Peru’s oil & gas investment guide 2018 / 2019 June 2018 About this oil & gas investment guide

The oil & gas industry in 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 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 . 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 contracts granted by the . 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 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 stability, low , rule of law, and an open (19%), (9,9%), and (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 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, , Puno, and thereby improving the 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 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 and , 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 te President is the Chief of State nnual sseml o te The Peruvian Government and Head of Government. ational an and te is elected directly through a nternational onetar und The president is elected every mandatory vote, applicable to in 201 and te 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

• niameral ongress • udges are aointed te • 10 seats ational udge eletion and • emers eleted oular evaluation oard • 19 Provinial vote, for a five-year term uniialities 201 • et eletions 2021 • 18 istrit uniialities • emer o te nited ations udiial sine 19 memer o te • onstitutional Legislative ran eurit ounil eteen 200 reuli branch Government and 200 type oal governments • emer o te orld rade Legal rganiation sine 199 system Executive • n 1998 eame a memer o branch Regional the Asia Pacific Economic governments ooeration P orum nternational relationsis • n 2011 eame a memer o • ie o state and ead o government the Pacific Alliance President Martin Vizcarra sine ar 2018 • Elections: Every five years by popular • ased on • 2 egional overnments vote non onseutive reeletion ivil la inluding te onstitutional et eletions 2021 Provine o allao • ainet ounil o inisters is • etroolitan uniialit o aointed te 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. , 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. and to the east, • The Highlands (Sierra), which and Colombia and 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 . 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 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, , Urban 76.7% Aymara , , hydrocarbons, Rural 23.3% , 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 289 15 - 64 years 66.0% 281 Age structure (2017) 2010 65 years and over 6.9% 2011 20 (2017) 2012 2 Annual 201 280 1.1% (2015 - 2018) growth rate 201 299 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 te P old oer silver in lead rude estimate or 201 201 23.9% 201 oil and roduts oee otatoes 22.7% 201 asaragus aria organi anana uinoa erries graes mangoes US$6,599 4.5% 21.8% 201 US$215 billion estimate or estimate aao tetiles fismeal and urea 20.7% 201 201 201 or 201 Petroleum and roduts P ied gross lastis mainer er aita investment Purasing veiles and Poer Poulation eat and aer P Parit living elo ross P overt line domesti er aita Prinial erman rodut nemloment eorts rgentina rail oreign rate Prinial ile ina det imorts olomia US$22,710 million Prinial out orea as o eemer 201 et eort ain nternational uador nited destinations imort eserves inimum tates and eio otal age ountries uli 24.8% det o te P as o eemer 201 erman rail anada ile US$63,621 million ina out orea tal aan as o eemer 29 ain iterland nited tates 201 S/930 and eneuela aroimatel 288 as o ril 0 2018

Sources: BCRP / Ministry of Economy and Finance (MEF) / Apoyo consultoría / International Labor Organization (ILO) / INEI / International Monetary Fund (IMF)

22 Background information Following a sound 4.0% growth reduce the national poverty rate in 2016, the Peruvian economy by almost 24 percentage points in Peru is one of the suffered strong headwinds and the last 10 years, to 20.7% of its fastest growing its expansion rate slowed down to total population in 2016. 2.5% in 2017. The country’s economic growth economies in Despite the mentioned slowdown, has much to do with the the region. Since Peru’s economic growth will monetary and fiscal policies speed up and continue to be applied over the past two 2000, it achieved one of the strongest among its decades, reducing the debt peers, as the central bank expects level (from 29.9% of the GDP an impressive growth of around 4.0% in 2018. in 2007 to 24.8% in 2017) accumulated It is expected that greater fiscal and ensuring a prudent fiscal stimulus for the reconstruction government: overall balance growth rate of plan and unlocking of the main equivalent to -2.1% of GDP in infrastructure projects will 2015, -2.6% and -3.2% for 2016 131.7% GDP. support Peru’s economic growth and 2017, respectively. All of over the next few years. Peru’s this has gone hand-in-hand with rapid expansion has helped to the liberalization of the goods

Economic Growth Rates Latin America projections: 2018-2019 (Annual average variation %)

0 1 2

2

2 20 1

0 Peru olomia ile eio rail rgentina eneuela -1 -2 -

nnual average variation variation nnual average - - - - -8 -9 -10 -10

*As of March 2018. Sources: International Monetary Fund (IMF) / For Peru, BCRP

Background information 23 Peru's oil & gas investment guide 2018 - 2019

and labor markets, opening up , , and with the entered trade through multiple recent EFTA States (European Free of into force on February 1, 2009, international trade agreements, the Trade Association) which opening the way to greater direct foreign investment, includes , Kingdom of trade and investment between and the maximization of the , Swiss Confederation and both countries. Likewise, the revenues resulting from its the Principality of . Free Trade Agreement (FTA) rich natural resources. Peru is It also has 31 (see page 42) with and Japan became also reaping the benefits of the Bilateral Reciprocal Investment effective in 2010 and 2012, increasing size of its market Promotion and Protection respectively. Additionally, Peru and domestic consumption, and Agreements (BRIPPAs). Also, entered into the Framework the development of its financial Peru maintains trade neqotiations Agreement for the Pacific sector, which can be seen, for correspondinq to the Trans Pacific Alliance in April 2011, a trading example, in the growth of private Partnership Agreement (which bloc that it forms part of together consumption by 2.5% in 2017 includes , , with Chile, Colombia, and (estimated at 3.2% for 2018). Chile, Japan, , and Mexico, aimed at encouraging Likewise, as of December 29, Singapore among others), and regional integration and the 2017, net international reserves with and . greater growth, development, stood at approximately 32% of and competitiveness of their The Free Trade Agreement (FTA) the estimated GDP as of the same date. The Peruvian economy for 2018 is expected to be the fastest GDP and GDP per Capita (Measured in Purchasing Power growing in South America. This Parity-PPP) of the Principal Economies of Latin America is driven principally by public (2017 and 2022) investment (14.2% for 2018), private consumption (3.2% for 2017 2022 2018) and improved employment GDP in US$Billions GDP per Capita in GDP per Capita in Country indicators. At the same time, (PPP) US$(PPP) US$(PPP) the growth of fixed private investment in 2018 is expected to Brazil 3,216 15,485 18,298 be situated at 5.5%. Argentina 913 20,707 24,932 Peru has signed a number of Colombia 720 14,609 18,227 Free Trade Agreements (FTAs). 404 12,857 12,210 These FTAs have been entered Peru 430 13,501 16,993 into with the United States, China, , the European Chile 456 24,797 30,079 Union, , Canada, Mexico 2,406 19,841 23,431 , Chile, , Mexico, Venezuela, , Source: International Monetary Fund (IMF), October 2017

24 Background information economies, as well as achieving the free circulation of goods, services, capital, and people. Peru’s traditional main exports are gold, copper, petroleum oil, natural gas, zinc, lead, iron, fishmeal, quinoa, , , mangoes, cacao, berries and , and its principal trading partners are Argentina, Brazil, Canada, Chile, China, Ecuador, , , Japan, Mexico, South Korea, , , and the United States.

Trade balance

53.8 51.9 47.4 0 46.4 44.9 41.0 42.9 42.4 41.0 41.9 43.7 0 39.5 37.3 38.7 35.8 37.2 37 35.1 34.4 31.0 28.5 28.8 0 27.1 21.0 20

illions 10.1 9.2 10.0 10 7.0 6.4 6.2 6.1 1.9 2.5 0 0.5 -1.5 -2,9 10 2008 2009 2010 2011 2012 201 201 201 201 201 2018 2019

orts morts rade alane

*Estimated. Sources: BCRP

Background information 25 Peru's oil & gas investment guide 2018 - 2019

Peru‘s main economic activities

Peru’s main economic activities (US$581 million were deposits of iron ore, phosphates, include agriculture, fishery, exported in 2017). It is also an manganese, petroleum, and mining, the exploitation of important producer and exporter gas. The principal destinations petroleum and gas, and the of fresh asparagus (US$409 for Peruvian copper are China of goods, most million in 2017), fresh grapes and Japan, gold to Switzerland, notably . The sharply (US$652 million in 2017) and United States and Canada, zinc contrasting geographical areas natural calcium phosphates to South Korea and silver to the of Peru make it a particularly (US$207 million in 2017). United States. diverse country, with a wide In mining, according to the U.S. One of the economic activities variety of ecosystems, and thus, geological survey, Peru ranked that is recently being exploited flora and fauna. second in the world in 2017 in and which shows great potential In 2017, Peru ranked as the the production of silver, copper is that of forestry resources world’s top producer of fishmeal and zinc, fourth in lead, and (cedar, oak, and mahogany, (US$1.458 billion exported); and , fifth in , and mainly). it is the third-largest exporter of sixth in gold besides having large

Main economic activities by region

uador olomia

ao lano uitos

u alara aamara ilao Paasmao Pualla rail g n P iser etile industr ruillo Petroleum ement lant g imote P n Oil refinery emial lant Paramonga a roa u u g refinery u n etal industr g ima - allao ismeal lant meldering e n uo etallurgial industr Piso u g atural gas a Puno u reuia old n in u g P ollendo ilver ead lo ile u oer e ron

Source: University of Texas - Perry Castaneda Library Map Collection

26 Background information (GDP) / Trade Balance

The Gross Domestic Product (GDP) in 2017 reached US$215 billion. At the end of 2017, total FOB exports came to US$44.9 billion, while imports totaled US$38.7billion. The principal exports came from the mining, hydrocarbons, and agricultural and livestock industries.

Peru’s GDP

00 *

20 2 21 222 189 198 20 192 19 200 19 18 10 122 121 102

illions 88 100 9 0

0 2002 200 200 200 200 200 2008 2009 2010 2011 2012 201 201 201 201 201 2018 2019

*Estimated Sources: International Monetary Fund (IMF) /BCRP

Gross Domestic Product (GDP) by Industry - Annual % Change

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* 2019*

Agriculture and Livestock 1.3 4.3 4.1 5.9 2.7 1.6 3.5 2.7 2.6 4.0 4.0 Fisheries -3.4 -19.6 52.9 -32.2 24.8 -27.9 15.9 -10.1 4.7 23.5 0.5 Mining -2.1 -2.7 -2.1 2.5 4.3 -2.2 15.7 21.2 4.2 2.4 3.0 Hydrocarbons 17.1 15.0 5.1 1.0 7.2 4.0 -11.5 -5.1 -2.4 -0.8 7.6 Manufacturing -6.7 10.8 8.6 1.5 5.0 -3.6 -1.5 -1.4 -0.3 4.8 3.5 Electricity and Water 1.1 8.1 7.6 5.8 5.4 4.9 5.9 7.3 1.1 2.5 3.5 Construction 6.8 17.8 3.6 15.8 9.0 1.9 -5.8 -3.1 2.2 8.5 8.0 Commerce -0.5 12.5 8.9 7.2 5.9 4.4 3.9 1.8 1.0 3.5 3.8 Other Services 4.6 7.7 7.3 7.4 6.5 6.0 4.2 4.0 3.4 3.7 4.0 GDP 1.05 8.5 6.5 6.0 5.8 2.4 3.3 4.0 2.5 4.0 4.0

*Estimated as of March, 2018 Sources: BCRP/INEI

Background information 27 Peru's oil & gas investment guide 2018 - 2019

Peru’s GDP by productive sector

5.1% 1.7% 0.7% 6.0%

ters servies griulture ivesto 10.2% 45.4% anuaturing onstrution ining il and gas letriit and ater 14.4% ommere iser

16.5%

Sources: BCRP GDP variations

10 8.5 9.1 8.5 8 6.3 6.5 7.5 6.0 5.8 4.0 4.0 4.0 2.4 3.3 2 2.5 0 1.0 200 200 200 2008 2009 2010 2011 2012 201 201 201 201 201 2018 2019

*Estimated Source: BCRP

Devaluation and inflation

Exchange rate appreciation: the market value of the Sol rose and fell 3.5% against the US Dollar in 2017. The annual inflation rate was 1.4% as of December, 2017. Peru’s central bank aims to keep the annual inflation rate within a target range of 1% to 3%.

1 14.2 12 9.6 9 6.7 6.6 3.9 4.7 3.0 3.5 2.1 2.6 2.9 3.2 1.4 Sol depreciation 3.2 4.4 0 -4.4 0.2 -1.7 2.0 - Sol -6.5 -2.5 -4.2 -3.5 - -6.2 -9 200 2008 2009 2010 2011 2012 201 201 201 201 201 2018

appreciation Inflation Devaluation

* Exchange rate estimated at 3.35 according to the Multiannual Macroeconomic framework (MMM) of August 2017 Sources: BCRP / Ministry of Economy and Finance

28 Background information 06 Infrastructure and services It is expected that Peru will only the result of truly integrating the realize its full economic potential national market and connecting after reducing its infrastructure it at low cost to markets of other bottlenecks. Estimates vary but, countries and regions. according to ProInversion, the The Government has been 2017 - 2018 portfolio of this evaluating different alternatives entity is comprised of 32 APP to reduce such problems. One (Public-Private Partnerships) of those alternatives is the projects and Asset projects for an construction of pipelines, i.e. to amount of more than US$14.4 transport natural gas extracted billion. Of this total, 16 APPs from Camisea’s gas fields to are scheduled to be awarded in the north and south region the current year, in the amount of Peru (called Southern and of US$4.1 billion; 15 projects Northern Peruvian Gas Pipeline for US$3,750 million in 2018; projects). Another important while Line 3 of the Metro of alternative under analysis is the Lima (US$6.6 billion) could be modernization of the Northern awarded on the lasts months of Peruvian Pipeline, constructed to 2018 or early 2019. In recent transport oil, 40 years ago, from years, Peru has begun to take the the northeastern region of Peru necessary measures to improve to the coast. its underprivileged infrastructure (transport facilities, electricity, Moreover, this need for water and communications) infrastructure also reaches the in order to promote new energy sector. The generation investments which will contribute and transmission of electricity to the development of the makes necessary big investments productive sectors of the country. in order to provide energy in Recently the Government has an efficient way considering approved a new regulation the geographical difficulties of for Public-Private Partnership the Peruvian territory, and the projects with the intention to expansion in the use of renewable reduce dramatically the timeline energy to produce clean of the whole process. energy will demand even more infrastructure investments. The oil & gas is one of the sectors affected by this constraint since oil & gas companies need to Public-Private have access to transportation Partnerships facilities to deliver their products to national and international Peruvian laws have incorporated markets. Well-developed Public-Private Partnerships infrastructure reduces the effect (PPPs), a modality of private of distance between regions, with investment participation.

Background information 29 Peru's oil & gas investment guide 2018 - 2019

PPPs are executed under the 220kV Substation (Puno) will project. Upon the signature of an form of concession, operation, be now connected by a 220kV agreement, the private company management, joint venture and transmission line instead of its commits to carry out a project in any other modality admitted current 138kV one. exchange for the recognition of by Peruvian laws. The main the investment and disbursements The project will bring important characteristic of PPPs is the made as a credit against income benefits for the south part of distribution of risks between the tax, through the issuance of the country, such as greater Peruvian Government and the a Regional and Local public security in the supply of energy to privates. Investment Certificate. guarantee continuous electricity PPPs provide the opportunity service to households, greater This regime has become an to invest by means of the use of capacity for electric transmission efficient tool of Corporate Social expertise, equipment, technology, to meet the growth of future Responsibility, allowing an among other tools in order to demand and the promotion of efficient and direct application of create, develop, improve, operate economic activities. public funds on behalf of regional or maintain public infrastructure governments, local governments, 500kV Mantaro-Marcona- or provide public services. This public universities and national Socabaya-Montalvo and modality of investment can be government’s entities in sectors associated substations requested as of a private initiative such education, health, security, transmission line or through a public tender. tourism, agriculture and irrigation, This project is one of the biggest culture, sanitation, sports, and the The Promotion Agency of Private projects ever awarded for the environment, among others. Investment of Peru (ProInversion) design, finance, construction, has estimated that the PPP It is important to highlight that operation and maintenance of a initiatives will have a direct and on December of 2016, by means 900 Km. long 500kV transmission substancial impact on investments of Legislative Decree No. 1202, line. The investment made was during 2018-2019. In the case of Petroperu (National Oil Company) about US$450 million. This the energy sector, investments up was authorized to use Works for line now transfers the energy to US$ 802 million during 2018 Taxes mechanism. The reason produced in central Peru to its have been estimated, the same for such a decision relies on the southern locations in order to ones that will reinforce the supply difficulties Petroperu faced when cover the energy demanded by of electric power in the country. In it was developing its activities in the increasing mining activities this regard, it is worth mentioning areas in which social conflicts arise developed in such areas. the following projects: easily. In this sense, Petroperu This transmission line was can now develop corporate 220kV Tintaya-Azángaro inaugurated on November of responsibility activities by this transmission line 2017. mechanism in the areas of This recently awarded project influence of its projects. (november 2017) consists of the Works for taxes Note that also in the case of the design, financing, construction, energy sector, the investments operation and maintenance of Works for taxes is a regime that can cover the remediation, a 220kV energy transmission consists of the joint participation construction and equipment line. By means of this project, between a private company and of electric systems and rural the Tintaya 220kV Substation a public entity to develop and electrification projects. (Cusco) and the Azángaro execute a public investment

30 Background information Infrastructure access map

Pacific ocean uan Palo ao Pantoa Colombia ua aovar Puerto Rico

eura Piura aan uitos Tumbes amsiau alara Loreto an Palo Paita aramiria Punta rena Piura euena Ports urimaguas

Lambayeue eneral uan Palo ua aovar Amazonas tn Cajamarca ining Brazil Paasmao ontamana alarigo o La Libertad San Martín droarons iama alaverr Pualla Huánuco Roadways imote Ancash

Puerto Paved uarme Ucayali uarme ntamina Ancash Pasco ue naved ntamina egueta uao Madre de Dios Pacific ocean ana Junín a Pamilla Roadways IIRSA - Peru allao aldonado onn Cusco Refinería Conchán Lima orte erro ul Huancavelica Paua maon ais Terminal embarue Puno marítimo Camisea an artn Ica entro Apurimac entral maon ais Ayacucho Bolivia an iols Areuipa ur Peru - Ica amariuni rail - olivia and Puno nteroeani an aa aro iga ais iols tio Mouegua atarani ndean ais Pacific ocean an uan ollendo Tacna lo Proeted roads Chile

Source: Ministry of Transport and Communications

Background information 31 Peru's oil & gas investment guide 2018 - 2019

Electricity infrastructure map

Transmission line 00 v 220 v ECUADOR COLOMBIA 18 v -0-0- v

MACHÁLA

L-2280 (55 Km) IQUITOS ZARUMILLA L-6665B TUMBES (24,1 km)

