’s economy has been growing at annual rates above other Beatriz countries in the region, largely supported by the prices of De La Vega commodities. In times where the international price of crude Energy Leader seems to be entering a period of stabilization, Peru has much to offer to actual and potential investors. For example, not only and Editor can investors count on eighteen basins, from which almost fifteen are under-explored, but also on promising Blocks of nearby successful projects, such as Camisea’s and others located offshore. This holds golden opportunities for investors as much of the country is still open to vast exploration. Hence, the Government is trying to crystalize such opportunities by promoting regulatory amendments as well as clarity to the environmental permits processe. Moreover, in order to optimize proven reserves of natural gas, efforts to continue and conclude midstream projects are underway by the Peruvian government. The objective is to spread the use of hydrocarbons throughout all Peruvian territory as Contact information a part of what is known as the “massification of natural gas”. This macro-project brings opportunities in the development of distribution concessions to residential and industrial users as well as Gas-to-Power projects. Notwithstanding the long-term objectives, renewables and petrochemical projects are also a goal to meet in the future. Peru is compliant with the EITI standard (Extractive Industries Transparency Initiative) since 2007, consolidating during the last ten years its proven leadership in fiscal transparency in extractive industries in Latin America. Currently, Peru is one of 16 EITI compliant countries showing meaningful progress, out of 51 countries in total. International investors are a crucial part of the growth and success of Peru’s oil & gas exploration and production. Peru welcomes foreign investment with an open and stable regulatory environment.
6 In times where the international price of crude seems to be entering a period of stabilization, Peru has much to offer to actual and potential investors.
7 Néstor Popolizio Peruvian Minister of Foreign Affairs Ministry of Foreign Affairs
“Peru’s Oil & Gas Investment Guide” is a valuable tool for foreign and national investors. It contains updated and complete information about the current investment climate in the hydrocarbons sector, its open and stable regulatory environment, including fiscal transparency in extractive industries and its positive outlook. Peru’s hydrocarbons sector has great potential for exploration, exploitation, distribution, and commercialization. For instance, although Peru has 18 sedimentary basins with hydrocarbon exploration potential, only three of them are being fully exploited. As such, significant areas with hydrocarbon potential remain unexplored. Oil and gas exploration and production require licenses or service contracts granted by the Government of Peru. There has been a reduction in investment, both in exploration and exploitation, due to the drop of international prices. According to Peru’s
8 It is important to emphasize that the oil and gas sector has a positive impact on the economy of Peru and its Pacific Alliance partners
Central Bank, hydrocarbons account for 12% and good practice standards, in accordance with of total investments estimated for the 2018- the country’s aim to become a full OCDE partner 2019 period, which shows its importance for in the near future. Peru’s economy. Estimates of hydrocarbon It is also important to emphasize the positive investment for the years 2018 and 2019 are at impact that the oil and gas sector has had on approximately US$4 billion, and its growth rate the economy of Peru and its Pacific Alliance is forecasted at 1,8% for 2018, after two difficult partners. Peru led export growth within the years marked by low oil prices. Pacific Alliance in 2017, with a 22,6% increase, In the last decades, Peru has shown to be a reaching a total of US$ 44,502 million, well strong economy with GDP growth, exchange rate above the growth rate of our partners Colombia stability, low inflation, rule of law, and an open (19%), Chile (9,9%), and Mexico (9,4%). The market. Consequently, Peru has held its place dynamism of Peru´s exports last year are as regional leader in terms of economic growth, due mainly to increases in exports from the despite changing global economic and political hydrocarbon, mining, and agro-industrial conditions. sectors. Oil and natural gas exports grew 70,4%, with significant increases in diesel (569%) and Likewise, Peruvian credibility within the gasoline (112%) shipments. The Pacific Alliance’s international community has strengthened exports grew by 11% in 2017, driven by more thanks to sound macroeconomic management, shipments of oil and derivatives (25%) and consistent private investment promotion policies, mining (21%). and continuing efforts to improve public policy
9 Eduardo Guevara Dodds Peruvian Vice Minister of Hydrocarbons Ministry of Energy and Mines
The Government, through the Ministry of Energy and Mines (MEM), supports and promotes the development of the hydrocarbons sector by promoting investment that is responsible, transparent, law-compliant, eco-friendly, and respectful of individuals. In order to boost hydrocarbon-related activities, guarantee energetic security and make our country more competitive, the MEM has worked on the Hydrocarbons’ Law amendments draft, so that investment in exploration and production can improve. The aforementioned draft proposes new roles for PERUPETRO S.A., implements transparency among Hydrocarbons Contracts, extends terms of current Contracts in relation to incremental development programs, and continues the development of non-explored basins. Likewise, the MEM worked on the modification of its Organization and Functions Law, by means
10 The sector will function more efficiently, specific initiatives will be boosted and an industry that generates jobs and welfare to Peruvians will become more dynamic; all the while complying with the highest environmental standards
of which the Hydrocarbons Viceministry was energy supply at the same time, in benefit of all created. In so doing, the sector will function of the population. more efficiently, specific initiatives will be Finally, we must also mention the “Talara boosted and an industry that generates jobs Refinery’s Modernization” project in charge of and welfare to Peruvians will become more Petroperu, with an estimated investment of dynamic, all the while complying with the highest US$5,000 million. This proposal consists in the environmental standards. construction and extension of units / facilities On the other hand, it is boosting the aimed towards increasing refining capacity from “Massification of Natural Gas – Natural Gas 65 to 95 thousand barrels per day and producing Distribution Through Pipelines in the Apurimac, cleaner fuels, reducing imports of such products, Ayacucho, Huancavelica, Junin, Cusco, Puno, and thereby improving the trade balance. and Ucayali Regions” project. With an investment The Government is leading these and other of approximately US$350 million, this project will initiatives to promote investment in the allow around 150,000 families from the South- hydrocarbons sector, whose importance in the central regions to benefit from natural gas, a reality of our country must be noted due to cheaper and less polluting fuel. our current situation as net oil importers, and Moreover, the MEM is promoting the “Integrated because through royalties and Income Tax more Transport System – Southern Peru”. With this social investments can materialize in order to project, natural gas will be delivered to southern close poverty and inequality gaps. Peru, and it will create infrastructure to secure
11 Seferino Yesquén León President of Perupetro S.A.
Undoubtedly, the great challenges of Peru in the upstream sector, are two, first to maximize the production of the fields in current production and on the other hand to widen the exploration horizon. We have under explored areas and we need a new hydrocarbon potential opportunities map to optimize its utilization and improve the prospectivity of our oil basins. Peru has 18 Sedimentary Basins with hydrocarbon exploration potential, distributed in 83 million hectares, 10 in the Coast, 6 in the Jungle and in the Sub Andean thrust and fold belt and 2 located intermountain. Likewise, the Exploration status of the 18 Basins is as follows: 1 mature, 7 semi-explored, 4 immature and 6 considered as frontier areas, not having any exploration well. We need a deep change in our production and exploration policy, it is urgent to develop projects which guarantee the increase of production and also identify new reserves which are commercially exploited, to guarantee the energy security and the country competitiveness.