L-6665A TUMBES ZORRITOS (24 km) NVO. ZORRITOS L-6664 u station (75 km) MÁNCORA

L-2249 RESERVA FRÍA (136 Km) PLANTA TALARA MALACAS TALARA droeletri lant PARQUE PARIÑAS L-2295 L-2250 PIURA EÓLICOTALARA (10,81 Km) (103,69 Km) CURUMUY LORETO CAMPANA POECHOS LOS EJIDOS SULLANA L-2161 CEMENTOS CASTILLA LA HUACA PIURA CHULUCANAS ermoeletri lant El ARENAL L-6663 SICACATE L-2248 AMAZONAS L-6660 (93,98 Km) L-6657A TABLAZO (10,8 km) QUIROZ PAITA L-6654 EL NOGAL TIERRA COLORADA L-6658A LOMA LARGA MUYO HUANCABAMBA L-60171 PIURA OESTE HUAPALAS (29,34 km) L-6699 MORROPON L-60751B old reserve lant LA UNIÓN TEXTIL PIURA (33,92 km) L-6658B BAGUA CHICA NUEVA MAPLE L-2241 OCCIDENTE (110 Km) JAEN JAEN L-2162 SECHURA (144,1 Km) LA PELOTA 21,71 km L-6658C MOYOBAMBA L-1137 QUANDA (40,61 km) GERA L-6036 OLMOS olar lant CONSTANTE FELAM 17,62 km CACLIC MOTUPE L-1018 L-1138 PAMPA PAÑALA(90,2 km) (96,3 Km) BAYOBAR 20,94 km LA NIÑA LAS PIZARRAS RIOJA L-2239 L-2238 CHACHAPOYAS TIERRAS NUEVAS (111 Km) (67 Km) CARHUAQUERCOAJAMARCCAAÑA BRAVA TARAPOTO LA VIÑA L-1135 CEMENTO LAMBAYEQUE (23,2 km) CUTERVO SELVA ind arm ILLIMO L-1130 L-6035 YURIMAGUAS L-2240 ESPINA COLORADA LAMBAYEQUE NUEVA L-1017 LAMBAYEQUE SUR CHIRICONGA (80,8 Km) CERRO CORONA CAJAMARCA CHICLAYO NORTE LA PAJUELA CHICLAYO OESTE TUMAN L-2263 (33,5 Km) CELENDÍN POMALCA LA QUINUA BELLAVISTA egion aital ETEN L-2236 (83,6 Km) L-1019 REQUE L-2237 L-2261 L-6049 CANTANGE (25 Km) GALLITO CIEGO (11 Km) SAN MARTÍN RECKA L-6045 CAJAMARCA CAJAMARCA NORTE JUANJUI CAYALTÍ L-6047 L-6042 L-6044 P. E. CUPISNIQUE L-6043 SAN MARCOS L-2234 CHILETE L-6048 AGUAS CALIENTES CUPISNIQUE (103 Km) GUADALUPE L-6050 L-1016 L-2260 LA MORENA (124 Km) CEM. NORTE PACASMAYO (137 Km) CAJABAMBA CHEPEN L-5010 L-2273 (327 Km) (117,53 Km) L-2275 (117,53 Km) L-1136 BRAZIL TEMBLADERA TOCACHE PUCALLPA (EUC) SANTIAGO DE CAOL-1118 LA LIBELRA TRAADMADA TRUJILLO NORTE L-1115 KIMAN AYLLU L-1124 YARINACOCHA TRUJILLO NUEVA L-1117 PALLASCA TAYABAMBA (109,9 Km) L-6674 MOTIL L-2272 PUCALLPA (104,39 Km) LLACUABAMBA ALTO CHICAMA L-6683 L-2274 L-1133 PORVENIR (104,39 Km) L-2233 PIAS L-1125 TRUJILLO SUR (134 Km) SIHUAS (131 Km) L-1132 L-5008 LA PAMPA POMABAMBA L-2232 (145,14 Km) (134 Km) L-1131 QUITARACSA I CAÑON DEL PATO L-1105 L-6682 HUARI L-1104 PACIFIC OCEANSANTA L-1103 HUALLANCA CHIMBOTE NORTE AUCAYACU SANTA CRUZ I L-1122 CHIMBOTE 2 L-1127 (44,42 Km) AGUAYTIA CHIMBOTE 1 SANTA CRUZ II L-2251 FROM CHILCA 220 CHIMBOTE SUR L-6679 CARÁZ HUALLANCA (73 Km) TRAPECIO L-6684 NUEVA TINGO MARÍA CARHUAZ L-2252 NEPEÑA L-6680 (174 Km) PIEDRA BLANCA BUJAMA CASMA ANTAMINA LA UNIÓN L-640 SAN JACINTO L-6694 L-2255 MARAÑON AMARILIS (31,65 Km) L-2215 L-6681 (52,08 Km) HUÁNUCO HUARAZ OESTE (221,16 Km) HUÁNUCO CHILCA L-2286 HUARÁZ L-5006 TICAPAMPA VIZCARRA CHAGLLA (377 Km) L-2253 PARIAC (51,54 Km) L-2150 L-6250 (127,6 Km) (16,5 Km) CONOCOCHA HUARICASHASH L-2216 L-2278 (221,16 Km) ANCASH(92,46 Km) L-2264 L-2254 SAN JOSE L-639 HUARMEY (14,2 Km) (123,9 Km) (16,74 Km) ANTAMINA L-1120 HUANCHAY CHACRAY (86 Km) GOYLLAPRAISSQUCIZOGA L-1101 BAÑOS OXAPAMPA 09 DE OCTUBRE (9,43 Km) FRANCOISE L-6080 PUERTO BERMUDEZ SAN BARTOLO UCHUCHACUA L-6082 PARAMONGA NUEVA ANTAGASHA L-1203 PARAMONGA HUICRA (28,30 Km) L-624 YANAPAMPA L-6084 VILLA RICA UCAYALI L-623 PASCO (18,5 Km) PARÁGSHA MILPO PICHANAKI SAN JUAN (12,2 Km) L-1033 L-720 SUPE (63,36 Km)CAHUA OXIDOS CERRO L-6086 L-619 YARUCAYA EXCELSIOR YUNCAN SATIPO LURIN RONCADOR CINCO ATE (6,75 Km) MANANTIALES ATACOCHA YAUPI PURMACANA L-2279 JUNÍN SANTA ISABEL (ELECTRIC TRAIN) L-677 (55,63 Km) CARHUAMAYO-ISA (6,4 Km) L-2259 CARIPA HUASAHUASI I-II LAS PRADERAS HUALMAY ANDAHUÁSI OROYA NUEVA L-6670 CARPAPATA HUACHO CONDORCOCHA L-678 VILLA EL SALVADOR SANTA ROSA PACHACHACA MALPASO (6,4 Km) L-644 CHEVES L-643 L-621 L-2212 LA OROYA CHORRILLOS (7,5 Km) L-620 (7,5 Km) (16,8 Km) CHANCAY HUANCHOR CANCHAYLLO (6,75 Km) L-2210 AZULCOCHA RUCUY (73,654 Km) YANANGO CHIMAY JUNÍN LOMERA L-2217 MATUCANA HUANZA LA VIRGEN VILLA MARIA CAJAMARQUILLA HUINCO CONCEPCION CARABAYLLO L-6072 JAUJA L-645 L-646 PARQUE INDUSTRIAL (12,1 Km) (12,1 Km) ZAPALLAL L-6073 PACHACAMAC CHILLÓN L-6074 RUNATULLO III VENTANILLA CHUMPE L-2201 RUNATULLO II L-2202 SALESIANOS OQUENDO TOROMOCHO (192,22 Km) L-6632 ATOCONGO SANTA ROSA POMACOCHA ESTE L-2205/ HUANZA L-2221 HUAYUCACHI CHAVARRIA (165,997 Km) L-2220 L-2206 CALLAHUANCA L-2219 (79,59 Km) MIRADOR (112,19 Km) MOYOPAMPA L-2218 MANTARO ORCOTUNA (194,82 Km) HUAMPANÍ RESTITUCION MADRE DE DIOS BALNEARIOS CERRO PTO. MALDONADO L-5001 LAS FLORES CAMPO ARMIÑO CUSCO L-2093 (89,8 Km) EL AGUILA L-2204 L-2227 CHAHUARES RESERVA FRÍA SAN JUAN (66,47 Km) L-6066 L-2094 CHILCA 2 (0,2 Km) PAMPAS LA PLANICIE L-2095 LIMA HUANCAVELICA COBRIZA 1 KALLPA L-6002 L-6061 COBRIZA 2 L-6002/1 L-1015 CHILCA 1 L-2090 PLATANAL HUANTA MACHAHUAY SANTA MARIA (82,4 Km) HUANCAVELICA CHILCA L-6643 L-6062 L-2203 COLCABAMBA L-6063 FENIX ASIA (247,25 Km) L-6002/1 MAZUCO SANTO DOMINGO DE LOS OLLEROS INGENIO MOLLEPATA MACHU PICCHU II DESIERTO SAN AYACUCHO SANTA TERESA CANTERA FRANCISCO CACHIMAYO NUEVA IMPERIAL L-6644 SURIRAY L-6006 L-2207 PAUCARTAMBO L-2208 (82,35 Km) QUICAPATA L-2050 CAUDALOSA L-6065 (53 Km) (57,0 Km) L-5032 PISAC L-1014 L-2217 (357,76 Km) (24,6 Km) CANGALLO DOLORESPATA ACEROS AREQUIPA L-2231 L-6003 (180,7Km) LLUSITA ABANCAY QUENCORO INDEPENDENCIA ANDAHUAYLAS SAN GABÁN L-2209 L-2051 PISCO (55 Km) (294 Km) L-1005/1 FUNSUR ICA L-2059 L-1010 PARACAS SEÑOR DE LUREN (189 Km) L-2060 L-6005 COMBAPATA (135 Km) ALTO LUNA L-2052 CHACAPUENTE STA MARGARITA (294 Km) APURÍMAC L-6001 PUNO PEDREGAL L-6008 SAN RAFAEL INDEPENDENCIA AYACUCHO L-2055 LAS BAMBAS TAMBO DE MORA L-2056 SICUANI ICA (31 Km) ANTAUTA PUQUIO ANTAPACAY HERCCA (0,2 Km) L-2211 PALPA COTARUSE (32,1 Km) TACAMA (155 Km) L-1005/2 L-6626 SELENE L-1009 L-6021 L-6603 (8,8 Km) CORA CORA ANANEA (31,3 Km) (25 Km) HACIA ICA NORTE NASCA ICA NORTE L-2053 MISAPUQUIO AYAVIRI L-6025 FUNSUR L-2054 TINTAYA L-1006 L-6605 (315 Km) ARES L-1008 (126,7 Km) L-6024 L-6604 P. E. MARCONA QUELLOPATA (96,3 Km) L-6607 L-6630 HUANCARAMA L-6026 L-6605 (31 Km) ARCATA (1,5 Km) CHIPMO PARACAS P.E.TRES HERMANAS MARCONA CONSTANCIA L-1011 POROMA AZÁNGARO (78,2 Km) (2,5 Km) EL HIERRO HUAYLLACHO L-6628 L-6015 HUANCANÉ ALTO L-6627 CAYLLOMA (12,6 Km) (18,2 Km) TACAMA SAN ANTONIO JULIACA LA LUNA SAN NICOLÁS L-6672 L-6311 PISCO L-6623/2 SAN IGNACIO (24,8 Km) TALTA CARACOTO TAPARACHI BELLA UNIÓN TAMBOMAYO L-2023 L-1012 CALLALLI (37 Km) PEDREGAL EL CARMEN L-5034 L-1020 L-2022 (276,6 Km) (83,4 Km) (201,4 Km) PUEBLO NUEVO VILLACURI BOLIVIA PUNO BELLAVISTA TAMBO DE MORA YARABAMBA L-2030 L-0639 AREQUIPA PARQUE (196,4 Km) CHARCANI V INDUSTRIAL ILAVE CHILINA SANTUARIO CHUQUIBAMBA L-0638 CHARCANI I,II,III,IV,VI SOCABAYA CORIRE L-6550 LA YARADA MAJES POMATA CAMANÁ LA JOYA OCOÑA MOQUEGUA SAN CARLOS C.S. MAJES L-2025 RUBÍ L-5036 L-2026 REPARTICIÓN (260 Km) SULFUROS (106,74 Km) MOQUEGUA C.S. REPARTICIÓN SAN CAMILO BOTIFLACA MOLLENDO L-5037 PUERTO BRAVO (117 Km) PUSH BACK MONTALVO TOQUEPALA SAN JOSÉ ILO 4 ARICOTA I L-1026 C.T. NODO ENERGETICO (35,5 Km) ILO 3 SARITA ILO 1 C.S. MOQUEGUA MILL L-6620 SOLAR SITE ARICOTA II PANAMERICANA L-2029 ILO 2 (124,13 Km) SOLAR RESERVA FRÍA TACNA PLANTA ILO L-6637 TOMASIRI L-6640 LOS HÉROES TACNA Source: COES L-6659 TACNA SOLAR

32 Background information 07 Peru’s investment- Peru has maintained its investment- vulnerabilities within a context grade rating grade credit rating since Moody’s of high and diversifying sources Investors Services raised it to of growth with low inflation and that level in December, 2009 strengthening macroeconomic matching moves made by Standard fundamentals. It is expected that & Poor’s and Fitch Ratings the these trends will remain in place previous year. Sound economic over the medium term despite an prospects, with GDP growth rates increasingly riskier international estimated at 4% over the medium environment. It is well known term, are a key supporting factor that countries with investment for the investment-grade rating. grade ratings gain a higher level of Peru’s robust growth prospects confidence that generates more are supported by important foreign and domestic investment. investments levels. The upgrade is The risk premium demanded also supported by the significant by multinationals and foreign decline in Peru’s fiscal and external investors is slashed after the

Peru’s investment grade rating (long term debt in foreign currency)

Country S&P Fitch Moodys ile a

Peru

eio olomia - aa2 rugua - aa2 Paragua a1

olivia - a

rail - - a2 rgentina 2 uador - eneuela aa

As of January 2018 Source: Standard & Poor’s/Fitch Ratings/Moody’s

Background information 33 Peru's oil & gas investment guide 2018 - 2019

Investment grade

S&P / Fitch Moodys Feature aa is ree - a1 a2 a ig rade - 1 2 ig eament aait - aa1 aa2 aa oderate eament aait - a1 a2 a ome eament aait - 1 2 igl nertain eament aait - aa1 aa2 aa tremel ulnerale to eault a eault

As of March 2018 Source: Standard & Poor’s/Fitch Ratings/Moody’s upgrade. At the same time, the to alleviating a still complex social Bloomberg Markets positioned investment horizon is elongated. situation in Peru, by achieving Peru as the ninth The same occurs with domestic improvements in employment and with the greatest international investment. Local investors decreases in poverty. projection, based on the country’s gain more self-confidence, thus advantages, such as low share allowing themselves to consider Country risk prices and their possible increase opportunities with lower rates of in the future. return. The impact is immediate, As of December 2017, Peru had As may be seen in the following as consumers gain access to credit a country risk of 136 base points, charts, Peru’s level of inflation is with more favorable terms. ranking as the second-lowest in Latin America. This score is nearly one of the lowest in Latin America, The upgrade to investment one-third of the regional average with a rate of 1.4% in 2017, grade has brought Peru a lot of (419 points). and an estimated range of 2.0% positive attention worldwide. More for 2018. In addition, over the importantly, it has had a positive Peru has achieved the position of past decade (2007-2016), the impact on the local economy and the third most globalized country Peruvian economy had the lowest should help to boost the stock in Latin America, according to the average annual inflation rate in market and the appreciation of Globalization Index established by Latin America, at 3.4%, below the Peruvian currency, the sol, in EY. Five elements are considered that of Ecuador (4.0%), Colombia the short term. For this reason, within this index: openness to (4.3%) and Brazil (6.2%). nowadays, many multinational foreiqn trade, capital flows, corporations look at the country exchange of technology and more seriously, as higher private ideas, international movement of investment is flowing into the workers, and cultural integration. country. This should contribute Additionally, in early 2018

34 Background information Country risk indicator (2006-2017)

800 00 00 9 200 000 eneuela 800 19 00 atin meria 00 200 000 rgentina 2800 200 22 200 eio 2200 2000 22 1800 rail 100 1 100 1200 olomia 1000 1 800 Peru 00 00 118 200 ile 0 1 e 1 e 1 e 1 e 1 e 1 e 1 e 1 e 1 e 1 e 200 2008 2009 2010 2011 2012 201 201 201 201

Source: BCRP

Background information 35 Peru's oil & gas investment guide 2018 - 2019

Estimated inflation rates in Latin America

2.0 1.4 3.2 Peru 4.4 3.2 20.0 25.0 40.3 rgentina 26.9 23.9 3.7 2.9 6.3 rail 10.7 6.4 2.6 2.3 2.8 ile 4.4 4.7 3.3 4.1 5.7 olomia 6.8 3.7 4.1 6.8 eio 3.4 2.1 4.1 4.2 4.5 3.9 Paragua 3.1 4.2 6.6 6.4 8.1 rugua 9.4 8.3 0 10 20 0 0 0

2018 201 201 201 201

*Estimated Sources: Latin America Concensus Forecast (March 2018)/BCRP

Estimated Gross Domestic Product (GDP) growth percentage rates (Pacific Alliance and Latin America)

4.0 2.5 Peru 4.0 3.3 2.4 3.4 1.5 ile 1.6 2.3 1.9 2.6 1.8 2.0 olomia 3.1 4.4 2.2 2.1 2.3 eio 2.7 2.3

0 1 2

2018 201 201 201 201

*Estimated Sources: Latin America Concensus Forecast (March 2018)/BCRP

36 Background information 08 Investment promotion Foreign investment In an attempt to reduce the conditions political risk perception of the legislation and country, Peru has adopted a legal trends in Peru framework for investments which offers automatic investment The Peruvian government is authorization and establishes committed to the pursuit of an the necessary economic stability investor-friendly policy climate. rules to protect private investors It actively seeks to attract both from arbitrary changes in the foreign and domestic investment legal terms and conditions of their in all sectors of the economy. It ventures and reduces government has therefore taken the necessary interference with economic steps to establish a consistent activities. investment policy, which Peru’s Central Bank reported eliminates all obstacles for foreign that the stock of foreign direct investors; with the result that now investment (FDI) inflow is expected Peru is considered to have one of to reach US$7 billion in 2018. the most open investment regimes FDI is concentrated in mining, in the world. communications, finance, manufacturing and energy.

Foreign direct investment inflows (US$ billions)

200 199 200 29 200 200 91 2008 92 2009 1 2010 8 2011 2012 201 9298 11918 201 88 201 822 201 8 201 9 2018 018 2019 10 0 2000 000 000 8000 10000 12000 *Estimated Source: BCRP

Background information 37 Peru's oil & gas investment guide 2018 - 2019

Foreign direct investment stock by sector (2017) the use of public resources and to promote the efficiency 3% 3% 4% in the functioning of public ining 3% 22% administration entities. ommuniations 13% inane Merger control rules nerg anuaturing in the electric sector ommere Regarding the electricity sector, Petroleum the Peruvian Institute for the 13% ervies 21% Protection of the Consumer ters and Copyright (INDECOPI) has 18% Source: ProInversion established special regulations on horizontal and vertical mergers which involve entities that develop The Peruvian government operator is in compliance with the electrical energy generation, guarantees foreign investors legal relevant Peruvian tax legislation. transmission and distribution stability on income tax regulations activities. These rules aim to and dividend distributions. Foreign Elimination of avoid cases of clusters that may investors entitled to obtain tax damage, distort or diminish the and legal stability are those willing bureaucratic free market and free concurrence to invest in Peru, in a two-year barriers principles of the sector. term, at least US$10 million in For these purposes, a previous the hydrocarbon and/or mining Due to the last tax reform, many authorization for mergers must be sectors; US$5 million in any other modifications were introduced requested to INDECOPI’s Defense economic activity or to acquire regarding the regulation of the of Free Market Commission by more than 50% of the shares of a activities carried out by public entities who, jointly or separately, privatized state-owned company. administration entities. Because of this, Legislative Decree No. own 15% of the market in the Peruvian laws, regulations, and 1256 declared the elimination case of horizontal concentration practices do not discriminate of illegal and unreasonable (develop one electrical activity), between national and foreign bureaucratical barriers that may and 5% in the case of vertical companies. Accordingly, national have been hindering the access concentration (develop two treatment is offered to foreign or permanence of economic or more electrical activities), investors. There are no restrictions agents into the Peruvian market before or after the merger. This on repatriation of earnings, or that may have contravened authorization must be duly international transfers of capital, laws or principles related to supported with documentation. or currency exchange practices. the bureaucratic simplification Once this authorization is The remittance of dividends, process. requested, the Technical interests and royalties has no Secretariat of the aforementioned restrictions either. The aforementioned Legislative Decree aims at public Commission must evaluate if the Foreign currency may be used to administration entities and all support documentation is enough acquire goods abroad or cover public employees and encourages for purposes of the requested financial obligations as long as the them to its compliance to improve authorization´s evaluation. If not,

38 Background information the Commission and its Technical Inmobiliarios (FIRBI’s).Under these Secretariat are allowed to request rules, companies who provide further information. real state to the said funds from January 1st, 2016 until December When the information is complete, 31st, 2019, shall consider that the Commission has 30 business such alienation took place in the days in order to evaluate the date in which the FIRBI transfers request. The term for the real state to a third party or to authorization evaluation may be another participant; or when the extended if it is necessary. While company transfers its participation this proceeding is in course, the certificates issued by the FIRBI as Commission is allowed to suggest a consequence of its contribution. modifications to the merger The mentioned Legislative Decree scope and limitations in order to also includes certain provisions make it free of negative effects with tax incentives on municipal on the market of generation, taxes (Property Transfer Tax). This transmission and distribution of regulation has been effective since electrical energy. January 1st, 2016. If the authorization is denied, an This exemption was already in appeal may be presented before Recognition force due to Law No. 30341, but the Defense of the Competence was only applicable on capital Tribunal No. 1. This Tribunal will of favorable gains performed in the Stock reconsider the authorization investment climate Exchange that were derived request and issue a final decision from stocks and securities According to the World Economic within the next 30 business days. representative of stocks. Due to Forum 2017-2018, Peru is among Legislative Decree No. 1262, the Notice that in case the vertical the top countries in Latin America exemption was extended to the or horizontal concentration in terms of macroeconomic following securities: results from a ProInversion environment, market size, • Debt securities. approved promotion project, the financial market development, aforementioned authorization labor market efficiency, • Mutual Funds quotes. proceeding may differ. goods market efficiency, and technological preparation, among • Trading invoices. Real estate others. • Certificates from Funds in investment Immovable Property (FIRBIs Exemption of capital shares). promotion rules gains in the Stock • Certificates from Trusts in On August, 2015, by means of Exchange Immovable Property (FIBRAs Legislative Decree No. 1188, shares). Peru enacted special rules with On December 10th, 2016, Peru tax incentives to promote Real enacted Legislative Decree No. In order to apply for the State Investment Trusts (REITs) 1261 on the Official Gazette, exemption on the aforementioned in Peru, called in spanish as which made several changes securities, certain requirements Fondos de Inversión en Bienes to the Peruvian capital gain must be observed, as established temporary exemption. by Legislative Decree No. 1262.

Background information 39 Peru's oil & gas investment guide 2018 - 2019

Global competitiveness index

2015 - 2016 2016 - 2017 2017 - 2018 Ranking Score Ranking Score Ranking Score Peru Total 65/148 4.24 67/138 4.23 72/137 4.22 SUB-INDEX: Basic requirements 74 4.52 77 4.43 79 4.45 Institutions 118 3.26 106 3.3 116 3.22 Infrastructure 88 3.54 89 3.57 86 3.77 Macroeconomic environment 21 5.89 33 5.44 37 5.35 Health and primary education 94 5.39 98 5.33 93 5.44 Efficiency enhancers 62 4.19 57 4.26 64 4.22 Higher education 83 4.08 80 4.13 81 4.10 Goods market efficiency 53 4.47 65 4.37 75 4.28 Labor market efficiency 51 4.33 61 4.34 64 4.27 Financial market development 40 4.49 26 4.75 35 4.51 Technological readiness 92 3.30 88 3.56 86 3.73 Market size 43 4.47 48 4.40 48 4.45 Innovation and sophistication factors 99 3.34 108 3.30 103 3.33 Business sophistication 72 3.93 78 3.78 80 3.81 Innovation 117 2.76 119 2.82 113 2.85

Source: World Economic Forum 2017-2018

Ease of Doing Business in Peru

According to Doing Business 2018, Peru ranks 58th out of 190 countries in terms of ease of starting a company and doing business, and ranks third in Latin America.

Doing Business Forbes (presenting Latin America countries) (presenting Latin America countries)

Position Country Position Country 49 Mexico 33 Chile 55 Chile 45 Costa Rica 58 Peru 54 59 Colombia 57 Mexico 61 Costa Rica 60 Peru 64 Puerto Rico (United States) 61 Colombia 79 Panama 64 Panama 94 Uruguay 74 Brazil 97 92 El Salvador 99 Dominican Republic 94 Guatemala 108 112 Paraguay Source: (WB) - Doing Business 2018 Source: Forbes 2017

40 Background information Summary of doing business indicators

Latin America and Indicators Peru the Caribbean • Number of procedures 7.0 8.4

Starting a • Time (days) 26.5 31.7 business • Cost (% of income per capita) 10.0 37.5 • Registration of minimum capital paid up (% of income per capita) 0.0 2.1 • Number of procedures 15.0 15.7 Construction • Time (days) 188.0 191.8 permits • Cost (% of warehouse valvue) 1.1 3.2 • Number of procedures 5.0 7.2 Property • Time (days) 7.5 63.3 registration • Cost (% of property value) 3.3 5.8 • Number of procedures 5.0 5.5 Getting • Time (days) 67.0 66.0 electricity • Cost (% of income per capita) 349.6 927.4 • Strength of legal rights index (0-12) 8.0 5.3

Access to • Depth of credit information index (0-8) 8.0 4.8 credit • Credit registry coverage (% of adults) 37.4 14.0 • Credit bureau coverage (% of adults) 100.0 43.1 Protecting • Extent of conflict of interest regulation index (0-10) 7.0 5.3 minority • Extent of shareholder governance index (0-10) 5.3 4.1 investors • Number of payments per year 9.0 28.0 Paying taxes • Time (hours per year) 260.0 332.1 • Total tax and contribution rate (% of profit) 35.6 46.6 • Time to export – Documentary compliance (hours) 48.0 53.3

Trading across • Cost to export – Documentary compliance (US$) 50.0 110.4 borders • Time to export – Border compliance (hours) 48.0 62.5 • Cost to export – Border compliance (US$) 460.0 526.5 • Time (days) 426.0 767.1 Enforcing • Cost (% of claim) 35.7 31.4 contracts • Quality of judicial processes (0-18) 8.5 8.4 • Time (years) 3.1 2.9 Resolving • Cost (% of estate) 7.0 16.8 bankruptcy • Recovery rate (cents on the dollar) 29.7 30.8

Source: World Bank (WB) - Doing Business 2018

Background information 41 Peru's oil & gas investment guide 2018 - 2019

Settlement of to settle disputes arising between Framework Agreement, signed investors and the government. on June 6, 2012 in Antofagasta investment disputes In addition, Peru has signed 31 Chile. Its profile is predominantly Bilateral Reciprocal Investment economic and commercial, and Foreign investors are protected Promotion and Protection its fundamental purpose is to against inconvertibility, Agreements (BRIPPAs) and 12 become an area that fosters expropriation, political violence Free Trade Agreements (FTAs) greater growth, development and and other non-commercial which include a chapter related to competitiveness of its economies risks through access to the investment. with a view to improving its corresponding multilateral and projection to the world and bilateral conventions such as contributing to an economic rise the Overseas Private Investment Pacific Alliance with social inclusion. Corporation (OPIC) and the The Pacific Alliance is a Multilateral Investment Guaranty mechanism for in-depth The Pacific Alliance’s Framework Agency (MIGA). integration, established by the Agreement determines that, as Declaration of Lima, signed by a fundamental part of the plan Also, Peru has joined the Peru, Chile, Colombia and Mexico to achieve its objectives, efforts International Convention for on April 28, 2011. Its founding should be directed towards the Settlement of International instrument is the Pacific Alliance free trade of goods and services, Disputes (ICSID) as an alternative

Bilateral Reciprocal Investment Promotion and Protection Agreements (BRIPPAs)

erman elgium uemourg enmar ustralia ain runei inland aan ua rane alasia l alvador eterlands e ealand rgentina tal ailand olivia ora ietnam olomia uador nited ingdom Paragua e euli eneuela omania eden iterland