12 We need a deep change in our production and exploration policy, it is urgent to develop projects which guarantee the increase of production and also identify new reserves which are commercially exploited, to guarantee the energy security and the country competitiveness
In this spirit, PERUPETRO S.A. has worked in For 2018, new areas proposed by PERUPETRO different measures to motivate the present sector S.A. specialists shall be included in the Areas players operating in the country and to be more Contracting Plan and international promotion competitive for the investment attraction. We will actively continue. have implemented a new promotion framework Regarding production, Perupetro will prioritize which is starting to bear fruits with the entrance the recovery of the production of fields in of new investors to Peruvian upstream, and we exploitation phase whose production has been are also working in new incentives to increase affected by the fall of price in 2014, adopting production, because one of our great challenges, measures aimed to restore the proven in which we are working resolutely, is to revert reserves which were reclassified as Resources, the hydrocarbon general balance in the long due to economic reasons, including investment term. incentives for drilling of development Wells, In the exploration field, our Contracting Plan reactivation of abandoned Wells, workovers for 2017-2018 period, delineated 54 areas and enhanced recovery projects. available for contracting, which are classified as Results achieved to date are positive, Peru is frontier and semi-explored areas to subscribe seen as an attractive investment destination TEA (Technical Evaluation Agreements), License due to its stable economy and legal stability. Contracts or TEA-Contracts, which we are We have great expectations in the future promoting through the participation in upstream and we are sure we will attain our strategic international events and direct approach with oil objective of increasing the economic companies interested in the Peruvian upstream development of our country. sector, with positive results which we hope will deliver results in the short term.
13 Alberto Ñecco Executive Director ProInversion
As one of the world’s fastest growing economies for over three decades (6.1 % annually as an average from 1994 - 2017), Peru has become a top investment option for top tier international companies and investment banks. Its solid macroeconomic policy as well as its dynamic economic growth has made it stand out against other emerging markets. For 2018, the Revised Multiannual Macroeconomic Framework 2017 – 2019 issued by the Ministry of Economy and Finance estimates a growth rate for 2018 of 4.3% for Peru, against a 2.2% growth for Latin America and the Caribbean and a 3.0 % globally. Moreover, its inflation has been estimated by Barclays at 2%, contrasting a global inflation of 2.4%. The recovery of prices in mining such as gold and copper, products on which Peru is one of the biggest exporters in the world, and will also provide an infusion to the Peruvian economy. Both legal and macroeconomic
14 ProInversion has become a key player in the structuring and promotion of the biggest and most relevant infrastructure projects around the country
conditions play a key role for foreign investments In the Hydrocarbons sector, one of the biggest to be attracted to Peru. Both national and projects at ProInversion is the “Massification foreign investments are to be subject to the of the use of natural gas”, which consists same compliance, making no distinction or on the design, finance, build, operation, and discrimination among any kind of investors. maintenance of the systems for the distribution of natural gas through a pipeline network in the Moreover, the Peruvian government has made a regions of Apurímac, Ayacucho, Huancavelica, particularly aggressive plan to close the national Junín, Cusco, Puno, and Ucayali. This project infrastructure gap, estimated at around USD has an estimated investment amount of US$350 160 billion until 2025. To achieve this objective, million (not including VAT) and will have a 32- ProInversion has become a key player in the year concession beginning the execution of the structuring and promotion of the biggest and concession agreement on the closing date. most relevant infrastructure projects around the country. Acting as the Peruvian investment bank, We welcome investors to explore the range of and with the collaboration of top tier transaction investment possibilities given in the Peruvian advisors which include bulge bracket tier one hydrocarbons sector and to contribute and investment banks and prestigious consulting participate in the development of energetic companies. ProInversion has developed a resources in a sustainable way pipeline of projects until 2019 that includes sectors such as hydrocarbons, mining, energy, hospitals, water and sanitation, railroads and telecommunication among others.