Source: ProInversion

42 Background information the free movement of people and capitals, and the development of cooperation mechanisms to encourage investment, as well as the sustainable quality of life for its populations. As part of this, the Pacific Alliance member countries are completing their legal framework in order to promote the achievement of their objectives, basing their actions on four main issues: Trade and integration The Alliance has focused on the fostering of negotiations that translate into measures that will facilitate trade and customs cooperation between members. Integrated Latin American with wider sources of financing. It Efforts are focused towards Market –MILA is hoped that the unified market of these countries will become eliminating tariff barriers, The – BVL the cumulation of origin with the leader in the region in a (Peru), the Santiago Stock number of issuers. regard to products that contain Exchange – BCS (Chile), the materials originating in one of Colombia Stock Exchange – BVC Movement of people the member countries, provided (Colombia) and, since, 2014, the The free movement of people is that the customs tariff is 0% Mexican Stock Exchange – BMV one of the central pillars of the everywhere, the reduction of (Mexico) together with the central Pacific Alliance. This workgroup technical obstacles to trade and securities registers of each is focused on developing issues the alignment with health and country have integrated their such as facilitating migratory phytosanitary measures. variable income market (shares) transit, free movement of people, by establishing the Integrated Capitals and services consular cooperation, student Latin American Market (MILA) and labor cooperation, and the Within the scope of capitals and with which it intends to diversify, exchange of information on services, the Pacific Alliance’s expand and make more attractive migration flows. actions are directed towards the negotiation of this type of cooperation in investment, cross- securities in the four country Cooperation border trade of services, financial members, as much for local as for The Pacific Alliance seeks services, telecommunications, foreign investors. air transport and maritime to encourage cooperation transport. It also seeks to This integration seeks to develop on aspects that significantly strengthen the integration of the the capital markets of the impact the comprehensive stock exchanges of the member member countries, in order to development of the population countries. provide investors with a greater of member countries and the offer of securities and issuers

Background information 43 Peru's oil & gas investment guide 2018 - 2019

strengthening of technology • Electricity exchanges will be Stabilization fund of their industries. To achieve subject to power and energy this, the main purposes of excess of the export country. for prices of oil’s the cooperation work group • Electricity exchanges will fuel derivatives are to consolidate a platform be made under the scope of student and academic The Stabilization Fund for of bilateral supply contracts movement, the structure Prices of Oil’s Fuel Derivatives between the entities to be of a scientific research is an intangible fund created designated by Peru and network on climate change, in 2004. It aims too sooth the Ecuador, up to the limit of the the identification and use high volatility of international oil transmission capacity that of synergies to increase prices, taking into consideration may be determined by the competitiveness of medium, that Peru is a net oil importer. electrical system operators. small and micro business, In so doing, the fund establishes the execution of physical • The importer must assume maximum and minimum limits interconnection projects, and the applicable regulatory (price bands), in order not the creation of a cooperation charges in its country. to let high volatility affect its fund. consumers. It is important to For these purposes, Peru and mention that there are price You can easily find more Ecuador have compromised to bands for fuels such as: information in the EY’s Pacific adapt its internal regulations Alliance Business Guide at if it is necessary, authorize 1. Fuel oil ey.com/pe/EYPeruLibrary. operative agreements between 2. Liquified Petroleum Gas the electric system operators, Electrical Regional and promote special projects 3. Gasoline 84 and 90 RON Market of the Andes and the exchange of technical 4. Gasohol 84 and 90 RON information required for the By means of the Decision No. operation of the system. 5. Diesel BX (mix of Diesel N° 2 757 of the and Biodiesel B100, wherein of Nations, a special temporal This special temporal regime X is the percentage of B100 regime for the regulation of will be in force until the in the mix) international transactions on regulations (operational, Products mentioned in items electricity was established commercial and coordination) 3, 4, and 5 above are excluded between: (i) Peru and Ecuador, of Decision No. 816 – that from fund regulations to the and (ii) Colombia and Ecuador. creates the new Electrical Regional Market of the Andes extent that they are used in the According to this regime, (MAER) – will be published exploration and production of transactions between Peru and in the Official Gazette of natural resources, processing of Ecuador are subjected–among Cartagena. Once such hydrobiological resources,and others- to the following main regulations will be published, cement manufacture. rules: the MAER will enter in force.

44 Background information The fund enables the government to compensate producers and importers, so that they do not charge consumers above of the maximum limit whenever oil prices surpass it. The payments made by the government (“compensation factor”) are the result of comparing import parity pricing with the maximum limit. Therefore: CompF = IPP – MaxLim Likewise, when oil prices fall below the minimum limit, producers and importers charge consumers with the minimum limit, and make payments to the fund (“contribution factor”), which are equal to the difference between the minimum limit and import parity pricing. Thus: ContF = MinLim – IPP The General Bureau of Hydrocarbons (DGH, in Spanish) manages the fund, whilst the Supervisory Body of Private Investment in Energy and Mines (OSINERGMIN, in Spanish) updates the price bands from time to time.

Background information 45 Peru's oil & gas investment guide 2018 - 2019

2 Starting a business Starting in Peru

46 Background information Peru's oil & gas investment guide 2018 - 2019

01 Requirements for foreign Foreign investors shall be able forms of corporations: the closely investors to sign licenses and service held corporation (Sociedad contracts and therefore, carry Anónima Cerrada) and the out oil & gas exploration and open stock company (Sociedad production activities if they Anónima Abierta). establish a corporation (subsidiary In these cases, the legal, or affiliate) or a branch in Peru. technical, economic and financial Furthermore, the investors shall capacity for carrying out oil & appoint a representative, in the gas exploration and production case of foreigners with an alien activities, evaluated by Perupetro, registration card. will lay in the parent company, The most common types of legal who will be jointly and severally organizations used by foreign responsible for the capacity of investors for doing business in their Peruvian branches and/or Peru are a corporation (Sociedad corporations. If there is no parent Anónima - S.A.) and a limited- company, the qualification process liability company (Sociedad must be followed by the applicant Comercial de Responsabilidad company. Limitada - S.R.L.). However, the Associative agreements, such as Peruvian Corporation Act also joint ventures, are also allowed. provides other forms of legal entities, including two special 02 Establishing Corporation To that purpose, first, investors a Peruvian must grant powers to a A corporation (Sociedad representative in Peru to execute corporation Anónima - S.A.) is composed said instrument. Also, investors of shareholders whose liability shall request the to Tax Authority is limited to the value of their (SUNAT) the registration of the shares. The board of directors company as taxpayer in order and one or more managers to obtain the tax identification manage the S.A. To incorporate number (Registro Único de an S.A., investors (i.e. the Contribuyente - RUC). The shareholders) shall sign a public bureaucratic and legal steps deed of incorporation before a that an investor must complete notary public and file it before the to incorporate and register a Public Registry of Legal Entities. standard S.A. normally take

Starting business in Peru 47 Peru's oil & gas investment guide 2018 - 2019

aital ounders sareolders es o sares

aital is divided into sares i n must ave a minimum o to ares must e nominative and te ma e reel transerred it ust individual or ororate sareolders reresent te unit into i te a rivate agreement unless su it no reuirements as to teir rorietar interests in a ororation transers are restrited te nationalit or residene are divided s a general rule ea ororate las ere are no e sareolders general meeting is sare gives te rigt to one vote ut minimum or maimum aital te sureme od o te and non-voting sares ma e issued reuirements altoug issued as oer o deision on an suet ares sall e reorded in te sto aital must e ull susried and te elusive oer o deision ledger ierent lasses or series o and at least 2 tereo aid in it reset to dissolution sares ma e issued it dierent uon inororation oneteless amendments to te las and a rigts andor oligations Peruvian inanial ntities reuest aital inrease or redution among ll sares o te same lass sall ave a minimum deosit o oter e ororate deisions te same ar value ut ma e issued aroimatel 0000 or te at a remium or at disount rom ar aount oening te amount ma ororations ma urase teir on ange deending on te inanial sares suet to ertain limitations ntit aital ma e sulied in las restritions on transer o as or in ind alue o sares are ermitted non-monetar ontriutions must e revieed and aroved a maorit o te oard o diretors itin 0 das o inororation and ma e allenged in ourt anagement during te olloing 0 das ne or more managers are aointed Requirements of and removed te oard o a Corporation (S.A.) diretors unless las stiulate ontrol aointment a general in Peru* sareolders meeting anagers n annual general meeting is ould e a natural erson or a legal reuired las ma sei a entit en onl one manager is iger uorum and larger maorities aointed ese ill e te general tan tose laid don la e manager ere are no nationalit minimum uorum or a general reuirements meeting is 50% of capital on the first all and an numer o sareolders on te seond all ost deisions are taen a simle maorit o te aid-u voting sares reresented oard o diretors n must ave a minimum o tree diretors it no maimum numer or maor deisions su as aital rovided te la ere are no reuirements as to teir nationalit or inreases or dereases or ororate residene iretors ma not e sareolders and te serve one to la anges te minimum tree-ear reneale terms iretors ma e eleted umulative voting uorum is to-tirds o total voting in i ea sare as as man votes as tere are diretors to e eleted shares represented on the first call and sareolders eiter aumulate teir votes in avor o one andidate or and 0 on te seond all and te distriute tem among several leted diretors must aet te osition deision reuires an asolute eressl and in riting uorum is al te oard memersi lus one maorit o total voting sares e oard o diretors as all te oers vested in its la and te reresented ororate -las

*The obligation to submit audited financial statements to the securities commission, stated for legal entities with annual sales or total assets eual or aove 000 ta units not listed in te to ange as delared as unonstitutional te onstitutional ourt on ril t 201 u oligation as in ore as rom une 2011

48 Starting business in Peru between 15-30 days once the contributions. At least 25% of • Centralized management. necessary documents arrive to each participant’s contribution Partners general meeting and Peru. to capital must be paid-in upon one or more managers (no founding. board of directors is required). The incorporation documents must include, at least, (a) the Although to incorporate a S.R.L • Transfer of interest. Transfer of company’s name; (b) business no minimum capital is specified, partners interest to third parties purpose and duration; (c) the entities of the national financial is subject to approval by the company’s domicile; (d) the system request a minimum existing partners and must be name, nationality, marital status deposit of approximately registered in the public register. and residence of any individual US$300.00 for the account • Continuity. Death, illness, shareholder and name, place opening. bankruptcy, retirement or of incorporation and address of The S.R.L.’s capital is divided into resignation of any partner does any corporate shareholder (a and represented by participating not cause the dissolution of the minimum of two shareholders interests which cannot be entity. are required to set up an S.A.); denominated shares and and (e) the capital structure (the which are not freely negotiable shares of nominal value and the certificates. Capital holdings total number of shares), classes may be transferred outside of shares and details of individual the company only after they initial capital contributions have been offered through the (whether in cash or kind). management to other partners or Sufficient proof that a minimum the company itself and they have of 25% of the capital stock declined to purchase the offered has been paid into a Peruvian interests. Further restrictions on Financial Entity before the transfers may be set out in the execution of the public deed bylaws. of incorporations must also be The partner’s general meeting shown. shall entrust the company’s management to one or more Limited Liability managers who are not required Company to be partners in the S.R.L. or Peruvian citizens. Decisions are The Limited Liability Company determined by the majority of or S.R.L. (Peruvian acronym for capital contributions. Sociedad de Responsabilidad Limitada) is subject to The main characteristics of the registration procedures, reporting S.R.L. are: and accounting requirements • Limited liability. Partners are similar to those for the S.A. The not personally liable for the minimum number of partners is corporation’s liabilities. two and the maximum 20, whose liability is limited to their capital

Starting business in Peru 49 Peru's oil & gas investment guide 2018 - 2019

Closely Held Corporation Provisions applicable to the S.A are applicable to the closely held corporation subject to certain specific provisions. A corporation can be classified as closely held if it does not have more than 20 shareholders and its shares are not listed in the Stock Exchange. The closely held corporation has certain features found in a limited-liability company (for example, limited liability of equity owners, absence of freely transferable equity shares and no requirement for a board of directors). Public Corporation A corporation will be considered “open stock” when either (i) it has undertaken an initial public offering (OPP) or stock market launch to sell its stock to the public; (ii) it has more than 750 shareholders; (iii) at least 35% of its shares are held by at least 175 shareholders; (iv) it is incorporated as an open stock corporation; or (v) all the shareholders with voting rights agree unanimously to subject the company to the legal regime applicable to open stock corporations. This form of corporation is subject to the Securities Market Act as well as to certain specific regulation on minority shareholders protection, public disclosure, among others.

50 Starting business in Peru 03 Establishing a branch Branches are another type apostille documents, among of investment vehicle that others, have been submitted to foreign investors can establish the Peruvian notary public. for carrying out oil & gas These documents include exploration and production copies of the parent company’s activities. The branch does not corporate charter and bylaws, have legal independence or minutes of the shareholders legal personality distinct from agreement to set up a branch in its parent company, except for Peru, certification of the branch’s tax purposes. Therefore, the address, assigned capital and branch will be regulated by the line of business, notifications of parent company’s bylaws and the appointment and powers of a its activities must be within the legal representative in Peru and parent company’s corporate a Peruvian consul’s certification purpose. that the parent company is duly In the case of branches, the constituted in the country of capital assigned by the parent origin and entitled to set up a company does not have any branch in a foreign country. All limitation, but it shall be these documents must be duly deposited or wire transferred in apostilled. a Peruvian financial institution. However there is no obligation to credit the transfer for registry purposes. The parent company Procedures for remains fully liable for the obligations assumed by the organizing a branch. branch in Peru The branch operates through its legal permanent representatives are similar to with sufficient powers. the procedures Procedures for organizing a applicable to branch in Peru are similar to the procedures applicable for organizing organizing corporations or limited liability companies. It corporations or takes between two to three weeks to register a branch once limited liability the necessary documents, such companies. as the certificate of existence of the parent company and the

Starting business in Peru 51 Peru's oil & gas investment guide 2018 - 2019

04 Associative agreements Associative agreements are investment provided these another type of investment vehicle contracts grant foreign investors that allow different companies a participation in the production (and individuals) to jointly capacity, which does not qualify participate and integrate into as a capital contribution. Also, certain businesses or enterprises these investment vehicles should for reaching a common purpose. correspond to contractual This type of investment vehicle is commercial transactions through very common in the hydrocarbon which a foreign investor provides sector because of the great risk goods or services, obtaining involved in carrying out this type a participation in the physical of activity. This makes sense due production, the global sales to the large amount of investment amount or the net profits of normally incurred in the the company that receives the exploration and production phase. investment. Unlike the other types of To carry out hydrocarbon investment vehicles, an activities, each of the parties associative agreement does not should be qualified as a contractor create a corporation or legal entity by Perupetro. To have such different from its associates. qualification, they should be Indeed, even though they have a legally, technically, economically common purpose in developing and financially qualified to a business activity together; engage in obligations, regulations associative agreements do not and investments required for create legal entities, therefore, developing the hydrocarbon each of the parties keep their activity. One of the parties must legal personality and patrimonial be assigned as the operator independence. responsible for conducting the activities; however, all of the There are three basic types of parties will be jointly and severally associative agreements that could liable before Perupetro for the be applied in Peru: assumed contractual obligation. a) partnership contracts, b) consortiums; and c) joint ventures; the latter not being regulated in the Peruvian Corporations Act. Resources assigned to the aforementioned contracts will be considered as foreign

52 Starting business in Peru Starting business in Peru 53 Peru's oil & gas investment guide 2018 - 2019 in Peru

3 Hydrocarbons Hydrocarbons

54 Hydrocarbons and energy in Peru Peru's oil & gas investment guide 2018 - 2019

Peru is a country that is most projects, especially in the known for its mining industry. southern regions. This should be no surprise On the other hand the since mining has been a central Government is working on the activity of the territory’s scope and applicable regulatory economy since pre-hispanic issues to implement an Energy times. Most rankings place Policy that may suit the future Peru as one of the top mining needs of the country. investment destinations, and one of the most prominent This comes along with the need producers. to take measures to prevent climate change consequences. However, aside from being rich Recently, in April of 2018, in mineral resources, Peruvian the Climate Change actions territory has a privileged Framework Law was approved location that offers a myriad by the Legislature. By means of of possibilities to all sorts this Law, Peru shows its promise of investment. Indeed, the to take planned actions in Pacific Ocean and Humboldt order to reduce its contaminant Current make Peruvian emissions and become and eco- industry one of the world’s friendly country as a measure most productive, Peru’s three to prevent the consequences geographic regions (coast, of the climate change. Peru is highlands, and jungle) fuel, its the very first country to have growing world-renowned cuisine such legal regulations since the industry, while its immense signing of the Paris Agreement cultural heritage, crowned on climate change issues. Peruvian by Machu Picchu, make Peru territory has quite an attractive tourism Finally, it is important to note destination. that Peru has great sources for a privileged the development of new kinds of The oil & gas industry is part electricity power. In this regard of Peru’s almost limitless location that it is expected that, in the future, investment options. The the industry of clean energy offers a myriad northern regions hosted Latin will increase its participation America’s first oil drilling wells, in the Peruvian Energy Matrix of possibilities while Camisea’s natural gas by means of the utilization of reservoirs changed the Peruvian energy sources such as wind, to all sorts of energy matrix forever. In fact biomass, water and solar. investment. the Camisea project and their surroundings assure the supply to even more gas-to-power

Hydrocarbons and energy in Peru 55 Hydrocarbons in Peru

3 Secc A | Oil & gas

56 Peru's oil & gas investment guide 2018 - 2019

National Energy gas will rise from 1900MMscfd to 2400MMscfd by 2025, making it Programme 2014- necessary to develop a national 2025 pipeline system for its supply. In order to achieve this goal, On November 2014, the Ministry minimum annual goals will be of Energy and Mines presented established, so that oil production the National Energy Programme can increase from the current 2014-2025. This document 43 Mbpd to 153 Mbpd by 2025. forecasts the energy demand of It is worth mentioning that the the country until 2025. It also sets optimization of the Talara and down how this demand could be La Pampilla refineries and the satisfied through alternative and biddings and direct negotiations traditional energy sources. on new Blocks will be crucial to The provision set forth in the complete this task. energy planning for the country In that regard, during 2017 more through 2025 expects an increase than 3 offshore Blocks were in the consumption of liquid assigned to new investors via hydrocarbons from 209,000 direct negotiations. However, it is bpd to 285,000 bpd or, another expected that during 2018 new scenario, from 212,000 bpd biddings will be launched on new to 339,000 bpd, stressing the Blocks around the country. necessity of new infrastructure. Therefore, the optimization To the extent that new exploration projects of the Talara and La projects achieve commercially Pampilla refineries will gain special viable exploitation operations, importance in order to reach those and pipeline infrastructure It is expected expectations, as well as onshore is developed to reduce and offshore exploration and transportation costs, natural gas that during exploitations projects and liquefied petroleum gas might increase their participation in the 2018 new Another relevant topic regarding final consumption of energy in demand of hydrocarbons is the country. Moreover, natural biddings will be that of the massification of gas projects could establish natural gas, which is already launched on new themselves as the cornerstone consolidating with the beginning to developing new gas-to-power of operations of multiple gas Blocks around projects, like those that are distribution through pipelines already operating in southern the country. concessions, and more biddings Lima and the Southern Power on that matter. It is expected that Node. the national demand for natural

Hydrocarbons and energy in Peru 57 Peru's oil & gas investment guide 2018 - 2019

01 Importance of Peru’s The oil & gas sector in Peru has to restructure the company oil & gas gone through a transformation, implementing a from an industry in decline process, ceasing Petroperu’s sector to a major contributor to the downstream operations, and economic growth in Peru. assigning Perupetro (newly created governmental agency) Historically, Peru became an the commercial faculties to importer in the late1980s and negotiate and subscribe license early 1990s. The combination and service contracts with of a state-dominated turn in investors (see more detail about Peru’s energy sector in the Petroperu in page 74). 1960s (political interference such as policies that changed As a result, Peru’s oil & gas sector from government to government, became more competitive. From refusal by various governments 1990 to 1997, investment in the to grant new contracts, and sector increased from $20 million fixed petroleum prices) and a to $4.3 billion. Areas under lack of significant discoveries operation hiked from 1 million to over the years, set Peru on a 23 million hectares in the same path of dwindling reserves. The period. Prices were set by the implementation of such policies market, not by the State. caused a decline in private This growth increased investment. significantly in 2004- 2005, when Under these circumstances, the major discoveries of natural the military regime decided to gas reserves near the Camisea expropriate the International River in the Amazon began Petroleum Company and created producing (which now is known a state-owned oil company named as the “Camisea Project”)*. Petroperu, which controlled From that moment on, Peru has the sector for approximately entered into a takeoff stage, 25 years. Nevertheless, their explained not only by the Camisea management did not result in discovery and the geology of an improvement of the sector the country’s potential, but also as revenues, and reserves and by the economic and political production started declining. For stability that it has achieved this reason, the government in during the last years. This force through the 90’s decided situation boosted the oil & gas

58 Hydrocarbons and energy in Peru Hydrocarbon Investment (2005-2017 exploration and exploitation phase in millions of US$)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* loration 90 10 2100 910 910 0 90 8080 80 010 2990 9 10 loitation 290 190 800 1080 1080 0 8800 1102 8129 8801 828 28 99

Total 10 8820 11000 11990 11990 1290 1090 1118 120 1189 8228 0 88

*The numbers shown for year 2017 include investments performed from January to December 2017. Source: Perupetro sector, as well as the oil & gas Oil exploration and exploitation discoveries in several locations investments evolution (1995-2017) of the country. The rising investment in Peru during the last years reflects such growth. 100 Due to smarter energy management, Peru began to 1200 diversify its energy use, reduce its dependence on imports, and 900 position itself as an exporter of 8

liquefied natural gas (LNG). Still, challenges remain, particularly 00 as exploration and development 9 2 28 activities begin to recover from a 00 299 context of low prices. 110 11 9 12 1 0 201 201 199 2000 200 2010 201

loration loitation

(*) The Camisea Project was discovered Sources: Perupetro in 1989

Hydrocarbons and energy in Peru 59 Peru's oil & gas investment guide 2018 - 2019

Estimated investment Midstream projects are still some operations in November 2017, by sector percentage of the most promising projects which could also lead to the (2018-2019)* nowadays. While TGP finished development of other industries the third expansion of Camisea’s in the northern and southern pipeline, thus allowing higher regions. It should be added that Sector 2018 - 2019 supply for consumption and several other concessions await to Mining 36.6% exports, the Southern Peruvian begin operations or be awarded by Infrastructure 22.4% Pipeline concession might have the Government. Oil & gas 11.1% a new international bidding as In 2012, Peru ranked 98th out of Electricity 5.3% soon as the Goverment finds 147 countries in a survey done Industry 4.2% the best way to transfer assets by Fraser Institute, which focused Other sectors 20.4% of the project to the winner on the attractiveness for global of the new bidding. The new Total: 100.00% oil & gas investment. In 2014, it Southern Peruvian Pipeline will ranked 79th out of 156 countries; *Estimated as of March, 2018 raise particular interest due to in 2015, 89th out of 126; and Sources: BCRP raising natural gas demand in the in 2016 it ranked 64th out of 96 southern regions of the country. countries. In that regard, Peru Moreover, due to its importance achieved its best position ever in to the production of northeastern 2017, when it ranked 58th out of According to Peru’s Central Bank, jungle Blocks, Petroperu (National 97 countries. 12.0% of the investments to be Oil Company) has recently made in 2018-2019 will be related announced its intention of joining In order to capitalize such to oil & gas activities. These new with a private company in order achievement, the government investments are expected to to work on the extension of the and Congress are currently exceed those achieved in 2016 by Northern Peruvian Pipeline, a working on making amendments 5.0%. project of approximately USD 1 to the Hydrocarbons Law, in Some of the investments that billion. order to establish the appropriate incentives, especially in royalties, are going to take place in Downstream activities have also social, environmental, and 2017 correspond to ongoing renewed the interests of investors infrastructure matters to promote projects that may lead to new and the government. Indeed, the investment in the sector. opportunities. Talara and La Pampilla Refineries’ In relation to upstream projects, Modernization Projects continue the most important investments their development aiming are focused in the northern and towards complying with the legal southeastern regions. The first dispositions to supply cleaner ones show promising results in fuels to consumers, as well as offshore blocks, while the latter refining heavy oil more efficiently. ones are taking advantage of That is just a glimpse of how much the infrastructure developed for downstream projects have drawn the Camisea Project (gathering attention lately, as there are two systems, infrastructure, among distribution concessions of natural other facilities). gas by virtual pipelines that began

60 Hydrocarbons and energy in Peru 2017 Resource Governance Index

Resource Value Revenue Enabling Rank Country Composite Measured Realization Management Enviroment 1 Norway Oil & gas 86 77 84 97 2 Chile Mining 81 74 81 90 3 Canada (Alberta) Oil & gas 75 69 59 97 4 United States ( Gulf of México) Oil & gas 74 66 63 93 5 Brazil Oil & gas 71 62 78 72 6 Colombia Oil & gas 71 59 85 67 7 Australia (Western Australia) Mining 71 65 51 96 8 Oil & gas 70 75 66 69 9 Trinidad and Tobago Oil & gas 64 64 57 71 10 Peru Mining 62 68 57 62 11 Mexico Oil & gas 61 64 54 65

Source: Natural Resource Governance Institute

Global Petroleum Survey 2017 Ranking of countries made according to the scope of investment barriers (based on the composite index score of Fraser Institute).

2013 2014 2015 2016 2017 Countries Argentina - Mendoza 150 108 103 74 56 Argentina - Neuquen 142 99 91 59 45 Argentina – Santa Cruz 143 140 107 86 71 Bolivia 145 153 117 93 96 Brazil – Onshore CC 154 87 66 82 41 Brazil – Offshore CC 114 69 47 65 53 Brazil – Offshore presalt arena 113 102 68 81 65 Colombia 31 59 60 53 47 Ecuador 74 155 121 89 93 Mexico 87 126 82 68 77 Peru 115 79 89 64 58 Venezuela 157 156 125 96 97 Notes: • CC: Concession Contract • PSC: Profit Sharing Contracts

Source: Fraser Institute

Hydrocarbons and energy in Peru 61 Peru's oil & gas investment guide 2018 - 2019

Oil and liquid hydrocarbons average audited production* (2007-2017)

190000 180000 10000 10000 10000 10000 112 10000 11 120000

arrels er da arrels 110000 100000 90000 80000 2010 2011 2012 201 201 201 201 201 2018

ontl average nnual average *Includes petroleum and natural gas liquids. Source: Ministry of Energy and Mines Ministry of Energy and Mines

Oil & gas canon revenues

The oil & gas canon is a portion of the generated income obtained by the Government for the oil & gas exploitation. The beneficiaries of such revenues are the Local and Regional Governments, among other public entities located in the area exploited. The following chart shows the amount of revenues obtained and destined to oil & gas canon since 2003.

1

1

12

10

08

0

tousands o millions 0

02

0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Perupetro

62 Hydrocarbons and energy in Peru Hydrocarbons and energy in Peru 63 Peru's oil & gas investment guide 2018 - 2019

Fiscal revenues (2007-2017 in billions of US$) The oil & gas industry represents one of the main sources of fiscal revenues, and comes not only from the activities carried out in the Camisea Project (Blocks 56 and 88), but also from the activities executed in other blocks.

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* License 791.03 1,132.01 859.12 1,319.57 1,998.33 1,894.75 1,932.66 1,608.19 728.98 627.39 792.06 contracts Service 65.03 85.30 54.10 73.89 1.00 105.03 88.27 85.01 39.96 32.86 36.78 contracts Total 856.03 1,217.31 913.22 1,393.46 1,999.33 1,999.78 2,020.93 1,693.21 768.94 660.25 828.84

*Estimated as of December 31, 2017 Source: Perupetro

Average natural gas audited production (2007-2017)

110 110 121 110 110 1210 12 1110 1010 910 810 10 10 10 ousand ui eet er da eet ui ousand 10 10 210 110 10 2010 2011 2012 201 201 201 201 201 2018

ontl average nnual average

Source: Ministry of Energy and Mines

64 Hydrocarbons and energy in Peru Transparency in oil the EITI report, so that citizens can be aware and informed of & gas activities how much their governments EITI (Extractive Industries receive from the exploitation Transparency Initiative), a of natural resources and also global coalition of governments, where such funds are destined. companies Peru joined EITI as a full and civil society, is an member in 2005, given the international organization that importance of oil & gas, and is working together to improve mining activities in the national openness and accountable income, and its meaningfulness management of revenues from in the Latin American and natural resources. global production. Thus, Peru became the first Latin By joining EITI, countries American country to join the implement the EITI Standard initiative and show meaningful to ensure full disclosure of progress towards meeting the taxes and other payments 2016 EITI Standard, ensuring made by oil, gas and mining transparency and stability of companies to governments, the rules related to the incomes which are disclosed annually in from extractive industries.

Hydrocarbons and energy in Peru 65 Peru's oil & gas investment guide 2018 - 2019

02 Hydrocarbon production The investment and work involved The hydrocarbon investment for and exports in the sector contributed to years 2018- 2019 is estimated the recovery and the positive at approximately US$4 billion evolution of the hydrocarbon and the growth of the sector is national production. An estimated to be 1.8% for 2018, emblematic example of this after two difficult years marked growth is the Camisea project. by low oil prices. This growth will This project was not only rely on the investment portfolio significant to the country, but and Peru’s geological potential, it also contributed to putting which already has the attention Peru on the map of natural gas of investors interested in offshore producers. Blocks.

Estimated GDP Hydrocarbon growth until 2017

-8 -1 -2 -2 -12 0 -11 ear ear ear

- -08

-

-9 anuar-etemer

-12 anuar-etemer anuar-etemer -1 201 201 201 2018

*Estimated as of March, 2018 Source: BCRP

66 Hydrocarbons and energy in Peru Hydrocarbons audited production (2007-2017)

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* Petroleum 28,146 28,027 25,927 26,531 25,387 23,984 22,956 25,296 21,173 14,773 15,900 (MBLS) NGL (MBLS) 13,416 15,903 27,100 30,832 20,354 31,596 38,187 37,751 33,360 34,671 33,134 Natural Gas 96,206 122,230 125,300 255,609 401,169 418,795 430,559 456,407 441,244 494,930 457,050 (MMCF)

* Estimated as of December, 2017. NGL: Natural Gas Liquids Source: Perupetro

Natural gas audited production by oil well (2017)

Accumulated Block % (MCF)* • Northern area - 15,924 3.48 • Aguaytía 31 - C 1,584 0.35 • Pluspetrol 88 232,768 50.93 • Pluspetrol 56 151,765 33.21 • Repsol 57 55,007 12.04 Total 457,048 100.00

1-

09 8 88 - 21 0 1- 120 88

*MFC: Thousands Cubic Feet Source: Perupetro

Hydrocarbons and energy in Peru 67 Peru's oil & gas investment guide 2018 - 2019

O&G Projects in the • Exploration activities in in three off-shore Blocks, while off-shore Blocks Z-61, Z-62, additional investment will be mid and long-term and Z-63 by Anadarko; and made in Block Z-38, and other off-shore Blocks Z-64, Z-65, offshore Blocks such as Z-64, Now that the scenario of Z-66, Z-67, and Z-68 under Z-65, Z-66, Z-67 and Z-68. low international oil prices negotiation. during 2014 and 2015 seems These off-shore projects are the past, Peru is recovering its • Natural gas distribution product of direct negotiations attractiveness as an investment through pipelines concessions. with Perupetro, which agreed to a destination in every segment minimum royalty rate of 5%. The projects stated above focus of the hydrocarbons sector, in upstream activities on some of Notwithstanding the upcoming especially upstream. Certainly, Peru’s most promising Blocks. off-shore projects, midstream the stabilization of oil prices projects await better conditions to around US$50, and the news of Indeed, after successfully finding re-launch biddings. upcoming changes in legislation reserves that represent almost have boosted projects in the mid 25% of those in Camisea, CNPC In that regard, not only will and long-term, especially those will invest more than US$ 4,000 the Southern Peruvian Gas related to offshore Blocks near million in the exploration and Pipeline be the most important the northern coast. exploitations of Block 58, which hydrocarbons’ infrastructure is contiguous to Camisea’s Blocks project awaiting new investors, Hence, hereby we provide an (56 and 88). but also Petroperu (NOC) will outlook of investments related start looking for a partner in to upstream, midstream, and It is possible that, like what order to expand the Northern downstream phases, to be carried happened with Repsol and CNPC’s Peruvian Pipeline. Together, out in the mid and long-term. Block 57, Block 58 will likely take both projects have estimated advantage of the already existing Main investment projects investments of around US$ 5 facilities in Camisea. billion. The total private capital Even though Blocks nearby investment projects expected It is also worth mentioning Camisea do seem attractive due for 2018 is worth approximately that downstream activities to their potential (besides those US$18,369 million. Almost 12% are gaining momentum due to located in the northwestern of that amount will focus directly new environmental regulations Regions, historically known for in the oil & gas sector, considering regarding fuels and efforts to their oil production), in 2017 the development of the following hasten a shift in the energy off-shore projects have caught projects: matrix. investors’ attention. • Exploration activities on Indeed, the biggest refineries In that regard, companies such Block 58, carried out by in the country (La Pampilla, as Tullow Oil and Anadarko have China National Petroleum owned by Repsol; and Talara, completed negotiations to acquire Corporation. owned by Petroperu – NOC), are several License Contracts on off- both undergoing modernization • Exploration activities on Block shore Blocks. projects in order to produce Z-38, headed by Karoon Gas For example, Anadarko will invest cleaner fuels and refine heavier Natural. more than a US$ 100 million oil.

68 Hydrocarbons and energy in Peru On the other hand, Government’s While Fenosa will distribute natural efforts to materialize the gas in the southern regions of massification of natural gas the country (cities of Arequipa, among Peruvian population Mollendo, Ilo, and Tacna), Quavii continue. Certainly, while will do so in the northern regions Calidda’s and Contugas’ networks (cities of Chimbote, Trujillo, and connections keep growing, Huaraz, Cajamarca, Chiclayo, there are new distribution Lambayeque, and Pacasmayo). concessions that began It is expected that both Fenosa operations during the last quarter and Quavii will accomplish around of 2017, and that will be the 116,000 connections during the object of international biddings first 7 years of operations. during 2018. Fenosa’s and Quavii’s concessions In that regard, we can mention will be complemented by the Fenosa and Quavii, who were upcoming international bidding to awarded with their distribution award the natural gas distribution concessions in 2013, and concession for the central regions received the first shipment of of the country (Apurimac, liquefied natural gas delivered Ayacucho, Huancavelica, Junin, from Pampa Melchorita via virtual Cusco, Puno, and Ucayali). pipelines (cryogenic trucks) on Expected investment amount for November 2017. this project is of US$ 350 million.

Hydrocarbons and energy in Peru 69 Peru's oil & gas investment guide 2018 - 2019

Southern Peruvian Gas Pipeline Project - Reference map

alvinas Plant Stretch b ass oint

Stretch c Stretch a1 uillaamas nta Pipeline Reference Map ermal uo iuintira Plant ros onstrution ill e made in tree stretes ana Benefited regions P

uture onnetions Stretch a2

P Where will natural gas be used? P Puno

1. Influence Area ollendos los and reuia uillaamas termal lants The pipeline will benefit and oter termal lant tat urima Puno reuia uo ouegua and ma oose to use natural gas ollendos ana regions everal ouegua ranes and oter ermal 2. inrastruture ill e uilt Plant eiles oring it veile rom te ieline in order los natural gas to sul tose regions ermal ana it gas Plant 3. ese to lants are art ndustr atories o te Poer ode aarded Pronversion in ovemer 201 4. esidenes

ungle and masl ungle iglands oast Elevation path mountain 000 000 ass 000 oint alvinas 2000 Plant 1000 0

Stretch b Stretch a1 Stretch a2

Source: Ministry of Transport and Communications

70 Hydrocarbons and energy in Peru 03 Diversifying the energy The development of natural on petrochemical, fertilizer and matrix: gas and condensates from the other projects. Camisea project have created Natural gas a new strategic option for the Camisea Project energy sector in Peru. Camisea’s estimated hydrocarbon Such development has reserves are around 13 million contributed to increase the cubic feet of natural gas and reserves and hydrocarbon 660 million liquid barrels. It is production and, therefore, the estimated that these reserves supply and demand patterns of will reduce the cost of electricity such an energetic matrix. and national fuel by the time they commercialize. Before the arrival of natural gas, the energy matrix of Peru Natural gas: the fuel of the depended on liquid fuels – future primarily imported diesel, coal, wood, and other traditional Camisea has contributed greatly energetics. Nowadays, the to Peru’s development by consumption of liquid fuels providing a steady and increasing has been reduced, in order flow of a clean energy source. to introduce different energy However, Camisea’s gas is far sources, such as LPG (Liquefied from just being a hydrocarbon Petroleum Gas) and VNG (Vehicle used directly in the industrial Natural Gas). In the future, Peru and housing sectors, as well as intends to generate a matrix for exports: arguably, its biggest based not only on petroleum, but contribution is the provision of equally on renewable energy and the necessary raw material to natural gas. generate electricity. The global trend, in terms of Camisea’s gas impact on fuel oil is to replace oil with savings in power generation are other sources that are cleaner estimated to be around US$22.4 and cheaper. So by the time billion during its first 10 years Camisea’s potential is fully (the project began operating in developed (Blocks 57, 58, among 2004). Without a doubt, it has others), Peru will be energetically dramatically changed Peru’s integrated into all corners. The energy matrix, and because of development of this industry this, it has paved the way for will trigger the possibility of some of the most ambitious progressing in the domestic energy and infrastructure projects and foreign markets, which will for the mid-term. contribute to a future advance

Hydrocarbons and energy in Peru 71 Peru's oil & gas investment guide 2018 - 2019

Thermoelectric plants it is one of the most important Piura might also benefit from the projects energy sources of the country. supply of liquefied natural gas coming from Pampa Melchorita’s The Camisea zone is located Due to the development of plant (very much like Fenosa and approximately 500 kilometers to the Camisea project, and the Quavii) in 2018, while the central the southeast of the city of Lima, increasing availability of natural regions of the country await the capital of Peru, on the eastern gas through the pipeline that ProInversion’s bidding in the short slopes of the Andes in the region connects such fields to the term. As can be noted, natural of Cusco. It is located in the Bajo coast, many projects regarding gas is on its way to becoming Urubamba valley, one of the areas thermoelectric power plants have the standard energy source for with the most natural biological started operating in recent years. Peruvian society. diversity in the world. Certainly, the gas pipeline has allowed thermoelectric power The major part of the reserves plants to be constructed and are located in two main gas operated some kilometers to fields, San Martín and Cashiriari, the south of Lima, in Chilca. located in opposite banks of the Fenix Power, Engie, Kallpa, Camisea River. Blocks 88 and 56 and Termochilca operate are known as the Blocks of the thermoelectric power plants Camisea project. in Chilca, generating around Three main actors are involved 16,000,000 MWh of a great total in the management of the of 48,587,388 MWh generated in natural gas industry in the the country during 2016. Some Camisea project, at different of the aforementioned companies stages. The production stage have currently developed was granted by the government extensions of their power plants to the Consortium integrated in Chilca. by Pluspetrol (operator) - Hunt Nonetheless, the southern Oil - SK Innovation - Repsol power node has already Exploración Perú - Sonatrach In the future, received investments to develop Peru Corporation - Tecpetrol. The Peru intends to thermoelectric power plants. transportation and distribution Engie is running some of those stages have been granted to generate a matrix plants, and some other investors Transportadora de Gas del Perú might find it attractive for new S.A and to Gas Natural de Lima y based not only projects in the node and its Callao S.A (Calidda), respectively. surroundings, especially when the on petroleum, Camisea’s gas is also currently southern Peruvian pipeline starts available in Ica, as well as some but equally on operating. southern and northern regions Camisea’s deposits are large of the country, through the renewable energy enough to satisfy the actual distribution concessions awarded and natural gas. energy needs of the country for to Contugas, Fenosa and Quavii. more than a decade. This is why In that regard, the region of

72 Hydrocarbons and energy in Peru Natural gas demand forecast (2012-2033)

2000

'20-' 2

20000

'12-'20 1

1000

10000

000

00 2012 201 201 201 201 201 2018 2019 2020 2021 2022 202 202 202 202 202 2028 2029 200 201 202 20

Possile uture letriit - ort - ort ter sers - ort letriit - ort ter sers - ort

Sources: Wood Mackenzie’s analysis / COES

Hydrocarbons and energy in Peru 73 Peru's oil & gas investment guide 2018 - 2019

04 Growth potential Peru has 18 sedimentary basins Regarding the other 15 basins with hydrocarbon exploration whose potential have not been potential. However, only three explored in detail, we have the of them have been exploited, Santiago and Huallaga basins, which shows that an important where abundant crude samples part of the national territory with have been found, inferring the hydrocarbon potential has not existence of active oil systems. been explored yet, especially in We also have the Madre de Dios the jungle and in the coast. basin, where preliminary studies confirm the presence of gas According to Perupetro, Peru is deposits. one of the few countries in the world whose territory is relatively A case that may bring attention underdeveloped, which means is the Titicaca basin, which that it has an almost intact produced light oil in very hydrocarbon potential. antique fields at the beginning of the 20th century. In the Ten basins are located in the case of natural gas, in 2014 continental zone of Peru (in the the Chinese company CNPC coast and in the south and north acquired Petrobras’ assets in the jungle), and the rest are located country, therefore comprising offshore. an investment of US$1.4 billion The basins located in Talara, in exploration activities in block Marañon and Ucayali are the 58, near Camisea fields. It was best known. Further studies have estimated at up to 8 trillion cubic been conducted at these basins, feet of natural gas. Recently, especially in the Talara basin, that they announced that Block has been explored and has had 58 exploratory efforts were production fields since the 19th successful, granting almost 4 TCF century. On the other hand, the in reserves. Marañon basin (northern jungle) already has production oil wells Petroperu (National and new structures have been discovered, but still this basin is Oil Company) only partially exploited. Even though Petroperu, a state- owned company of private law, In the same sense, even though initially was not actively involved the Ucayali basin (northern and in exploration and exploitation central) has not been explored of hydrocarbon activities, which yet, in the south zone are the occurred as a consequence of Camisea fields, which are the the privatization process during principal natural gas deposits of the 90’s; nowadays it is re- Peru.

74 Hydrocarbons and energy in Peru assuming its participation in the this project make the Peruvian In the same Legislative Decree, hydrocarbon production scenario. northern region more dynamic, Petroperu has been authorized allowing refining of heavy oil to participate as a partner and In 2006, Peruvian Congress from Jungle’s Blocks, but it also also as an operator (if agreed) passed Law No. 28840, which assures the total nationwide in the exploration and the allowed Petroperu to return supply through Petroperu’s fuel exploitation of hydrocarbon to participate in all stages of distribution grid. activities according to the terms hydrocarbon activities, especially and conditions included in the in exploration and production. Petroperu’s reorganization correspondent contract. For these Thus, it could be a competitor in and its participation in purposes, the only condition that every activity of the industry. social projects it must fulfill is not making any The first step into reinserting On December 31, 2016, by disbursement while developing Petroperu into upstream activities means of Legislative Decree No. exploration activities. It is worth was taken in October 2014, 1292, the government declared mentioning that due to the said when Petroperu associated with the necessity to modernize and Legislative Decree No. 1292, a private company planning reorganize Petroperu. Petroperu is now authorized on exploring and producing to organize and carry social For this purpose, it authorized hydrocarbons in Block 64. The responsibility activities through Petroperu to modify totally or acquisition of 25% interest in the Regime called Construction partially its internal structure in Block 64’s License Contract work for Taxes, according to Law order to improve the efficiency might be complemented with the No. 29230. of its operation, increase its acquisition of significant interest operational capacity and to in Block 192’s License Contract modify its services to reach in the short term. Block 192 was an adequate standard of Oil & gas the highest producing block in the performance, considering country during the last decade, companies must the necessity to protect the and could be an ideal opportunity environment and the nearby for Petroperu in its return to fulfill all the communities. upstream operations. requirements Also, Petroperu has been Aside from Petroperu’s return authorized to contract third to upstream activities, it should needed to develop parties by means of joint be mentioned that in 2016 venture, services contracts, exploration the aforementioned NOC was among other forms, regarding authorized by Congress to adopt and production the management and operation all the necessary measures to of its current projects and assure the correct engineering, activities under a the future ones. By this, the procurement and construction government has noted that license or service of the new assets that will let despite the authorizations given Talara’s Refinery to be able to to Petroperu, it is still a public contract. produce LPG, oils and 50 ppm entity. sulfur diesel. Not only does

Hydrocarbons and energy in Peru 75 Peru's oil & gas investment guide 2018 - 2019

Oil reserves (2005-2016)

11000000 10000000 9000000 8000000 000000 Proven 000000 000000 Proale 000000 Possile 000000 ousands o arrels o ousands 2000000 esoures 1000000 0 200 200 200 2008 2009 2010 2011 2012 201 201 201 201

* Includes contingent and prospective resources. Data updated up to December, 2016. The resources come principally from a reclasification of possible reserves to resources as of 2009 Source: Ministry of Energy and Mines

Natural gas reserves (2005-2016)

120000

100000

80000 Proven

0000 Proale

0000 Possile

20000 esoures

0

ousands o millions o ui eet ui millions o o ousands 200 200 200 2008 2009 2010 2011 2012 201 201 201 201

* Includes contingent and prospective resources. Data updated up to December, 2016. The resources come principally from a reclasification of possible reserves to resources as of 2009 Source: Ministry of Energy and Mine

Natural gas liquids reserves (2005-2016)

000000

000000

000000 Proven

000000 Proale

2000000 Possile

ousands o arrels o ousands 1000000 esoures

0 200 200 200 2008 2009 2010 2011 2012 201 201 201 201

* Includes contingent and prospective resources. Data updated up to December, 2016. The resources come principally from a reclasification of possible reserves to resources as of 2009 Source: Ministry of Energy and Mines

76 Hydrocarbons and energy in Peru Peru’s blockmanp

Miscellaneous matters 77 Peru's oil & gas investment guide 2018 - 2019

1 Hydrocarbons and energy in Peru Peru’s 2D seismic map

Miscellaneous matters 79 Peru's oil & gas investment guide 2018 - 2019

3 Hydrocarbons and energy in Peru Peru's oil & gas investment guide 2018 - 2019

Exploitation and exploration contracts (2017)

Subscribed Inforce Investment (US$millions)*

• Exploitation 0 26 467.79

• Exploration - 20 17.07

Total 0 46 486.86

* Investment made up to December, 2017

• Exploitation contracts Zone Operator Block Basin subscription date Lot area / ha Effective work area / ha

Pacific Stratus Energy 192 Marañon 30-Aug-15 512,347.241 2,037.00

North Pluspetrol Norte 8 Marañon 20-May-94 182,348.210 541.00 Rainforest Geopark Peru S.A. 64 Marañon 07-Dec-95 761,501.001 66.00

Perenco 67 Marañon 13-Dec-95 101,931.686 378.00

Maple 31B y 31D Ucayali 30-Mar-94 71,050.000 154.00

Central Aguaytia 31-C Ucayali 30-Mar-94 16,630.000 18.00 Rainforest Maple 31-E Ucayali 06-Mar-01 10,418.934 9.00

Cepsa 131 Ucayali 21-Nov-07 480,985.304 90.00

Pluspetrol 56 Ucayali 07-Set-04 58,500.000 64.00

South Pluspetrol 88 Ucayali 09-Dec-00 82,803.521 129.00 Rainforest Repsol 57 Ucayali 27-Jan-04 287,102.800 12.00

CNPC 58 Ucayali 09-Set-05 340,133.717 65.00

GMP I Talara 27-Dec-91 6,943.250 339.00

Petrolera Monterrico II Talara 05-Jan-96 7,691.420 136.00

Graña y Montero III Talara 31-Mar-15 35,799.305 227.00 Petrolera IV Talara 31-Mar-15 29,521.990 181.00

GMP V Talara 08-Oct-93 9,026.032 42.00

North-West SAPET VI/VII Talara 22-Oct-93 32,434.113 2,513.00

UNIPETRO ABC IX Talara 16-Jun-15 2,754.133 52.00

CNPC X Talara 20-May-94 46,952.342 2,252.00

Olympic XIII Sechura 30-May-96 263,357.845 29.00

Petrolera Monterrico XV Talara 26-May-98 9,999.772 10.00

Petrolera Moneterrico XX Talara 19-Jan-06 6,124.207 131.00

Savia Z-2B Talara 16-Nov-93 130,315.659 318.00

Tumbes, Continental BPZ Z-1 30-Nov-01 178,961.384 30,077.00 Talara Shelf Talara, Savia Z-6 20-Mar-02 528,116.614 15,552.00 Sechura

Hydrocarbons and energy in Peru 81 Peru's oil & gas investment guide 2018 - 2019

• Exploration contracts (continues)

Zone Operator Block Basin susbcription date Lot area / ha Effective work area / ha

Perenco Peru 39 Marañon 09-Sep-99 79,164.497 119.00 Limited

Gran Tierra 95 Marañon 07-Apr-05 345,281.667 7,509.00 Energy

Pacific Stratus 116 Santiago 12-Dec-06 658,879.677 128.00 Energy North Gran Tierra Rainforest 123 Marañon 29-Sep-05 940,421.092 171.00 Energy

Gran Tierra 129 Marañon 11-Apr-05 472,433.684 90.00 Energy

Andean Exploration 145 Bagua 16-Apr-09 500,000.004 80.00 Peru S.A.C.