15 1 Background information 2 Starting a business in Peru 01 Form of government 19 02 Geography 20 01 Requirements for foreign investors 47 03 People 21 02 Establishing a Peruvian 04 Currency 21 corporation 47 05 Economic over-view 22 03 Establishing a branch 51 06 Infrastructure and 04 Associative agreements 52 services 29 07 Peru’s investment-grade rating 33 08 Investment promotion conditions 37 CONTENT
16 3 Hydrocarbons in Peru 4 Tax and legal framework
Secc A | Oil & gas 56 Secc A | Regulatory terms 131 01 Importance of Peru’s oil 01 Oil & gas 132 & gas sector 58 02 Energy 135 02 Hydrocarbon production and exports 66 Secc B | Peruvian general fiscal terms 139 03 Diversifying the energy matrix: natural gas 71 Secc C | Special fiscal rules 152 04 Growth potential 74 01 Oil & gas 153 Secc B | Gas to Power and other 02 Energy 162 energy sources 86 01 Importance of the Energy 5 Miscellaneous sector 87 matters 02 Energy production and 01 Labor legislation 167 exports 94 02 Accounting standards 172 03 Renewable energy 03 Enviromental obligations 174 sources 111 04 Prior consultation 176 04 Potential of Renewable Energy Sources 114 05 Anti-corruption regulations 178 Secc C | Trends in the oil & gas, and energy industry in Peru 118 6 Appendix 01 Oil & gas 119 01 Regulators and 02 Energy 124 stakeholders 181 03 Digital trends 126 02 EY services 186
17 Peru's oil & gas investment guide 2018 - 2019 information
1 Background Background
18 Background information Peru's oil & gas investment guide
01 Form of government Peru is a democratic approved by the Congress and constitutional republic with promulgated by the President. a multiparty system. Under The judicial and electoral bodies the Constitution of 1993, the are independent. Peru osted ill ost t e President is the Chief of State nnual ssem l o t e The Peruvian Government and Head of Government. ational an and t e is elected directly through a nternational onetar und The president is elected every mandatory vote, applicable to in 201 and t e P five years and cannot run for all citizens between the age of ummit in 201 re-election immediately. The 18 and 70. In the current period President appoints the Prime (2018 - 2021) Martin Vizcarra Minister and the members of the was designated as President. Cabinet. There is a unicameral Peru has some of the best Congress of 130 members macroeconomic indicators of the elected for a five-year period. Americas and expects to grow The legislative proposals can be in terms of the Gross Domestic submitted by both the executive Product (GDP), at a rate well and legislative branch, and above the average rate of the will become law once they are region. Country overview
• ni ameral ongress • udges are a ointed t e • 1 0 seats ational udge ele tion and • em ers ele ted o ular evaluation oard • 19 Provin ial vote, for a five-year term uni i alities 201 • e t ele tions 2021 • 1 8 istri t uni i alities • em er o t e nited ations udi ial sin e 19 mem er o t e • onstitutional Legislative ran e urit oun il et een 200 re u li branch Government and 200 type o al governments • em er o t e orld rade Legal rgani ation sin e 199 system Executive • n 1998 e ame a mem er o branch Regional the Asia Pacific Economic governments oo eration P orum nternational relations i s • n 2011 e ame a mem er o • ie o state and ead o government the Pacific Alliance President Martin Vizcarra sin e ar 2018 • Elections: Every five years by popular • ased on • 2 egional overnments vote non onse utive reele tion ivil la in luding t e onstitutional e t ele tions 2021 Provin e o allao • a inet oun il o inisters is • etro olitan uni i alit o a ointed t e resident ima
Sources: Peruvian Constitution / CIA - The World Factbook / Ministry of Foreign Affairs / United Nations
Background information 19 Peru's oil & gas investment guide 2018 - 2019