Compañia Consultora de 100 Ucayali 26-Mar-04 7,700.000 40.00 Petroleo

Marañon, Talisman 103 09-Aug-04 870,896.168 120.00 Central Huallaga Rainforest Petrolifera 107 Ucayali 01-Sep-05 252,232.329 114.00 Petroleum Peru

Petrolifera Huallaga, 133 16-Apr-09 309,309.197 47.00 Petroleum Peru Ucayali

South Pluspetrol 108 ENE 13-Dec-05 869,105.835 36.00 Rainforest

Gold Oil Peru XXI Sechura 04-May-06 240,755.063 44.00

Upland oil & Talara, XXII 21-Nov-07 369,043.817 66.00 gas Sechura

North-West Upland oil & XXIII Talara 21-Nov-07 93,198.956 543.00 gas

Petro Bayovar XXVII Sechura 16-Apr-09 49,821.139 144.00

Ricoil S.A. XXIX Lancones 18-Set-15 303,802.343 000.00

KEI Peru Z-38 Tumbes, Talara 12-Apr-17 487.545.511 112,555.00

Continental Anadarko Z-61 Trujillo 09-Oct-17 680,519.430 170.00 Shelf Anadarko Z-62 Trujillo 09-Oct-17 656,356.153 154.00

Anadarko Z-63 Trujillo 09-Oct-17 548,049.976 129.00

82 Hydrocarbons and energy in Peru 2D and 3D seismic

Registered 2D seismic, (2007-2017)

12000 11,019.4 10000

8000 7,405.0 6,426.6 5,966.9 m

000 5,070.2

000 2,503.2 2000 1,332.9 1,150.7 2,035.9 109.0 0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

Registered 3D seismic, (2007-2017)

000

00 4,313.0 000 00 3,018.0 000 2,694.1 2,497.2 200 2,392.5 m 2,040.1 2000

100 1,425.9

1000

00 483.9 0.0 0.0 0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

*As of December, 2017 Source: Perupetro

Hydrocarbons and energy in Peru 83 Peru's oil & gas investment guide 2018 - 2019

2D and 3D seismic

Development drilling (2003-2017)

225 200 175 150 125 100 75 umer o ells umer o 50 25 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

Northwest 1 2 9 1 10 128 18 19 1 0 2 1

Plinth 0 2 22 2 19 20 2 0 0

Jungle 10 10 9 9 12 1 10 8 2 2 1

Total 2 9 8 1 18 1 21 22 19 8 101 81 1

Exploratory drilling (2003-2017)

10 8 6 4 2 umer o ells umer o 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

Northwest 2 0 2 1 0 0 0 11 0 0 0

Plinth 0 1 2 1 1 2 2 0 0 0 0

Jungle 1 1 2 9 1 0 2

Total 8 9 12 9 1 9 12 0 2

*As of December, 2017 Source: Perupetro

84 Hydrocarbons and energy in Peru Hydrocarbons and energy in Peru 85 Hydrocarbons in Peru

3 Secc B | Gas to Power and other energy sources

86 Peru's oil & gas investment guide 2018 - 2019

01 Importance of the energy sector

Evolution of the electrical market

aria droeletri onstrution o arani allauana nauguration o ilina a 199 Plant starts anta osa ermal droeletri Plant droeletri Plant ermal entral ational letri oerating entral 00 onstrution starts oerating a o 128 a o ervies a irst 0 ig tension te letri ndustr transmission line aralana ima 1884 1895 1905 1938 1956 1962 1886 1903 1907 1952 1958 1965 irst 220 transmission ima onton onstrution o ima-osia irst 18 tr aon del Pato line uino ima ain uare is osia transmission line transmission line droeletri Plant auiu illuminated or te droeletri Plant starts oerating aruamao a 20 starts droeletri Plant first time 298 onstrution o roa oerating 0 starts oerating anaoto droeletri uina droeletri Plant Plant starts oerating

o legal regulation inistr o eveloment or te setor suervises te setor

e antaro irst eletri e nteronneted nauguration o te aruauero e interonneted droletri Plant interonnetion eteen stem o tird ase o te droeletri sstem o starts to e uilt ima and antaro ort-enter Peru antaro stem and starts nauguration o riota antaro droeletri is ormed droeletri Plant starts oerating oerating 1 droeletri Plant Plant starts oerating 1966 1973 1981 1984 1990 1994 1972 1979 1982 1989 1992 1996 a 1921 te nauguration o te a o 20 arani a o 28 a 2 a letri etor is seond ase o eneral letriit droeletri entral letri onessions tat reates nationalied te antaro a 18 starts a droeletri Plant oerating urrent regulator nteronnet stem entit o outern Peru

inistr o nerg ond ines suervises te setor

egislative eree egislative eree o 122 o 1002 Promotion o rameor or te ureme eree o e amisea Proet te develoment o Operation of first solar develoment o Puli-Private 020-199- starts oerating reneale energ lant eartiion olar ssoiations egislative enial regulation or a 2990 a tat a o 2982 eree o 1221 te ualit o eletri strengtens te energeti nergeti oial nanement o te regulation servies seurit nlusion und o energ distriution 1997 2004 2008 2012 2015 2000 2006 2011 2014 2016 e antaro oaaa a o 2882 a or omined gas le Inauguration of first out nergeti ode 220 transmission the efficient development alla ermal entral ind arm arona line starts oerating o eletriit generation starts oerating atinal nteronneted a o 289 ural irst 00 letri stem electrification Law transmission line ila a Planiie - aallal

suervises te setor

Source: OSINERGMIN

Hydrocarbons and energy in Peru 87 Peru's oil & gas investment guide 2018 - 2019

The Peruvian electricity history Years later, the non-military political crisis, and the low scope demonstrates that since the first Government of Fernando of the electricity services and time electricity was introduced Belaunde Terry entered into infrastructure. in Peru - around 1886 - it has force. During his regime, in 1982, In this regard, as the economic dramatically changed to reach the the Electricity General Law No. and customs framework had to development level that this sector 23406 was enacted. Through be modernized, other sectors has nowadays. this Law, the electricity public included modifications to its service remained in services of the Prior to year 1970, the electricity current regimes in order to National Electricity Corporation, sector was developed by a private guarantee better investment this is, ElectroPeru, but through its corporate cluster called “Empresas conditions and to promote regional affiliates. Eléctricas Asociadas” who corporative competitiveness. operated the public lightning and Under this new scheme, ten Under this new context, many the public trolley service in Lima. regional affiliates were created national corporations were Up to this time, such services in order to distribute electricity, privatized. This was enforced by were supervised by the Ministry of aiming to cover the supply means of Legislative Decrees No. Development. needs in the Peruvian territory. 662 and No. 674. Electroperu was the main In 1970, the electricity sector As a result, the electric sector was corporation, considered as the regulation changed radically as reformed during the 90s. At this holding corporation and the one the military government of the time, the sector was oriented to in charge of the hydroelectrical Peruvian president Juan Velazco enhance the supply of electricity power plant of Mantaro, Cañón del Alvarado entered into force, and through an open market to Pato, Carhuaquero and Carhua, was continued by the military international commerce. Under and also of the north-center government of the Peruvian this new context, Law No. 25844, transmission grids that were not president Francisco Morales Law of Electrical Concessions was assigned to the regional affiliates. Bermudez. enacted in order to attract new Despite the efforts made to private investment to activities In such years, the Government enhance the regulation of the that were not successfully being managed to nationalize the electricity sector, in 1990, only assured for the rendering of electrical industry through Law 45% of the Peruvian population electrical services and to end the No. 19521 and created the had access to electricity. In that monopoly that covered the sector. National Electricity Corporation moment, the electricity supply – Electroperu. As of this, In this regard, Law No. 25844 only covered 74% of the demand, Electroperu took all the electricity stated the conditions in which new and the distribution losses were sector chain activities (generation, agents could participate in the equivalent to almost 20% of the transmission and distribution), Electrical Sector in each activity electricity. becoming the new owner of the of the electrical sector chain total assets that were previously Later, in 1991, the Government (generation, transmission and used and operated by the cluster of initiated the distribution). The main principles called “Empresas Eléctricas restructuring of the regulatory to be applied in the sector were Asociadas”, but now under the framework of the electricity the free entrance and the open name Electrolima S.A. sector due to the big social and access, considering pricing

88 Hydrocarbons and energy in Peru freedom for the generation and Avoidance of Monopolies and Regarding the specific case of commercialization activities, and Oligopolies in the electrical Sector rural electrification, according to regulated prices for transmission was published. Law No. 28749 – Law of Rural and distribution activities. Electrification, an important issue Currently, according to the to address is the development of In connection to the National Fund for the Finance systems in isolated and borderline abovementioned, years later, of the Corporate Activity of the locations in which the lack of in 1996 and 1997 specific Peruvian Government (FONAFE), electricity makes impossible the regulatory Laws for the the Government still has development of activities. That’s sector were enacted. In 1996, participation in Companies who the reason why the participation Law No.26734 created the develop activities in the electricity of the Government in the electrical Supervisory Body of Private sector. However, its participation in sector is focused outside the Investment in Energy and Mines this sector is very limited (sixteen capital. Only in this case is it (OSINERGMIN), the regulator corporations located outside the imperative that the Government entity of the sector to which the capital) in comparison with the assumes a subsidiary role as Ministry of Promotion functions in initial years of the sector, as the investor because executing energy electrical matter were transferred; following chart shows: projects in these areas is highly and, in 1997, the Law for the expensive. Nowadays, the private Generation activities Distribution activities participation in the electrical • Empresa de Generacion Electrica • Electro Puno S.A.A. market is growing more. Many Machupicchu S.A legal dispositions have been • Electrosur S.A. • Empresa de Generacion Electrica de enacted to enhance the conditions Arequipa S.A. • Electro Sur Este S.A.A. for the development of the sector • Empresa de Generacion Electrica del • Electro Ucayali S.A. considering the new global trends Sur S.A. • Empresa de Administracion de and the needs of the Peruvian • Empresa de Generacion Electrica San Infraestructura Electrica S.A. population. Considering this, the Government is focusing on the Gaban S.A. • Empresa de Administracion de introduction of incentives for • Electroperu S.A Infraestructura Electrica S.A. attracting investment in clean • Sociedad Electrica de Arequipa energies infrastructure in order • Electro Oriente S.A. to increase the offer of energy all • Electrocentro S.A. around the Peruvian territory. • Electronoroeste S.A. • Electronorte S.A. • Hidrandina S.A.

Source: National Fund for the Finance of the Corporate Activity of the Peruvian Gov- ernment – FONAFE / EY

Hydrocarbons and energy in Peru 89 Peru's oil & gas investment guide 2018 - 2019

Investments in the • Mantaro Nueva Yanango grid, index shows that Peru is the held by Interconexión Eléctrica 28th most attractive country for electrical market S.A. investments in energy in relation to a ranking of 47 countries. According to Peru’s Central • Intipampa, held by Engie Bank, 6.8% of the investment to Energia Peru S.A. be made in 2018-2019 will be • Wayra 11, held by Grupo Enel. related to energy activities. As of December 31, 2017 there Another useful indicator that were already 21 announced show our attractiveness for projects worth USD1, 257 million investments in the energy sector approximately. is the Renewable Energy Country Attractiveness Index (RECAI) The projects to be developed developed by EY on the basis or continuing to be developed of the evaluation of factors that consist of the construction of drive market attractiveness in a generation and transmission grids world where renewable energy all along the Peruvian territory. has gone beyond decarbonization The main projects that have been and reliance on subsidies. This announced are:

As of October, 2017

Technology indices scores (out of 100) Overall Previous Country RECAI Onshore Offshore Solar PV Solar Blomass Geother- Small Marine Rank Rank Score wind wind CSP mall hydro 1 1 China 67.4 51.3 57.0 55.1 40.5 44.4 23.2 41.2 35.5

2 2 India 61.9 49.2 19.0 52.6 38.2 45.3 29.4 39.8 25.5

3 3 United States 61.8 49.8 51.6 46.1 37.6 41.8 43.9 36.0 32.8

4 4 Germany 60.7 45.0 55.3 44.8 16.9 44.4 36.8 29.1 19.5

5 5 Australia 60.5 45.9 32.9 50.2 38.4 34.8 24.9 33.8 33.3

6 8 France 57.2 43.5 39.0 44.4 22.6 45.5 31.8 27.5 37.7

7 7 Japan 56.7 41.3 45.4 43.7 18.0 47.9 45.7 30.4 25.2

8 6 Chile 56.1 43.2 20.2 45.6 35.7 37.7 41.2 36.8 29.0

9 9 Mexico 55.8 42.6 19.5 48.8 25.1 43.4 43.3 30.6 21.6

10 10 54.6 42.8 57.3 36.6 13.3 46.2 25.7 26.8 38.7

11 12 Argentina 54.1 44.3 20.8 45.4 32.5 37.3 32.3 34.1 19.8

12 11 Canada 53.5 44.6 28.8 41.0 18.5 37.9 20.5 41.7 42.5

13 14 Morocco 53.3 41.2 17.1 45.3 38.4 6.6 13.6 16.9 13.6

90 Hydrocarbons and energy in Peru Technology indices scores (out of 100) Overall Previous Country RECAI Onshore Offshore Solar PV Solar Blomass Geother- Small Marine Rank Rank Score wind wind CSP mall hydro 14 13 53.2 43.5 47.3 35.3 17.2 44.2 16.6 18.9 25.6

15 16 52.5 41.6 45.6 36.2 14.2 36.0 25.2 24.1 16.3

16 17 Turkey 52.2 43.4 18.9 42.1 24.6 35.9 40.1 38.3 16.4

17 15 Brazil 52.0 44.2 22.8 43.5 21.5 49.3 14.9 42.9 17.8

18 18 Italy 50.5 39.5 31.3 37.2 30.5 45.6 37.4 39.9 19.6

10 27 Egypt 50.5 42.1 14.1 45.7 39.0 12.8 11.6 14.8 11.6

20 22 Portugal 50.3 34.9 32.0 30.8 25.7 36.9 23.7 30.5 26.7

21 23 50.2 39.1 15.6 42.1 18.1 42.9 42.0 39.6 26.3

22 24 Belgium 50.1 40.9 43.6 33.3 13.8 41.0 19.8 22.8 14.2

23 19 49.8 39.7 17.8 42.5 37.1 32.8 13.9 29.0 22.9

24 21 Jordan 49.6 37.9 13.6 42.6 29.3 20.9 13.1 16.6 13.1

25 20 49.1 42.2 32.2 32.0 14.0 40.0 20.1 35.0 28.7

26 26 Pakistan 48.9 39.2 12.8 42.9 21.4 20.3 18.5 34.5 16.8

27 29 Spain 40.8 39.5 21.9 36.9 24.9 37.4 17.8 26.2 23.1

28 28 Peru 48.5 37.0 14.5 40.2 23.0 32.9 23.6 36.2 18.4

29 33 South Korea 48.2 28.2 29.7 39.9 18.5 32.1 18.9 26.2 39.1

30 25 Israel 48.0 30.9 13.7 43.2 31.7 21.2 14.1 21.6 17.7

31 40 Ireland 47.6 41.8 26.7 31.9 13.6 31.5 22.6 25.1 29.1

32 30 Finland 47.5 43.8 41.2 24.3 14.5 48.1 16.9 27.8 14.5

33 32 Greece 47.4 37.4 24.1 37.1 28.7 18.8 22.3 25.5 12.8

34 31 Thailand 47.1 34.9 15.0 38.6 21.7 40.4 16.1 27.3 17.6

3S 36 Uruguay 46.1 39.0 16.6 36.1 17.6 34.9 14.2 23.5 18.2

36 - 45.7 36.8 20.8 36.5 16.7 38.9 16.7 34.4 17.1

37 35 Kenya 45.7 37.3 13.7 38.9 21.6 27.1 45.9 30.5 11.7

38 - Algeria 45.6 33.5 14.2 42.8 32.9 17.3 11.2 17.7 11.2

39 39 Dominican 45.5 34.6 14.1 37.6 19.0 20.0 14.4 31.6 12.8 Republic

40 37 Kazakhstan 45.4 36.4 12.7 38.8 16.6 13.4 12.2 25.6 12.2

Source: EY

The results are quite encouraging considering that it was not until 2008 that the promotion of a regulatory policy on renewable energies began in Peru.

Hydrocarbons and energy in Peru 91 Peru's oil & gas investment guide 2018 - 2019

Government take in the electrical market Fiscal revenues of the Electricity Sector The Electricity Sector generates an important amount of fiscal revenues regarding the general applicable taxes to all corporations (Income Tax and Value Added Tax), despite of the special rules applicable to the sector for promoting the investments. The following chart shows the revenues obtained by the Tax Authority for Electricity Generation in the recent years, and the percentage that represents in relation to the total fiscal revenues of a year.

Fiscal revenues 2006 - 2017 (in millions of Soles) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Income Tax 397 541 680 691 706 701 949 1,039 1,113 1,281 1,339 1,191 VAT 658.7 659.4 688.2 753.9 711.1 795.3 964.1 947.1 1016.2 1217.2 1273.6 1421.4

1,056 1,201 1,368 1,445 1,417 1,497 1,914 1,986 2,129 2,498 2,613 2,612

Source: SUNAT/EY

Level of participation in the total fiscal revenues 2006 - 2017 (in percentage) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Income Tax 4.0% 4.1% 4.6% 6.5% 4.8% 3.6% 4.6% 5.3% 6.0% 7.6% 8.1% 7.7% VAT 5.5% 4.9% 4.4% 4.4% 3.6% 3.6% 3.9% 3.5% 3.5% 4.0% 4.1% 4.4%

Source: SUNAT/EY

Special contributions OSINERGMIN Contribution

This contribution is applicable 2014 (S/) 2015 (S/) 2016 (S/) 2017 (S/) to generation, transmission and OSINERGMIN Contribution paid by distribution concessionaries of the 89’394,684 102’650,080 121’522,316 121’951,581 corporations electricity sector, and it should be of the electricity sector paid to the Supervisory Body of Total OSINERGMIN Private Investment in Energy and Contribution Mines (OSINERGMIN). The rate (Mining, hydrocarbons 339’614,764 307’408,959 331’412,821 368’314,166 and electricity of this contribution is 0.52 % for companies) 2017, 0.51% for 2018 and 0.50% for 2019, applied on their monthly Source: OSINERGMIN billing after deducting VAT.

92 Hydrocarbons and energy in Peru OEFA Contribution

This contribution is applicable 2014 (S/) 2015 (S/) 2016 (S/) 2017 (S/) to generation, transmission and OEFA Contribution distribution concessionaries of the paid by 17’686,596 22’376,732 24’789,071 25’518,251 electricity sector, and it should be corporations of the paid to the Enviromental Audit and electricity sector Total OEFA Evaluation Agency (OEFA). The 109’605,747 118’661,293 133’041,398 142’090,247 Contribution rate of this contribution for years 2017-2019 is 0.11 % applied Source: Integrated System of Financial Management – SIAF on their monthly billing after deducting VAT.

Hydroenergetic Canon revenue The Hydroenergetic Canon is a are the Local and Regional The following chart shows the portion of the income earned by Governments, and this kind of amount of revenues obtained the Government for the payments canon is equivalent to 50% of by Hydroenergetic Canon that is made by corporations regarding the Corporate Income Tax paid distributed to Local and Regional the utilization of hydric resources by corporations that are holders Governments: in electricity generation activities. of concessions in which hydric The beneficiaries of this Canon resources are used.

2014 (S/) 2015 (S/) 2016 (S/) 2017* (S/)

Transfers to Regional 50’513,894 54’435,507 51’075,503 33’802,592 Governments

Transfers to Local 151’541,684 163’302,496 153’208,597 101,429,714 Governments

*As of September, 2017. Source: Consultation of transfers to the National, Regional and Local Goverments - MEF

Hydrocarbons and energy in Peru 93 Peru's oil & gas investment guide 2018 - 2019

02 Energy production and exports Energy supply With the development of has become one of the main economy, energy needs have issues when elaborating National increased. As this relationship Policies on the economy and between the development of social issues. economy and the use of energy is a direct one, through the years, Currently, energy offered by the Government has put effort corporations in the energy into trying to connect every business can be classified area of Peru to a stable source according to the following: of energy. In this sense, energy

droaron Non-renewable sources oal

idroeletri energ onventional over 20 termoeletri energies energ oal and diesel Renewable sources on-onventional ind oer solar energ energies iomass idroeletri energ less tan 20

94 Hydrocarbons and energy in Peru Production estructure (2017)

In the recent years, a new 0.5% global trend in clean energy has emerged, which makes 20.0% 65.7% atural as and possible the increase in electrical generation based in Petroleum renewable sources. However, it is still not the most important eneale nerg source of energy in the Peruvian droeletri iouels production of the electrical 13.8% ind solar geotermi iomass et market. The production of energy using these new kind of aron energies is expected to increase in the following years as our Source: SNMPE energy matrix will tend to become a diversified one. According to the report Annual production of electrical generation power stations developed by the National Society of Mining, Petroleum of COES (GWh), accumulated to december 2017 and Energy (SNMPE) and the Economic Operation Committee Variation Plants 2017 2016 of the National Interconnected Energy % System (COES), the energy Hydroelectric 26 739.54 22 155.88 4 583.66 20.69% produced during 2017 was Thermoelectric 19 774.81 23 883.16 -4 108.35 -17,20% mostly based on hydric sources, Renewable 2 478.90 2 287.37 191.53 8,37% being followed by energy Total 48 993.25 48 326.42 666.83 1,38% produced by gas (thermoelectric energy). Just a little energy has been being produced on wind Source: COES and solar plants (renewable sources).

Hydrocarbons and energy in Peru 95 Peru's oil & gas investment guide 2018 - 2019

Despite that fact, we must point out that the promotion of investment in the energy sector has been established as a national priority in the past years and corporations have introduced new technologies for efficient processes, and as a result the generation of energy has increased year by year. As an example of this, in 2012, the energy produced in Peru reached 37’617,577.57MWh, while five years later, in 2017, the energy produced was about 49’570,266.34MWh.

2012 2013 2014 2015 2016 2017

MWh 37’617,578 39’916,920 42’050,519 44’786,562 48’587,388 49’570,266

Source: COES/EY

Electricity demand The demand of the electricity their supplier, which can be Investment in Energy and Mines sector is split in three groups: the a distributor or a generation (OSINERGMIN) is the entity Interconnected Electrical National corporation of the SEIN. responsible for setting the prices System (SEIN), the Isolated for these kind of users. On the other hand, the regulated Systems, and self-producers. users group consists of users who The energy demanded by all Between these demanding are subject to pre-established users always increases month by groups, two classes of consumers prices (i.e. bar prices) with no month. The demand in the prior are identified: free users and negotiation capacity when months that were registered by regulated users. contracting with energy suppliers. the COES are the following: Free users are the electricity The Supervisory Body of Private users who are not subject to pricing regulations in regards to the electricity and power Minimum demand Average demand Maximum demand that they use. This category (Mw) (Mw) (Mw) of users has a sub-category of February 2018 4 782,692 6 617,315 6 576,968 “great users”, which consists January 2018 5 093,406 6 576,545 6 489,035 of the users that have signed December 2017 4 717,506 6 413,413 6 462,403 contracts to obtain power of 10MW or more. This class of November 2017 5 042,870 6 333,720 6 425,457 users have negotiation capacity October 2017 4 497,970 6 147,494 6 341,241 in order to set prices along with Source: COES/EY

96 Hydrocarbons and energy in Peru 1000 • According to other specialists of the sector, the sudden suspension of new big projects 12000 due to the economic slowdown and political factors create 9000 bottlenecks in the country between investments in energy 000 projected for big demands, and the growth not realized in 000 energy demand that remained at a similar level. New big projects would increase the 0 energy demand. 2011 2012 2013 2014 2015 2016 2017 • Others argue as an important aimum demand nstalled aait issue regarding the Peruvian demand of energy, the Source: COES/EY presence of clandestine users. Such kind of users does not allow for a reliable measurement of the energy demand as they cannot be Nevertheless, regarding the • The large amount of projects observed in plain sight by users’ needs, it is said that of energy generation that have regulators. the Peruvian market has an been awarded in the past, now “oversupply of energy” because under operation, as cause of Moreover, for experts as Edwin a gap between installed capacity the generated electricity that Quintanilla – former Vice Minister and consumption is reported. This has no way out into the market of Energy and Mines of Peru-, means that the energy reserve as its amount exceeds the this “oversupply of energy” is margin has gone from 30% during capacity of transmission grids. logical and common in systems 2011 to almost 50% in 2015, of electrical generation, as there • Electricity generation reaching more than 50% in 2017. is always an additional reserve companies pointed out that (to face a drought, an incident in However, it is important to there are lots of energy the gas pipeline, maintenance or bear in mind that some experts generators operating in the failure of a power plant, among of the industry attribute this market, so the need to sale others), since the supply must “oversupply of energy” to the produced energy be continuous and sustained. external factors of the Peruvian to a price war. Because of Therefore, the expert explains electric market, not connected this, prices offered –most that there is always a reservation with the real necessity of energy of the time- get so low that on numbers that the Ministry in the country. To this regard, they become unsustainable of Energy and Mines (MINEM) some of the reasons given to for the costs structure of the estimates. explain this “oversupply of generators, distorting the energy” are the following: natural energy market. Countries of the South American Region such as Chile have

Hydrocarbons and energy in Peru 97 Peru's oil & gas investment guide 2018 - 2019

reserves of almost 90% in its (via concessions) related to the lowest prices until covering central interconnected system, generation, transmission and the energy quota. By the end of Ecuador 50%, and Colombia 60%, distribution of energy. This entity 2017, the Supervisory Body of which confirms that they are is also entitled to evaluate and Private Investment in Energy and required reserves to address the award private initiative projects Mines (OSINERGMIN) had already main risks. regarding the activities developed hosted four auctions. in the electricity sector according Thus, from the point of view of Regarding generation activities, to the applicable laws. this expert, the energy reserve up to 2017, 20 thermoelectric margin is not an indicator of Grant of a MINEM plants, 32 hydroelectric plants, “oversupply of energy” in an concession and 29 plants with renewable economic and literal sense energy are operating in the This entity (Ministry of Energy because the country still has country. In addition, 34 total and Mines - MINEM) is authorized an energy need to be covered. definitive concessions were to award definitive and temporal External factors of the electrical granted (16 hydroelectric plants concessions once the requests market contribute to accumulated and 18 with renewable energy), of the interested corporations energy reserves that in the end and they are still in project phase. are duly evaluated according are a good problem because to the requirements stated in On the other hand, up to February energy reserve margins show the Electric Concessions Law. 2018, Peruvian Goverment the high growth market and its This entity also develops the records 16 temporal concessions externalities. conditions and requirements to to carry out Feasibility Studies be considered in the Supervisory related to hydraulic plants (8), Infrastructure of the Body of Private Investment in wind farms (4), and solar plants electric market Energy and Mines (OSINERGMIN) (2). auctions for generation of Many projects of energy electricity based on renewable generation and energy energies. transmission grids have been developed in the last decade due Authorization through to the guarantees and conditions OSINERGMIN auction stated in legal dispositions. This kind of concession award is According to our legal framework, only applicable to generation of the authorization to develop electricity based on renewable energy related activities can energies in the terms of be awarded by means of the Legislative Decree No. 1002. following alternatives: The auction is on the energy quota to be established by the Award of a ProInversion Ministry of Energy and Mines project (MINEM). For this purpose, ProInversion (Peruvian interested corporations propose investment agency in charge a determined amount of energy of the promotion of business (MWh) and its associated price opportunities) is authorized to (USD/MWh). The awards are given award pre-designed projects to the corporations that proposed

98 Hydrocarbons and energy in Peru The energy reserve margin is not an indicator of “oversupply of energy” in an economic and literal sense because the country still has an energy need to be covered.

Hydrocarbons and energy in Peru 99 Peru's oil & gas investment guide 2018 - 2019

GENERATION ACTIVITIES DEVELOPED UNDER AUTHORIZATIONS No. Plant Name Concession Holder Installed Capacity (MW) Location Investment Amount (in millions of US$) OPERATING PLANTS - THERMOELECTRIC PLANTS (GAS TO POWER) 1 C.T. C.C. KALLPA IV KALLPA GENERACION S.A. 873.9 LIMA 395 2 C.T. C.C. CHILCA 1 ENERSUR 862.2 LIMA 374 3 C.T. SANTO DOMINGO DE TERMOCHILCA S.A.C. 197.6 LIMA 128.5 LOS OLLEROS 4 C.T. LAGUNAS NORTE MINERA BARRICK MISQUICHILCA S.A. 12.78 LA LIBERTAD 640

5 C.T. TABLAZO SUDAMERICANA DE ENERGIA DE PIURA 30 PIURA 22.5 6 C.T. DE COGENERACION ILLAPU ENERGY S.A. 13.6 LIMA 14 HUACHIPA 7 C.T. RECKA SOCIEDAD MINERA CERRO VERDE S.A.A. 181.3 LAMBAYEQUE 102.53 8 C.T. PUERTO CALLAO APM TERMINALS CALLAO S.A. 0.875 LIMA 1.69 9 C.T. CHILCA 2 ENRESUR 75.4 (simple cycle) LIMA 140 112.8 (combined cycle) 10 C.T. MALACAS ENEL GENERACION PIURA 52.8 PIURA 55 11 C.T. IQUITOS NUEVA GENRENT DEL PERU S.A.C. 77.7 LORETO 108.7

Source: MINEM

GENERATION ACTIVITIES DEVELOPED UNDER CONCESSION AND COLD RESERVE CONTRACTS No. Plant Name Concession Holder Installed Capacity (MW) Location Investment Amount (in millions of US$) OPERATING PLANTS - THERMOELECTRIC PLANTS (GAS TO POWER) 1 C.T. PLANTA ILO TERMOSUR 564 MOQUEGUA 220.4 2 C.T. MALACAS EEPSA 200 PIURA 106.4 3 C.T. CICLO COMBINADO FENIX POWER PERU 534.3 LIMA 857 CHILCA (FENIX) 4 C.T. PLANTA ETEN PLANTA DE RESERVA FRIA DE 240.5 LAMBAYEQUE 145 GENERACION ETEN S.A. 5 C.T. PUERTO BRAVO SAMAY I S.A. 720 AREQUIPA 390 6 C.T. PLANTA PUCALLPA INFRAESTRUCTURAS Y ENERGIAS DEL 45.63 UCAYALI 23.8 PERU S.A.C. 7 C.T. PUERTO MALDONADO INFRAESTRUCTURAS Y ENERGIAS DEL 20.08 MADRE DE DIOS 9.27 PERU S.A.C. 8 C.T. ILO 4 ENERSUR 3X236.67 MOQUEGUA 432.4 9 C.T. IQUITOS NUEVA GENRENT DEL PERU S.A.C. 77.7 LORETO 108.7

Source: MINEM

100 Hydrocarbons and energy in Peru GENERATION ACTIVITIES UNDER DEFINITIVE CONCESSIONS No. Plant Name Concession Holder Installed Capacity Location (MW) OPERATING PLANTS - HYDROELECTRIC PLANTS 1 CH ARICOTA I EGESUR S.A. 23.8 TACNA

2 CH ARICOTA II EGESUR S.A. 11.9 TACNA

3 CH CAHUA STATKRAFT PERU S.A. 39.6 LIMA AND ANCASH

4 CH CALLAHUANCA ENEL GENERACION PERU S.A.A. 80.7 LIMA

5 CH CAÑON DEL PATO ORAZUL ENERGY EGENOR 256.55 ANCASH

6 CH CARHUAQUERO ORAZUL ENERGY EGENOR 95.0 CAJAMARCA

7 CH CERRO DEL AGUILA CERRO DEL AGUILA S.A. 525.0 HUANCAVELICA

8 CH CURUMUY SINDICATO ENERGETICO S.A. - SINERSA (before: Guicon S.A.) 12.0 PIURA

9 CH CHAGLLA EMPRESA DE GENERACION HUALLAGA S.A. 456.0 HUANUCO

10 CH CHEVES STATKRAFT PERU S.A. (before: Empresa de Generacion Electrica 168.2 LIMA Cheves S.A. EGECHEVES)

11 CH G1 EL PLATANAL COMPAÑIA ELECTRICA EL PLATANAL S.A. 220.0 LIMA (before: Cementos Lima S.A.)

12 CH CHARCANI IV EGASA 14.4 AREQUIPA

13 CH CHARCANI V EGASA 135.0 AREQUIPA

14 CH CHIMAY CHINANGO S.A.C. 149.0 JUNIN

15 CH GALLITO CIEGO STATKRAFT PERU S.A. 34.0 CAJAMARCA (before: , Cahua S.A.)

16 CH HUANZA EMPRESA DE GENERACION HUANZA S.A. - EMGHUANZA 90.6 LIMA

17 CH HUAMPANI ENEL GENERACION PERU S.A.A. 31.36 LIMA

18 CH HUINCO ENEL GENERACION PERU S.A.A. 258.4 LIMA

19 CH MACHUPICCHU EGEM S.A. 91.4 CUSCO

20 CH MALPASO STATKRAFT PERU S.A. 54.4 JUNIN AND PASCO (before: Centromin Peru S.A., Electroandes S.A.)

21 CH MANTARO (SANTIAGO ELECTROPERU S.A. 798.0 HUANCAVELICA, ANTUNEZ DE MAYOLO) JUNIN AND PASCO

22 CH MARAÑON HIDROELECTRICA MARAÑON S.R.L. 18.4 HUANUCO

23 CH MATUCANA ENEL GENERACIO N PERU S.A.A. 120.0 LIMA

24 CH MOYOPAMPA ENEL GENERACION PERU S.A.A. 63.0 LIMA

Hydrocarbons and energy in Peru 101 Peru's oil & gas investment guide 2018 - 2019

GENERATION ACTIVITIES UNDER DEFINITIVE CONCESSIONS No. Plant Name Concession Holder Installed Capacity Location (MW) OPERATING PLANTS - HYDROELECTRIC PLANTS 25 CH PACHACHACA STATKRAFT PERU S.A. 12,0(3) JUNIN

26 CH RESTITUCION ELECTROPERU S.A. 210.4 HUANCAVELICA

27 CH SAN GABAN II EMPRESA DE GENERACION ELECTRICA SAN GABAN S.A. 110.0 PUNO

28 CH SANTA TERESA S.A.A. (before: EGEMSA) 98.1 CUSCO

29 CH YANANGO CHINANGO S.A.C. (before: Compañia Minera San Ignacio de 40.5 JUNIN Morococha S.A.)

30 CH YAUPI STATKRAFT PERU S.A. 108.0 JUNIN AND PASCO

31 CH YUNCAN ENGIE ENERGIA PERU S.A. (before: EGECEN S.A., ENERSUR S.A.) 130.0 PASCO

32 CH QUITARACSA I ENGIE ENERGIA PERU S.A. (before: ENERSUR S.A.) 112.0 ANCASH

Source: MINEM

GENERATION ACTIVITIES UNDER DEFINITIVE CONCESSIONS N° Plant Name Concession Holder Installed Capacity Location (MW) OPERATING PLANTS - WITH RENEWABLE ENERGETIC SOURCES (RER) HYDROELECTRIC PLANTS 1 CH CAÑA BRAVA ORAZUL ENERGY EGENOR 5.7 CAJAMARCA

2 CH CARPAPATA III GENERACION ELECTRICA ATOCONGO S.A. 12.80 JUNIN

3 CH CHANCAY SINDICATO ENERGETICO 19.20 LIMA

4 CH HUANCHOR HIDROELECTRICA HUANCHOR S.A.C 16.2 LIMA

5 CH LA JOYA GENERADORA DE ENERGIA DEL PERU S.A. 9.6 AREQUIPA

6 CH RUCUY EMPRESA DE GENERACION ELECTRICA RIO BAÑOS S.A.C. 20.00 LIMA

7 CH SANTA CRUZ I HIDROELECTRICA SANTA CRUZ S.A.C. 5.90 ANCASH

8 CH SANTA CRUZ II HIDROELECTRICA SANTA CRUZ S.A.C. 6.0 ANCASH

9 CH QUANDA ADINELSA 2.76 CAJAMARCA

10 CH YANAPAMPA ELECTRICA YANAPAMPA S.A.C. 4.12 ANCASH

102 Hydrocarbons and energy in Peru GENERATION ACTIVITIES UNDER DEFINITIVE CONCESSIONS N° Plant Name Concession Holder Installed Capacity Location (MW) OPERATING PLANTS - WITH RENEWABLE ENERGETIC SOURCES (RER) 11 CH PIAS 1 CONSORCIO MINERO HORIZONTE S.A. (before: Aguas y Energia 12.6 LA LIBERTAD Peru S.A.)

12 CH POECHOS I SINDICATO ENERGETICO S.A. - SINERSA 15.4 PIURA

13 CH POECHOS II SINDICATO ENERGETICO S.A. - SINERSA 10.0 PIURA

14 CH LAS PIZARRAS EMPRESA ELECTRICA RIO DOBLE S.A. (before: ABR Ingenieros 18.8 CAJAMARCA S.A.C.)

15 CH RUNATULLO III EMPRESA DE GENERACION ELECTRICA DE JUNIN S.A.C. 20.0 JUNIN

16 CH RUNATULLO II EMPRESA DE GENERACION ELECTRICA DE JUNIN S.A.C. 19.1 JUNIN

17 CH POTRERO EMPRESA ELECTRICA AGUA AZUL S.A. 19.9 CAJAMARCA BIOMASS THERMAL PLANTS 18 CTB PARAMONGA 1 AGRO INDUSTRIAL PARAMONGA S.A.A. 23 LIMA

19 CTB CAÑA BRAVA BIOENERGIA DEL CHIRA S.A. 12.0 PIURA

20 CTB MAPLE ETANOL AGROPECUARIA AURORA S.A.C. (before: Maple Etanol S.R.L.) 37.52 PIURA SOLAR PLANTS 21 CS MAJES SOLAR 20T GTS MAJES S.A.C. 20.0 AREQUIPA

22 CS TACNA SOLAR 20TS TACNA SOLAR S.A.C. 20.0 TACNA

23 CS PANAMERICANA SOLAR PANAMERICANA SOLAR S.A.C. 20.0 MOQUEGUA 20 TS

24 CS REPARTICION SOLAR GTS REPARTICION S.A.C. 20.0 AREQUIPA 20T

25 CS MOQUEGUA FV MOQUEGUA FV S.A.C. 16.0 MOQUEGUA WIND FARMS 26 CE PARQUE EOLICO PARQUE EOLICO MARCONA S.R.L. 32.0 ICA MARCONA

27 CE TALARA ENERGIA EOLICA S.A. 30.0 PIURA

28 CE CUPISNIQUE ENERGIA EOLICA S.A. 80.0 LA LIBERTAD

29 CE PARQUE EOLICO TRES PARQUE EOLICO TRES HERMANAS S.A.C. 97.15 ICA HERMANAS

Source: MINEM

Hydrocarbons and energy in Peru 103 Peru's oil & gas investment guide 2018 - 2019

GENERATION ACTIVITIES UNDER DEFINITIVE CONCESSIONS (PROJECTS)

No. Plant Name Concession Holder Installed Capacity Location Investment Amount (MW) (in millions of US$)

HYDROELECTRIC PLANT 1 CH TARUCANI TARUCANI GENERATING COMPANY SA 49.0 AREQUIPA 70.9 2 CH LA VIRGEN LA VIRGEN SAC 84.0 JUNIN 165.7

3 CH CENTAURO I Y III CORPORACION MINERA DEL PERU SA 12,5 (1st. phase) ANCASH 4.1 CORMIPESA 12,5 (2nd. phase) 4 CH TULUMAYO IV EGEJUNIN TULUMAYO - IV SAC 56.2 JUNIN 105.2 5 CH MOLLOCO GENERADORA ELECTRICA 302.1 AREQUIPA 619.7 MOLLOCO SAC - GEMSAC 6 CURIBAMBA ENEL GENERACION PERU SAC 192.0 JUNIN 577.38 7 OLMOS 1 SINDICATO ENERGETICO SA 51.0 LAMBAYEQUE 91.38 AND PIURA 8 CH CATIVEN I y II COMPAÑIA MINERA PODEROSA SA 29.0 LA LIBERTAD 68.6 9 CH PUCARA EMPRESA DE GENERACION HIDROELECTRICA DEL 130.0 CUZCO 149.8 CUZCO - EGECUSCO 10 CH VERACRUZ COMPAÑIA ENERGETICA VERACRUZ SAC 730.0 AMAZONAS AND 1 443,76 CAJAMARCA 11 SAN GABAN III HYDRO GLOBAL PERU SAC 205.8 PUNO 329.54 12 CH TULUMAYO V EGEJUNIN TULUMAYO - V SAC 83.2 JUNIN 158.1 13 CH BELO HORIZONTE COMPAÑIA ENERGETICA DEL CENTRO SAC 180.0 HUANUCO 679.8 14 CH CHADIN 2 AC ENERGIA SA 600.0 AMAZONAS AND 2 023,0 CAJAMARCA 15 CC.HH. TINGO I, II y III ENERGORET SAC 406.0 AMAZONAS 694.49 16 CH SANTA TERESA LUZ DEL SUR SAA (5) 40,4 CUSCO 104.53 (Power boost)

Source: MINEM

104 Hydrocarbons and energy in Peru GENERATION ACTIVITIES UNDER DEFINITIVE CONCESSIONS (PROJECTS)

No. Plant Name Concession Holder Installed Capacity Location Investment Amount (MW) (in millions of US$)

WITH RENEWABLE ENERGETIC SOURCES (RER) HYDROELECTRIC PLANTS 1 CH ANGEL II GENERADORA DE ENERGIA DEL PERU S.A. 19.95 PUNO 24.24 2 CH ANGEL III GENERADORA DE ENERGIA DEL PERU S.A. 19.95 PUNO 27.22 3 CH ANGEL I GENERADORA DE ENERGIA DEL PERU S.A. 19.95 PUNO 25.6 4 CH SANTA LORENZA I EMPRESA DE GENERACION ELECTRICA SANTA 18.7 HUANUCO 38.7 LORENZA S.A.C. 5 CS INTIPAMPA ENGIE ENERGIA PERU S.A. 40 MOQUEGUA 57.5 6 CH 8 DE AGOSTO GENERACION ANDINA S.A.C. 19.00 HUANUCO 39.30 7 CH KARPA HIDROELECTRICA KARPA S.A.C. 20.00 HUANUCO 34.0 8 CH HER EDEGEL S.A.A. 0.7 LIMA 3.00 9 CH CARHUAC ANDEAN POWER S.A. 20.00 LIMA 29.88 10 CH ZAÑA ELECTRO ZAÑA S.A.C. 13.2 CAJAMARCA 22.6 11 CH PALLCA CARBON LATAM PERU S.A.C. 10.10 LIMA 23.52 (before: Andean Power S.A.) 12 CH MANTA PERUANA DE INVERSIONES EN ENERGIAS 18.44 ANCASH 18.40 RENOVABLES S.A.C. 13 CH MAMACOCHA CH MAMACOCHA S.R.L 20.00 AREQUIPA 58.82 (before: CH Laguna Azul) 14 CH COELVIHIDRO II CONSORCIO ELECTRICA DE VILLACURI S.A.C. 15.00 LIMA 17.68 15 CH COLA I HIDROELECTRICA COLA S.A. 10.40 LA LIBERTAD 9.8 AND ANCASH WIND FARMS 16 CE WAYRA I ENEL GREEN POWER PERU S.A. 132.3 NAZCA 296.6 (before: Parque Nazca) 17 CE PARQUE EOLICO GR TARUCA S.A.C. 18.37 CAJAMARCA 32.1 DUNA 18 CE PARQUE EOLICO GR PAINO S.A.C. 18.37 CAJAMARCA 32.1 HUAMBOS

Source: MINEM

Hydrocarbons and energy in Peru 105 Peru's oil & gas investment guide 2018 - 2019

TEMPORARY CONCESSIONS IN STUDY PHASE No. Plant Name Concession Holder Installed Location Investment Amount Capacity (MW) HYDROELECTRIC PLANTS 1 CH VILCANOTA 4 EMPRESA DE GENERACION ELECTRICA SANTA 62,06 CUSCO US$150,000.00 MARIA SAC 2 CH CCOLLPANI EMPRESA DE GENERACION ELECTRICA 50 CUSCO US$150,000.00 CCOLLPANI SAC 3 CH PAUCARTAMBO OXAPAMPA ENERGIA SAC 63 PASCO AND US$250,000.00 JUNIN (no VAT included) 4 C.H. NUEVA GRANADA HIDROELECTRICA NUEVA GRANADA SAC 22 CUSCO USD256,000.00 (no VAT included) 5 CH ESPERANZA MONSPI PERU SAC 20 AYACUCHO S/68,000.00 (no VAT included) 6 CH CHIMU HIDROELECTRICA CHIMU SA 50 LA LIBERTAD S/266,090.00 (VAT included) 7 CH SAN GABAN I EMPRESA DE GENERACION ELECTRICA SAN 110 PUNO USD796,500.00 GABAN SA (VAT included) 8 CH AUKA LEVEL INGENIEROS SAC 20 AYACUCHO S/38,350.00 (VAT included) WIND FARMS 9 CE TAMBORERO SOLAR INVESTMENT SAC 60.0 ANCASH US$35,000.00 (no VAT included) 10 C.E. PAMPA LOMITAS ENGIE ENERGIA PERU SA 150 ICA S/400,000.00 (VAT included) 11 C.E. PUNTA LOMITAS SUR ENGIE ENERGIA PERU SA 100 ICA S/400,000.00 (VAT included) 12 C.E. PUNTA LOMITAS ENGIE ENERGIA PERU SA 150 ICA S/400,000.00 NORTE (VAT included) SOLAR PLANTS 13 CS HIPERION HIPERION SOLAR SAC 100 AREQUIPA US$22,525.00 (no VAT included) 14 CS MAJES II SW ENERGIAS LIMPIAS DEL SUR SA 80 AREQUIPA S/19,057.00 (VAT included)

Source: MINEM

106 Hydrocarbons and energy in Peru Regarding transmission activities, up to 2017, 325 total definitive concessions were granted for gridlines projects (298 in operation and 27 under construction).