02 Geography Peru, located on the west central approximately 19 million coast of South America, is inhabitants. Lima, the political bordered by the Pacific Ocean and economic capital of the to the west, Chile to the south, country, is located in this region. Bolivia and Brazil to the east, • The Highlands (Sierra), which and Colombia and Ecuador to consists of the Andean Mountain the north. With a total land area Range, covers 27.9% of Peru’s of 1,285,215.60 km2, Peru territory and contains almost 10 is the third largest country in million inhabitants. South America after Brazil and Argentina. It may be divided • The Amazon Jungle (Selva) is geographically in three regions: the largest region occupying 60.4% of Peru’s territory, in • The Coast (Costa), which is which 3 million inhabitants a narrow desert strip 3,080 reside. This region is rich km long that accounts for in petroleum and forestry only 11.7% of Peru’s territory resources. even though it contains
Peru’s geographic information
Population Principal languages Natural Resources 32.2 million Spanish / Quechua / Gold, copper, silver, Urban 76.7% Aymara zinc, lead, hydrocarbons, Rural 23.3% fish, phosphates, and Currency* agricultural products Sol (S/) Area S/1 = US$0.310 1,285,215.60 km2 Timezone US$1 = S/3.238 GMT-5 (five hours behind Greenwich Mean Time). There Religion Climate is no daylight savings time, Freedom of religion Varies from tropical in the and there is only one time mostly Roman Catholic Amazon region to dry on the zone throughout the entire Coast to temperate to very country. cold in the Highlands
*Exchange rate as of December 31,2017 Sources: BCRP / INEI / SBS
20 Background information 03 04 People Currency The estimated population of Peru The Peruvian currency is the Sol for the year 2018 is 32.2 million, of (former “Nuevo Sol”) (S/ or PEN). which 10.3 million (approximately Peru has a free-floating managed 32.0%) reside in Lima, the capital of exchange rate regime. Banks are the country. The labor force is about currently (April 04, 2018) buying 23.4 million (2016). US dollars at S/3.224: US$1.00 and selling at US$1.00: S/3.225. The predominant religion is Roman Parallel market rates are slightly Catholicism and the main official different. languages are Spanish and Quechua. Aymara is also spoken in some parts There are no restrictions or of the southern Highlands region limitations on holding bank of the country. With respect to the accounts in foreign currency or to literacy rate, 94.1% of the population remit funds abroad. aged 15 and over can read and write.
People overview Exchange rate
32.2 million people 200 20 Population 76.6% resides in urban 200 00 areas 2008 1 0 - 14 years 27.1% (2017) 2009 2 89 15 - 64 years 66.0% 2 81 Age structure (2017) 2010 65 years and over 6.9% 2011 2 0 (2017) 2012 2 Annual 201 2 80 1.1% (2015 - 2018) growth rate 201 2 99 18.0 births/1,000 201 1 Birth rate population (2017) 201 5.7 deaths/1,000 201 2 Death rate population (2017) 2018 2 Sex ratio At birth 1.3 male/female 2019 28 1 2 Life expectancy 74.9 years (2017) P at birth
Sources: INEI *Estimated as of March 2018 Sources: BCRP
Background information 21 Peru's oil & gas investment guide 2018 - 2019
05 Economic overview With an estimated population of in macroeconomic performance, 32.2 million for 2018, and rich with very dynamic GDP growth deposits of copper, gold, silver, rates, reduction of external debt, lead, zinc, natural gas, petroleum a stable exchange rate, and low and urea, Peru is a very diverse inflation which in 2017 was 1.4%, country due to the climatic, inside the Central Bank’s annual natural and cultural variation of target range of 1% to 3%. its regions. The country has had continuous Peru’s economy reflects its varied economic and political stability geography, an arid coastal region, since the early 1990’s. The the Andes further inland, and Peruvian economy has grown tropical lands bordering Colombia 131.7% between 2000 and and Brazil. Abundant petroleum 2017. This growth was resources are found mainly in largely driven by prudent the Amazon Jungle area. In macroeconomic policies, recent years, Peru has achieved investor- friendly market policies significant advances in social and and the government’s aggressive development indicators as well as trade liberalization strategies.
Peru’s economic overview
US$13,501 21.6% o t e P old o er silver in lead rude estimate or 201 201 23.9% 201 oil and rodu ts o ee otatoes 22.7% 201 as aragus a ri a organi anana uinoa erries gra es mangoes US$6,599 4.5% 21.8% 201 US$215 billion estimate or estimate a ao te tiles fis meal and urea 20.7% 201 201 201 or 201 Petroleum and rodu ts P i ed gross lasti s ma iner er a ita investment Pur asing ve i les iron and steel