TRANSMISSION ACTIVITIES UNDER DEFINITIVE CONCESSIONS (PROJECTS) No. Transmission Line Name Concession Holder Location Tension Length Investment (kV) (km) Amount (millions of USD) 1 S.E. TULUMAYO IV - T8 (220 KV S.E. EGEJUNIN TULUMAYO-IV S.A.C. JUNIN 220 8.147 3.1 RUNATULLO III - S.E. CONCEPCION) 2 S.E. POROMA - S.E. MINA JUSTA MARCOBRE S.A.C. ICA 220 14.16 18.78 3 LOS HEROES - PARQUE INDUSTRIAL ELECTROSUR S.A. TACNA 66 11.71 34.0 4 S.E. PLANICIE - S.E. INDUSTRIALES CONSORCIO TRANSMANTARO S.A. LIMA 220 12 60.8 220 5 5 LT SE 8 DE AGOSTO - SE TINGO MARIA SE EL GENERACION ANDINA S.A.C. HUANUCO 138 58,67 8.0 CARMEN - SE 8 DE AGOSTO CH 8 DE AGOSTO - 22,9 1,83 SE 8 DE AGOSTO- SEEE 8 DE AGOSTO AND EL 13,8 0,18 CARMEN 6 C.H. CHALHUAMAYO - SET SATIPO ELECTROCENTRO S.A. JUNIN 22.9 19.27 1.3 7 S.E. BELLA UNION - S.E. CHALA SOCIEDAD ELECTRICA DEL SUR AREQUIPA 60 75.87 64.0 OESTE S.A.- SEAL 8 SE H1 - SE CHANCHAMAYO EMPRESA DE GENERACION JUNIN 60 18.5 4.4 ELECTRICA SANTA ANA S.R.L. 9 S.E. CARHUAQUERO - S.E. CAJAMARCA CONCESIONARIA LINEA DE CAJAMARCA, 220 95,76 106.887 NORTE S.E. CAJAMARCA NORTE - S.E. CACLIC TRANSMISION CCNCM S.A.C. AMAZONAS AND 220 159,28 S.E. CACLIC - S.E. MOYOBAMBA NUEVA S.E. SAN MARTIN 220 110,17 MOYOBAMBA EXISTENTE - S.E. MOYOBAMBA 138 2,70 NUEVA 10 S.E. C.T. IQUITOS NUEVA - S.E. C.T. IQUITOS GENRENT DEL PERU S.A.C. LORETO 60 14.2 5.5 (ELOR) 11 S.E. COLCABAMBA - S.E. POROMA S.E. POROMA CONSORCIO TRANSMANTARO S.A. AYACUCHO, 500 360,00 - S.E. YARABAMBA S.E. YARABAMBA - S.E. HUANCAVELÍCA, 500 454,00 MONTALVO ENLACE S.E. MANTARO (CAMPO ICA, AREQUIPA 500 98,00 ARMIÑO) - S.E. COLCABAMBA ENLACE S.E. AND MOQUEGUA 220 2,70 YARABAMBA - S.E. SOCABAYA 220 3,60 12 S.E. ANDAHUASI - S.E. YARUCAYA HUAURA POWER GROUP S.A. LIMA 66 21.2 2.9 13 S.E. LA VIRGEN - S.E. CARIPA LA VIRGEN S.A.C. JUNIN 138 62.57 5.8 14 S.E. MOQUEGUA - S.E. INTIPAMPA S.E. ENGIE ENERGIA PERU S.A. (before: MOQUEGUA AND 138 10,76 4.3 INTIPAMPA - S.E. TOQUEPALA (MILL SITE) Energia del Sur) TACNA 138 27,96 15 SE ANGEL I - BOCATOMA GENERADORA DE ENERGIA DEL PUNO 13,8 2,1 6.2 SE ANGEL I - SE ANGEL II-SE ANGEL III - SE SAN PERU S.A. 138 8,8 GABAN II

Hydrocarbons and energy in Peru 107 Peru's oil & gas investment guide 2018 - 2019

TRANSMISSION ACTIVITIES UNDER DEFINITIVE CONCESSIONS (PROJECTS) No. Transmission Line Name Concession Holder Location Tension Length Investment (kV) (km) Amount (millions of USD) 16 SE RUNATULLO III - SE TULUMAYO IV EGEJUNIN TULUMAYO-IV S.A.C. JUNIN 60 7.49 1.4 17 S.E. RUBI - S.E. MONTALVO ENEL GREEN POWER PERU S.A. MOQUEGUA 220 21.51 14.8 18 S.E. FLAMENCO - S.E. POROMA ENEL GREEN POWER PERU S.A. ICA 220 0.685 8.3 19 S.E. SURIRAY (MACHUPICCHU) - S.E. KAYRA ATN 3 S.A. ANCASH 220 153,81 135.45 (ONOCORA NUEVA) 220 109,98 S.E. KAYRA - S.E. ONOCORA 220 70,63 S.E. ONOCORA - S.E. TINTAYA NUEVA 20 S.E. MAMACOCHA - S.E. CHIPMO HIDROELECTRICA LAGUNA AZUL AREQUIPA 66 63.7 7.1 S.R.L. 21 SE TARUCANI - SE MAJES TARUCANI GENERATING COMPANY AREQUIPA 138 58.4 10.6 S.A. 22 C.H. ZAÑA - S.E. CAYALTI ELECTRO ZAÑA S.A.C. CAJAMARCA AND 60 50.3 4.0 LAMBAYEQUE 23 S.E. CAMANA - S.E. ALTO OCOÑA SOCIEDAD ELECTRICA DEL SUR AREQUIPA 138 48.8 11.8 OESTE S.A. 24 LT SE MANTA - SE LA PAMPA PERUANA DE INVERSIONES EN ANCASH 66 2.68 0.51 ENERGIAS RENOVABLES S.A.C. 25 SE MONTALVO - SE TIA MARIA ABENGOA PERU S.A. AREQUIPA AND 220 101.15 23.61 MOQUEGUA 26 S.E. TULUMAYO V - S.E. TULUMAYO IV EGEJUNIN TULUMAYO-V S.A.C. JUNIN 220 9.18 4.2 27 S.E. BELO HORIZONTE - S.E. TINGO MARIA COMPAÑIA ENERGETICA DEL HUANUCO 220 20.2 0.1 CENTRO S.A.C.

Source: MINEM

108 Hydrocarbons and energy in Peru Regarding the projects that are to In 2002, CAN Decision No. 536 in force in the terms stated in come, according to the December established the general rules for Decision 816 and its ruling. 2017 Report of the Central Bank the subregional interconnection According to the current of Peru, for the period 2018- of the electric systems of provisional regime, the exchange 2019, the following projects are Colombia, Ecuador and Peru. This of electricity between Peru to be awarded in the electricity Decision stated the main rules and Ecuador will be subject to sector: for purposes of the exchange surplus energy and power of the of energy between the signing • Reboost up to 1000 MVA of exporter country. By this, Peru Countries. the 500kV of the Carabayllo – and Ecuador compromise to Chimbote – Trujillo grid. Later in 2009, the respect the agreements between aforementioned Decision No. entities from both countries as • Variable reactive compensator 536 was suspended by means they respect the correspondent in San Juan sub-station. of Decision No. 720. According internal regulations. • New 500kV sub-station in La to Decision No. 757 published Note that Peru has a simple link Planicie. in 2011, Decision No. 536 grid between Zorritos (Peru) and would remain suspended, but Machala (Ecuador) so the electric • Chincha Nueva sub-station. a provisional regime for the interconnection is pretty basic, exchange of energy between Peru • Nazca Nueva sub-station. that’s why the amount of energy and Ecuador would enter into import and export between them • 220kV Nueva Carhuaquero force. sub-station. is not so high. In addition, the Nowadays, Decision No. 536 electricity generators can not Energy export is still suspended and the celebrate contracts directly with provisional regime is still in force a foreign company or vice versa, Regional interconnection is a until the new Andean Region it is the Interconnected Electrical challenge for a growing market Electric Market (MAER) stated National System (SEIN) that such as the Peruvian electricity in Decision No. 816 is ruled and exports and that is credited to the market, trying to expand the has its ruling published in the Economic Operation Committee disputable market to make it Cartagena Gazzette. Once this of the National Interconnected more interesting and promote happens the MAERC will enter System (COES). greater investment and greater possibilities of choice for the consumers. The generation of significant margins of energy reserves has led to a greater Electricity exchange between Peru - Ecuador (GWh), interest in interconnection, to accumulated to december 2017 offer surplus energy in other countries. Variation Exchanges 2017 2016 Energy % Peru has an agreement for the exportation of energy with Import 16.60 22.40 -5.81 -25.92% Ecuador under the scope of Export 0.00 37.88 -37.88 100.00% some Decisions of the Andean Community of Nations (CAN) Source: COES since 2002.

Hydrocarbons and energy in Peru 109 Peru's oil & gas investment guide 2018 - 2019

In relation to other countries of Chile. According to information the South American Region, it is provided by the regulatory important to mention that Peru entities of both countries, the has a Binational Interconnection electric interconnection could Agreement with Brazil signed in be operational during 2019, and 2010, but such interconnection the transmission line will extend is expected to be a project to for 50 kilometers and will have a be developed in the long term; transport capacity of about 200 and there are no expectations MW. for a connection between the This future interconnection Colombia and Peru grids as they would not be the end of the are geographically far, and such interconnection between Peru connection will necessitate a big and Chile. According to the investment in infrastructure into Ministry of Energy and Mines of areas that are hard to get into. Chile, if this project is successful However, in June 2017 the and the market conditions are Ministries of Energy and Mines favorable, they would extend of Chile and Peru agreed to an the interconnection to a second electric interconnection between project that is projected from the both countries, through the Camisea area (south of Peru) to construction of the Tacna-Arica Antofagasta (north of Chile). So transmission line. The beginning Chile could export the renewable of March 2018 is the planned energy produced in the northern date to award the construction zone, but also buy cheap of the power line linking electricity produced with natural southern Peru and northern gas that is extracted in Camisea.

110 Hydrocarbons and energy in Peru 03 Renewable energy Energy Plan 2014- electricity generation awarded sources in 2014 will be in abundance of 2025, COP and use, and that non-conventional renewable resources will increase OECD its participation in the national The Technical Organism for energy matrix to 5%. Strategic Planning of Peru The expected change in our (CEPLAN) developed the 2014 – energy matrix follows the same 2025 National Energy Plan. This orientation as what is happening document describes the current globally. Nowadays, countries are situation in Peru regarding the rushing to modify the structure use of energy in Peru in the of their energy matrix and make recent years and details what them dependent on renewable should be expected in regards to resources for economic, social energy management matters in and environmental reasons. the short term future. As an example of this, it is Currently, Peru’s energy matrix is known that many countries have dominated by the use of natural introduced national policies in gas as the main resource for the order to become 100% renewable production of natural gas from energy based countries. Along Camisea Project is still one of the this line, Denmark, as one of biggest projects developed in the the countries leading the way to energy sector. Before natural gas become a sustainable country, became the main energy source, aims to be 100% fossil fuel free the energy matrix depended, by 2050 through increasing the basically, on liquid fuels and other use of wind power and developing hydrocarbons. other clean energies. According to the abovementioned Other examples of how serious energy plan, in the coming years this trend is being taken by it is expected that generation of countries are: energy will come, mainly, from hydroelectricity and other non- • Almost 100% of the energy conventional renewable sources. used by Iceland comes from This change is already on its way geothermal and hydroelectric as the Government is promoting power plants. the use of new energy by means of incentives stated in legal • Sweden has implemented dispositions. policies in order to eliminate fossil fuel usage. Regarding the development of renewable sources, it is worth • UK now generates more saying that in years 2020 electricity from wind farms and 2021, the 1,200Mw of than from coal power plants as

Hydrocarbons and energy in Peru 111 Peru's oil & gas investment guide 2018 - 2019

they now use a combination of (COP), which is an annual Renewable energy grid-connected wind farms and meeting on the framework of standalone turbines. the United Nations Framework policy Convention on Climate Change • Uruguay has heavily invested Regulation in Peru of renewable (UNFCCC). This meeting serves in wind and solar power in energies is still limited. In to assess progress in dealing with recent years. As a result of this, year 2000, the first specific climate change, and negotiate Uruguay now has an energy Law on an energy issue - this the Kyoto Protocol to establish supply that is 95% powered by is, Law No. 27345 – Law for legally binding obligations for renewable sources. This has the promotion of the efficient developed countries to reduce been achieved in less than 10 use of energy - was enacted. their greenhouse gas emissions, years. Later, in year 2005, Law No. and consider the principles and 28546 – Law for the promotion discuss the main aspects of the • Mexico is one of the countries and use of renewable energy implementation of the Paris with the lowest prices for sources in rural, isolated and Agreement. renewable energy generation in borderline areas was enacted. the world. In the three auctions In 2017, the COP meeting This was the first attempt of carried out in the country, the discussion topic was sustainable the Peruvian Government to sale price of 1 megawatt hour innovation in which the use of generate renewable source- plus a clean energy certificate clean energies and new policies based energy. Since this, the (CEL) went from US$47.78 for the reduction of greenhouse regulatory framework orientation in the auction of 2015, to gas emissions were talked about. changed and aimed to promote US$33.4 in the second auction the development of electricity By its side, the Organization of last year, to no less than production by means of the use for Economic Co-operation and US$20.57 in the process that of big-scale energies (on-grid and Development (OECD) is also a concluded in November 2017. off-grid). great promoter of the use of This trend is also supported clean energy as an international Despite having a general law for not only by economic reasons, policy. According to the OECD, geothermal energy –a kind of but by the need of countries to investment in clean energy needs renewable energy- since 1997, assure their energy resources to be mobilized at a pace and its Ruling was only published when facing the consequences scale to contribute to mitigating in 2006 by means of Supreme of climate change. Regarding climate change and achieve the Decree No. 072-2006-EM. This this, countries have signed transition to a low carbon energy Supreme Decree established the agreements and hold annual system. For the OECD the need of conditions and other important meetings in which they come global policy for the use of clean regulations regarding the together to incentive the use of energy is a relevant factor for the development of geothermal clean energies to prevent any social and economic development concessions in Peruvian Territory, possible negative consequences of countries. Regarding this, the and then was replaced for a of climate change. OECD has held roundtables in new Ruling published in 2010 In this regard, every year, which the main discussion was by means of Supreme Decree Kyoto signing countries hold the need for investment in clean No. 019-2010-EM In 2008, the Conference of the Parties energies globally. Legislative Decree No. 1002 was enacted. The main purpose of this Legislative Decree was to qualify

112 Hydrocarbons and energy in Peru the promotion of renewable - 2025. In this document, the energies as an issue of national expectations for the future of This 2014 - 2025 interest. In this sense, this Peru in Energy regulation and National Energy Legislative Decree established the development are described. main regulations for the auction Plan highlights of renewable source energy This 2014 - 2025 National and its conditions. As of this, by Energy Plan highlights the the importance of the end of year 2008, the first importance of the use of clean renewable source energy auction energy in the future in order the use of clean was hosted by the Supervisory to prevent any future energy energy in the Body of Private Investment in deficit and at the same time Energy and Mines (OSINERGMIN). promote the regional sustainable future in order This was the beginning of the development and integration. Peruvian path to clean energy. Also, this Plan foresees that to prevent any the 800,000TJ of energy Later, in 2010, the first Energy consumption registered in 2014 future energy National Policy was published will increase to 1’321,000TJ to for period 2010 - 2040. This 1’612,000TJ in 2025 depending deficit. document set the long term on Peru’s GDP in such year. objectives and principles in energy matters that Peru should Despite this great effort to set a reach by 2040. As a way to path to development in energy reach such objectives, a medium- matters, it is still pending a term National Policy was then specific National Plan for the published for the period of 2014 Development of Clean Energies (Renewable Energies).

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04 Potential of Renewable According Bloomberg reports, This study determined a total Energy 33% of the world’s electric power technical potential of 61, 832 will come from renewable sources MW, which is still considered as Sources by the year 2050. Peru has great the technically usable national potential for the development of hydroelectric potential, due to clean energies, and in this sense, the lack of updated information. investments should be oriented in Likewise, a potential of around 1 the following energies: 000 MW was estimated for small hydroelectric plants (less than 10 Hydroelectricity MW). Water is the main renewable Region Theoretical Technical energy source in Peru for the potential, potential, generation of electricity, both in MW MW the interconnected system and Amazonas 14 114 4 234 in isolated systems (especially Ancash 5 555 1 667 associated with mining companies Apurimac 1 347 404 and some industries). For many Arequipa 8 362 2 509 years, hydroelectric plants have Ayacucho — — helped generate electricity, Cajamarca 3 807 1 142 producing less contamination Cusco 24 501 7 350 which is benefitial for the users. Huancavelica — — Huanuco — — In Peru, this kind of energy is Ica 2 552 766 possible thanks to three big water Junin 1 654 4 816 sources: the Atlantic runoff, the La Libertad 1 649 495 Pacific runoff and the Titicaca Lambayeque 886 266 runoff. In the 1970s, within Lima 7 444 2 233 the framework of the Peruvian- Loreto 54 936 16 481 German Energy Cooperation Madre de Dios 9 445 2 834 Program, an evaluation of the Moquegua 1 508 452 national hydroelectric potential Pasco — — was carried out. About 800 Piura 931 279 hydroelectric projects with a Puno 573 172 minimum power of 30 MW were San Martin 37 278 11 183 evaluated, and 328 hydroelectric Tacna 398 119 projects that met the defined Tumbes 295 89 viability criteria were finally Ucayali 14 472 4 342 selected. Total 206 107 61 832

Source: MINEM

114 Hydrocarbons and energy in Peru Wind power energy power. Currently, the potential Moquegua and Tacna), and Puno of this kind of energy is almost and Cusco. This kind of energy consists of the three times greater than its actual movement of big air masses from installed capacity. Solar energy high atmospheric pressure areas to low atmospheric pressure Geothermal energy This kind of energy is, basically, areas. Due to the location of the source of the origin of Peru on the globe, including Geothermal energy consists of every other kind of energy. The areas between the Pacific Ocean the energy generated and stored appropriate utilization of solar and the Andes, winds from in the earth due to its heat. energy by means of solar panels the south west lead to great Whenever temperatures cause and other solar collectors leads to opportunities for the use of wind underground water to reach its the generation of thermal energy power energies as they reach boiling point, this can be useful that can be used in isolated areas speeds greater than 5m/s (this for purposes of using such heat to and places where there is no is the minimum speed needed make turbines work and generate connection to electric grids. energy. This is known to happen to generate electricity with this As this energy depends on solar most frequently in volcanic areas. source). light, it is the easiest to reach According to the Wind Atlas of Scientifically, as we have many in almost every place of Peru. Peru developed by the MINEM, volcanic areas in Peru and we are The average annual radiation Peru has an estimated potential located in the seismic zone of the of Peruvian regions oscillates of more than 77,000WMV, well-known Pacific Ocean Ring of between 3.3kWh/m2 and above which means that more than Fire, there are numerous thermal 6.0kWh/m2 annually, being 22,000WMV can be generated sources with temperatures Ancash, Arequipa, Lambayeque, from this source. Moreover, between 40°C (104°F) and 90°C Moquegua, Puno and Tacna the according to the Peruvian Wind (194°F) that are mostly located in regions with the highest average, Maps calculated at 50, 80 and the Occidental side of the Andean and hence, being the regions with 100 m, respectively, the areas Mountains and the highlands. the most potential. with the greatest potential for As such, Peru has more than Regarding this kind of energy large capacity wind generation 156 identified geothermal source, in 2003, the National are on the coast. The regions of areas, more than 200 hot water Service of Meteorology and Piura, Lambayeque and Ica have runoffs, many vents and some Hydrology (SENAMHI) developed the highest average annual wind geysers with temperatures near a Solar Energy Atlas in which an speeds. the 100°C (212°F). The greatest important valuation of this source Wind power can complement geothermal potential for Peru is is detailed. Despite this document hydraulics, because it is precisely found in six geothermal regions: having not been updated, during the dry season when the Cajamarca, Huaraz, Churin (Lima, there are many other scientific best movement of the winds Pasco and Huanuco), Central publications in which the occur on the Peruvian coast, the Zone (Huancayo, Huancavelica Peruvian solar energy potential is same ones that have an energy and Ayacucho), Volcanic Zone described in detail. vocation for their stability and (Ayacucho, Apurímac, Arequipa,

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Biomass The conditions for the auctions are hydroelectric, wind powered, established by the MINEM, and the biomass and solar energy. In This kind of energy is more likely process is hosted by OSINERGMIN. the case of the second auction, to be used in isolated systems This latter also sets the maximum the energy quote was about where there are no other prices and calculates the 2,500GWh/year between biomass renewable resources. There applicable premium annually. and solar energy. As a result are three major regions where of the two calls, a total of 26 In these auctions, awards biomass presents an interesting authorizations for projects were are granted to offerors who potential to be used for medium awarded. The main awarded communicate the lowest prices up energy purposes and great power: projects were Marcona Wind Farm to the limit of the energy quote the northern coast ( Project (Ica) and and Talara Wind applicable to the auction. For bagasse, husk, hydrobiological Farm Project (Piura). these purposes, the interested waste); the high jungle (coffee corporations send offers that husks, forest residues); and the detail the desired amount of Second auction low forest (forest residues). annual energy (MWh) and its (2011) From now on, concerning non- related prices in USD/MWh. conventional energies (solar, wind This Auction consisted of a unique The awarded corporations in powered, geothermal, biomass call in which the energy quote these auctions have the right to and hydroelectric up to 20MW), was 1,981GWh/year between a minimum income equivalent their promotion via auctions hydroelectric, wind powered, to the energy and price offered hosted by the Supervisory Body biomass and solar energy. This in the auction, but only if their of Private Investment in Energy time, 10 authorizations for compromised energy amount and Mines (OSINERGMIN) was projects were awarded. The liability is met. Also, these authorized by Legislative Decree main projects awarded were Tres corporations have the right to No. 1002 in 2008. Hermanas Wind Farm Project additional income based on the (Ica) and Moquegua Solar Plant For purposes of these auctions, energy produced in excess (valued (Moquegua). the Ministry of Energy and in CMg) and other additional Mining (MINEM) states an energy income if reactive energy is Third auction (2013) objective to be reached by each generated. kind of energy source. The main This Auction also consisted of a Up to 2018, four auctions incentives for these auctions are unique call in which the energy have already been hosted by that the awarded corporations quote was 320GWh/year for OSINERGMIN: have priority on the supply and biomass, 1300GWh/year for sale of energy by the Economic hydroelectric energy and 500,000 Operation Committee of the First auction (2009 - PV systems for solar energy. In National Interconnected System 2010) this unique call, 15 authorizations (COES), priority on the access for projects were awarded. to distribution and transmission This first Auction consisted of This time, hydroelectric energy grids and long term stable prices two calls. The energy quote projects like Hydrika 1, Hydrika 2, determined by auctions. established for the first Auction Hydrika 3 and Hydrika 4 (Ancash) was 4,380GWh/year between were awarded.

116 Hydrocarbons and energy in Peru Fourth auction (2016) This is the last Auction that was made. It consisted of two calls in which 13 authorizations for projects were awarded. The authorized projects consisted of 2 biomass related projects, 3 wind power related projects, 2 solar energy related projects and 6 hydroelectric energy related projects. Projects like Biomasa Callao (Lima), Huambos Wind Farm (Cajamarca) and Intipampa (Moquegua) were awarded. All the aforementioned Auctions had had great reception between the corporations of the sector and in each one almost 100% of the established energy quote was able to be covered. There is expected to be a fifth Auction this year 2018.

Hydrocarbons and energy in Peru 117 Hydrocarbons in Peru

3 Secc C | Trends in the Oil & Gas, and the Energy industry in Peru

118 Peru's oil & gas investment guide 2018 - 2019

01 Oil & gas

Trends in the In particular, Perupetro’s reform will focus on three pillars or main hydrocarbons topics, which are: industry 1) Regulatory framework The actual international context, 2) Reinforcement and in which oil prices have still redefinition of Perupetro’s role slumped more than 60% of their value compared to 2014, truly 3) National Plan puts companies at a stage in The first pillar aims toward which it will be necessary to developing a more competitive produce more efficiently. But framework with worldwide it also brings an opportunity to tendencies that allows it to attract discuss new policies that may new sustainable investments, help to develop new projects. with wide entrepreneurial, In particular, this means that technological, social, and governments will have to step environmental support. This up in order to prevent negative means, among other aspects, a consequences in economies revision of contractual terms, a which rely heavily on oil. regulatory update of norms and Certainly, countries like Mexico regulations, and attainment of a and Colombia have taken socio-environmental license. decisions towards reducing the The second pillar is focused on tax burden of oil companies. remaking Perupetro into an active Meanwhile, Peru is looking investment promoter, leading forward to following those steps, the interaction and development especially regarding the reduction of sector policies, with full of royalties. capacity and autonomy. This In this regard, during the last few will include the institutional and months, Perupetro has began organizational strengthening of revising hydrocarbon regulations Perupetro, a redefinition of its and identifying topics that could promotion process, contractor’s be changed in the short-term. support, hydrocarbons The main goal of this reform production and reservoir is to provide energy security, management. sustainable economic growth The third pillar will aim towards and to improve the quality of life the development of a National for the population. In this sense, Hydrocarbons E&P Plan, by the reform has been focused on establishing medium and long redesigning and reinforcing the term production, reserves and institutional framework in order goals. to articulate more efficient and timely plans.

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As part of these reforms, not only in the area surrounding oil industry, especially for its Perupetro is also revising the the Camisea project, but also in contribution to the diversification current royalty framework, other locations, such as Piura and of the availability of liquid fuels the contract model and the Tumbes. for transport. requirements related to legal, In Peru, there is no significant technical and financial capacity Biofuels production of biodiesel or of oil & gas companies. Results of ethanol, but some processing these activities are expected to be The development of the plants have been installed during approved by the first, second and natural gas industry in Peru is recent years. third quarter of this year (2017). contributing to the creation of new industrial opportunities Some of the companies that have Perupetro is also planning to around this resource, such as in made investments in this industry carry out oil bidding rounds on biofuels and in the Petrochemical are: Pure Biofuels, Biodiesel several onshore and offshore Industry. This will contribute Peru International, Herco blocks during the coming to reaching the energy matrix Combustibles, among others. years and thereby promoting diversification objective, so that investment in the peruvian oil & by 2025 Peru will have reached a Peru has some advantages gas sector. diversified and more equilibrated related to biofuel production, due matrix (13.8% oil; 65.7% natural to the great potential to develop The opportunity opening for Peru gas and natural gas liquids; and several oil crops, and by obtaining is important, even more so if we 20.0% renewable resources). fats and oils from animal consider that the majority of the byproducts. The existing potential oil sedimentary basins have not In this context, biofuels are a crops show high production been explored yet. Also, there clean and renewable alternative yields. are large natural gas reserves against the contaminating

120 Hydrocarbons and energy in Peru Petrochemical Competitive integration Governments Industry in Peru Extraction / a material will have to step The Petrochemical Industry is an ata important economical segment as up in order to in many countries, especially in tanol prevent negative the ones that have available raw alt material in competitive quantities 1st Generation / asi Petroemial consequences such as Peru. in economies The Petrochemical Industry is tlene Prolene divided into three segments: lorooda which rely • First generation basic industry heavily on oil. (for example: synthesis gas, 2nd Generation ethylene) Poletlene Polrolene • Second generation industry P (for example: ammonia, mmonia urea, polyethylene, and rea polypropylene) 3rd Generation • Transformation industry or third generation (for example: Plastis fertilizers NPK, MAP, plastics) ertiliers In the case of Peru, the vision that needs to be realized is to oure have a planned petrochemical development for the southern part of the country that will not In this sense, the implementation only supply the country but also of laws, including the ones create earnings and an export affecting energy security and the market for its products mainly future of Petrochemical Industry in the Pacific Coast of Latin (Laws No. 29163, 29690, and America. 29970) demonstrate a great opportunity for private companies Nevertheless, Petrochemical willing to invest. Industrial Planning in a country such as Peru, in which investment Having raw materials (supply) and is linked to decisions of private a developing market (demand) companies, requires an important worldwide are some of the agreement between sector variables that make it attractive authorities of the Government today to start a competitive and potential investors. Petrochemical Industry in Peru.

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Added value Petrochemical A list of integrated units in a petrochemical complex, with and investment Complex their respective investment estimations, demonstrates that The development of a Peruvian opportunities they all could be more than Petrochemical Industry The arrival of natural gas to the US$15 billion: must search for a synergy southern part of the country between the future Southern is a unique opportunity for Investment Peruvian Gas Pipeline, first and Project developing investment projects US$ billion second generation Industrial in petrochemicals, which will Petrochemical Complex and LNG 5 add value to the supply chain of the third generation industrial Ethylene natural gas. 5 complex: plastic transformation Polyethylene industry (bags, containers, etc.). Ammonia Urea 1.8 Natural Gas Competitive availability of raw Methanol 1.5 atural gas as man material is the main factor to Infrastructure and 1 omonents tat an e make this Project feasible. In services this case, the existence of a transormed into oter Energy 1 derivatives reasonable gas flow at the end of the SPP is very important. This Propane C hypothesis will only be possible 3 if a new LNG unit is developed Prolene in the region, since it is the only Benefits for the Polrolene project that can add natural gas country lastis demands. The installation of a The planning of a petrochemical petrochemical industrial base in complex involves a number of Ethane C2 the country will not only increase other important decisions. Not added value to nonrenewable tlene only the ones that guarantee raw resources such as natural gas, Poletlene material supply, but also factor in but with the ensuing decrease o etlene location, access to transportation of imported petrochemical (highways, sea ports and products (improving the trade airports), supplies such as water balance), it will also contribute to Methane C 1 and electricity, and of course improving national and regional human resources. mmonia economic growth. This growth rea ertiliers The opportunities explained will create quality jobs and new road and port infrastructure, mmonia itrate above are great for investors to among other significant benefits ertiliers visualize how this synergistic for the country, especially to the etanol aints interrelationship will benefit them, the government and the southern region. Benefits for the population in general. country in respect to taxes will be significant.

122 Hydrocarbons and energy in Peru Opportunity to join several stakeholders to achieve the desired goals It is important to consider that the development of a Petrochemical Industry is one of the objectives of the Energy policy of the Peruvian Government. To achieve this goal, it is necessary to establish a Strategic Plan together with the Government, regional and private sectors that will allow this megaproject to be developed in the short term. Not-with-standing the above, private companies are willing to directly negotiate the terms of supply of natural gas. Certainly, such statement were made by Contugas in relation to three possible investors willing to engage in petrochem operations.

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02 Energy

Start-ups In addition to their main service, these little corporations have The energy revolution is just included a social component in starting in Peru. Until now, the their scope, and their knowledge market has only shown great is used to help vulnerable openings for development of populations to have access to big corporations that are able electricity through the use of to meet the requirements set clean energies. in regulatory laws that aim After generating income with to attract high amounts of their main service, these start- investment. Despite this, there ups use a percentage of their are lesser known offerors who act earnings to create lamps that as market agents that are trying use solar power to function and to expand the scope of benefits of donate them to areas where there using clean energies to users that is no connection to an electricity cannot connect to the already system. In this sense, these built big systems of electricity. start-ups make sales in conjuction This is happening with some with large corporations that seek start-ups. to reduce their operating costs, Start-ups consist of big potential and the profit achieved by the big corporations that are in their corporations serves to collaborate initial phases. All of them with for the benefit of vulnerable innovative ideas in different areas consumers in the electricity that can produce growth in order market. to become important participants Other example of start-ups, that of the market. The Energy Sector just pop up around the world in is not out of the scope of start- the energy sector with innovative ups; many revolutionary ideas projects, are the ones related to have been in place and markets the creation of flowerpot battery are now starting to get results. chargers that generate energy For example, in Peru, we found from the photosynthesis of the start-ups focused on creating plant they host; and apps that efficient systems based on allow control of the consumption renewable energies. These kind of of energy, emphasizing the start-ups have developed hybrid effects that such consumption systems in order to reduce costs may generate if it becomes an by up to 90% when producing excessive one; among others. energy. This product is intended As we can see, the energy to lower the cost structure for big market is not limited only to big companies.

124 Hydrocarbons and energy in Peru corporations but also to start- ups willing to innovate and set a new path to sustainability and well-being. Electric vehicles Another relevant trend regarding the use of energy is linked to environmentally friendly cars (electric vehicles). These kind of cars are becoming popular as they help decrease greenhouse gas and other emissions that cars powered solely by internal combustion engines produce. Around the globe, many countries are promoting the use of electric cars. In the case of Peru, recently, in 2018, the first electric bus has been put into service for public transportation and it is expected that two additional buses will be introduced before 2019. Despite that, just a small number of hybrid cars are already circulating around the territory, the trend is that electric cars become a popular mean of transportation in the future.

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03 Digital trends Technology has defined the first making will be one of the fastest decade of this millennium since areas of growth over the next its very beginning. Not only did 3-5 years, according to World we witness the dot-com bubble Economic Forum. burst and erase millions of dollars In the case of oil & gas in market capitalization of several companies, AI could be used firms, but also the recovery of together with robotic process those who survived and are now automation, generating Intelligent tech giants, such as Amazon, Automation, so that they can E-bay, and Google. employ critical thinking and The shift from an analog to quality checks among other a digital world has driven traditional human processes, humankind to increase the pace which have the potential to of our every day lives. Nowadays, automate entire functions and it seems completely natural to free up time for engineers to have visual conversations through focus on engineering tasks. our mobile devices with any Moreover, AI could also be used person anywhere in the globe, to with tools such as big data and store bigger amounts of data and analytics to identify the best areas analyze it at incredible speed, to and ways to drill and complete make renewable energy sources wells at lower costs, decrease economically viable, and so on. unplanned downtime, optimize The Oil, Gas and Electricity production, and improve refinery industries are embracing and chemicals operations, among and harnessing the power of other actions that would add digital disruption in their daily value in the short and/or mid- operations and plans for the term. future. Hereunder, we will The Electricity Industry makes a provide some examples of how similar use of AI in its activities technology is helping companies as the Oil&Gas sector does. to bring that future today. Electricity Industry activities also demand the application of AI to Artificial Intelligence simplify processes and reduce the (AI) use of some expensive sources. Besides this, AI is also being used These advanced computing for the management of grids techniques based on cognitive that have some level of computing and self-learning learning and in devices designed programming methods to to predict failures and outages. optimize and support decision-

Sources: EY / World Economic Forum

126 Hydrocarbons and energy in Peru AI has also revolutionized the way and Data Acquisition (SCADA), engineers and other professionals this is, an application that allows The shift from work whenever emergencies on centralized monitoring and an analog to grids happen, nowadays there are control of remote systems for self-healing grids that are able to the generation and transmission a digital world reroute power around damaged of energy. IoT is used to allow equipment to keep the energy users to access data via HMI has driven flow. Moreover, AI is also used by interface after it is collected consumers that use devices that from remote field sensors, humankind to are able to react to preferences, actuators, controllers and other the pace of our leading to improved cost control communication devices. and comfort. everyday lives. IoT is also used for purposes of smart metering. Smart Internet of Things metering is used in smart grid (IoT) implementations to transform traditional energy infrastructure. The internet has gone a long The use of IoT in smart metering way from just being a means to helps to reduce operating costs share information through the by operating metering operations web. Now, it can bound together remotely, by improving several devices in order to share forecasting and reducing energy data almost automatically, and theft and loss. use it with almost no human interaction. The IoT is on its way to integrate the physical tools Mobile Devices we use to produce goods and Mobile devices have empowered services, and, thus, to live. people perhaps beyond what computers did back when the The Industrial IoT is one of IoT’s latter became commodities uses that could help oil & gas available to almost everyone. companies of all three segments They are evolving at a faster pace to improve their operations even every year, simulating many, if further. In that regard Industrial not all, the functions of a desktop. IoT could connect field assets and equipment by using sensors, Oil, Gas and Electricity companies integrate transportation and are aware of this, and they use storage facilities, or even expand mobile technology that allows the visibility of the supply chain. use of specialized applications in fields such as health, safety On the side of Electricity Industry, and environment (HSE), IoT is used in Supervisory Control therefore dramatically reduce

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the possibilities of harm to their In the same way in the Electricity on-field employees in hazardous Industry, Blockchain is seen as situations. a useful tool when managing and controlling their production Blockchain of clean energies. As many corporations control their Blockchain is the technology production by certificates to everyone is talking about due to differentiate clean energy from the cryptocurrency frenzy that fossil fuels based energy and came to the forefront last year. sometimes such management Indeed, blockchain is the core becomes burdensome when component of cryptocurrencies, participating in a transaction, and a technology in which its Blockchain can be used to potential is still being discovered keep track of such certificates by private companies and by means of generating and governments alike (Delaware, for saving data in a more efficient example). way. Therefore, the security The oil & gas sector is just that Blockchain provides can be starting to discover such utilized by sellers and buyers in potential. Due to the inherent order to access such information security of the blockchain at a lower transactional cost. technology, oil & gas companies Hopefully, Peru will be one of could establish a better control of the next countries to enjoy the data and information and provide benefits of the digital revolution. consistency – particularly around As such, for this purpose not only the accounting of hydrocarbons, does the Peruvian regulatory supply and demand, and regime need to change and match materials movement. the new trends but corporations As the sector increasingly should also revaluate how they leverages sensor technology operate, decide whether or not across upstream and downstream they will fit and feel comfortable assets, Blockchain can help in the market once their business compress process time and model changes, and finally begin reactivity to an event by the process of change by aligning connecting assets directly to with new trends at the pace that service providers without the fits them and its stakeholders the need of human intervention. best. Furthermore, its use in smart contracts could also transform the supply chain, allowing for increased process efficiency and compliance.

128 Hydrocarbons and energy in Peru Peruvian energy trends also aim towards goals with significant social impact, such as transportation.

Hydrocarbons and energy in Peru 129 Peru's oil & gas investment guide 2018 - 2019 framework

4 Tax and legal Tax

130 Tax and legal framework Tax and legal framework

4 Secc A | Regulatory terms

131 Peru's oil & gas investment guide 2018 - 2019

01 Oil & gas

Hydrocarbons in order to determine if it fulfills all the requirements needed agreements to develop exploration and production activities under the Oil & gas exploration and contract modalities mentioned production activities are above. conducted under license or service contracts granted by the It must be noted that the terms Government. Under a license and conditions under which contract, the investor pays a license contracts are negotiated royalty, whereas under a service and subscribed remain the same contract, the Government pays for onshore and offshore blocks. remuneration to the contractor. On the other hand, contractors As stated by the Peruvian will have the right to use Constitution and the Organic water, grit, wood, and other Law for Hydrocarbons, a license construction materials, and contract does not imply a transfer to negotiate permissions, or lease of property over the area easements and the right to use of exploration or exploitation. water and surface rights, that necessarily result in carrying By virtue of the license contract, out their activities. If the the contractor acquires the exercise of such rights generates authorization to explore or economic damages, they must be to exploit hydrocarbons in a compensated. determined area, and Perupetro (the entity that holds the Regarding the subscription Peruvian state interest) transfers of contracts, Perupetro has the property right in the extracted begun revising the scope of the hydrocarbons to the contractor, current applicable regulations who must pay a royalty to the related to hydrocarbon royalties, state. qualification requirements for oil & gas companies and the terms of License and service contracts the license contracts to be signed are approved by supreme decree with companies. issued by the Peruvian Ministry of Economy and Finance, and the Peruvian Ministry of Energy Upstream, and mining, and could only be midstream and modified by a written agreement signed by the parties. downstream Before initiating any negotiation, activities every oil & gas company must The activities performed in the be duly qualified by Perupetro, hydrocarbon sector are divided

132 Tax and legal framework into three stages: “upstream”, working program established in it will only need to comply with “midstream” and “downstream”. the contract, and also commits specific requirements according The activities included in the to fulfill an additional working to Peruvian regulations so as to “upstream” stage comprise the program that justifies such store them. exploration and exploitation extension. Midstream related activities can of hydrocarbon deposits, The contractor shall be also be related to the operation while the “midstream” and responsible for providing the of gas processing plants and “downstream” stages refer to technical and economic resources gas treatment and conditioning refining, natural gas processing, required for the execution of the facilities in order to make it transportation, distribution and operations of this phase. transportable, the operation of commercialization of oil, gas and fuel pipelines systems, maritime by-products. • Exploitation phase transportation by tankers, and Upstream Activities (*) The exploitation phase is operating oil storage terminals. comprised of development and • Exploration phase Investment projects in gas production activities related to processing facilities can be The exploration phase is aimed oil & gas extraction, in order to subject to the benefits granted to at discovering areas with oil transport it to relevant markets. upstream projects. In this regard, potential. To reach that objective, These activities include, among a contract shall be signed by the oil companies must plan, execute others, drilling of exploitation investor and government, and it and evaluate every type of wells, the construction of can only be modified by mutual geological, geophysical, and pipelines to transport the agreement. geochemical activity and carry extracted hydrocarbon production out other studies, geophysical and any other activity for activities, drilling exploratory extracting hydrocarbon. oil wells and other related and This phase will have a maximum necessary activities for oil duration of 30 years for crude oil, discoveries. and 40 years for non-associated This phase will have a maximum natural gas and condensates, duration of 7 years, counted from both counted from the contract the effective date of the contract effective date. (60 days after the signing date) Midstream Activities established on each contract. These activities can be considered This term can be divided into as a crucial part of the oil & gas several periods as agreed to in sector activities, as they consist the contract. of the transport by pipelines, and Notably, the Ministry of Energy storing of hydrocarbons. In order and Mines can authorize an to start activities related to the extension of three years for transportation of hydrocarbons this stage, if the contractor has by pipelines, a company must complied with the minimum be granted a concession, whilst

(*) Peru’s oil & gas Investment Guide is mainly focused on upstream activities

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Downstream Activities wholesalers, who in turn, dispatch national market, for a specific them to oil stations, to retailers period stated in the contract. • Refining and/or direct consumers, etc. In Assignment of an oil the case of liquid hydrocarbon This activity involves the interest construction of industrial and similar hydrocarbon facilities, in which crude oil, byproducts, contractors must The contractor can partially natural gasoline or other obtain an authorization from the or totally transfer its interest hydrocarbon sources are Ministry of Energy and Mines or associate with any other transformed into fuel products, (MEM). In the case of natural gas, qualified investor, provided that such as liquefied petroleum distribution must be granted by a the operation is approved by the gas (LPG), gasoline, diesel and concession. Ministry of Energy and Mines industrial fuels. Contractors must (MEM). obtain an authorization from the Government policies The transfer of the contractor’s General Hydrocarbons Bureau for on the sale of interest will lead to the executing such construction. natural gas maintenance of the same Distribution and responsibilities regarding the commercialization Contractors must consider that guarantees and obligations the authorization to explore assumed by the contractor. In this Liquid fuels and other or to exploit proven natural sense, the stabilized tax regime hydrocarbon byproducts obtained gas reserves requires them to applicable to the contractor will as a consequence of the activity guarantee the supply of the also apply to the transferee. of refinery are distributed to

134 Tax and legal framework 02 Energy Keywords new circumstances of the energetic system. Each country and/or region Electricity power develops an Energy Matrix depending on its own policies, challenges and It is the amount of energy that objectives. can be delivered or distributed to a system in a simple unit of Renewable Energy Source - time. Power is registered in RER Watts, the active power unit of the International System of Units. Consists of energy sources such as 1 Watt is equivalent to 1 Joule biomass, wind power, solar power, (international unit of energy or geothermal sources and tidal energy. work) per second (time unit). As In the case of hydraulic energy, such such, power indicates the amount source shall be considered as RER of energy that can be delivered if its installed capacity is less than each second for the consumption 20MW. of electric systems (as the SEIN). Geothermal source and by- The power electric appliances products is set in Watts if they are low powered, but if they have medium Geothermal sources refers to energy or high powered, their power that comes from underground is set in KiloWatts (kW), which and includes geothermal fluids of is equivalent to 1,000 Watts or high and low temperatures. By- MegaWatts (mW), equivalent to products of this kind of energy refer 1’000,000 Watts. to minerals in solution and other products that can be obtained from Electric systems natural thermal fluids, brines, gases and fumes located underground. Interconnected Electrical National These by-products do not include System - SEIN hydrocarbons. Group of transmission lines and sub-stations that are Electricity industry interconnected between them and with generation plants to allow the activities transference of electric energy Generation between two or more generation systems. Activity that consists in the production of electricity by means Isolated System of the transformation of a primary Electric system that is not source like water or a thermic one connected to the SEIN. such as natural gas, petroleum, carbon, diesel, among others. Energy Matrix Renewable sources like wind, geothermal heat, solar radiation, The Energy Matrix is a unique and biomass, are also used for the market model that shows the production of electricity.

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According to Peruvian regulations, Distribution when the demand exceeds this activity does not qualify as a 500Kw. public service; nor is it a natural Activity that consists of the • Generation of energy with monopoly. Generators could be transformation of high or energetic renewable sources considered as energy traders. extra high voltage energy to lower voltage of 30,000V or when installed capacity exceeds Transmission less in order to distribute such 500Kw. energy to final users. According Activity that consists in the to Peruvian regulations, the Authorizations transport of energy from distribution activity comprises Consists in the permission that generation plants to consumption the grids operation and the should be requested for the centers. This activity uses high commercialization of energy to development of thermoelectric voltage grids (30V. and 60,000V.) regulated users and free users. generation activities whenever and extra high voltage grids the installed capacity of the plan (138,000V. and 220,000V.). Granting rights in exceeds 500KW. According to the Electric the electric sector Concessions Law there are two Temporary concession kinds of transmission system: Definitive concession This title grants the right to use public goods and the temporary • Primary, which is paid by all This title is required for the right of way. The owner of this the users of the electric system utilization of public goods and for kind of concession is responsible despite the active or inactive the owning of the right of way for for the execution of viability use of the system, and the the construction and operation of studies on generation plants generation plants, sub-stations, • Secondary, which is paid only and sub-stations or transmission transmission lines and grids for by the effective users of the lines; also, the owner has a the serving of electricity to the system, that is consumers and preferential right when requesting public. generators. the correspondent definitive Law No. 28832, added two According to the Electric concession. kinds of additional transmission Concessions Law, its granting is systems: required for the development of Granting rights for the following activities: • Guaranteed system, which is electric generation subject to bidding depending on • Generation of electric energy with renewable the Transmission Plan approved that is based on hydraulic by the Ministry of Energy and sources whenever the installed energy (RER) capacity exceeds 500Kw. Mining, and the RER generation auctions • Complementary system, which • Transmission of electric energy Auction is developed under the lead when its facilities could affect of one or more agents like State property and/or require a Public tender process hosted by complement of the Transmission right of way. the Supervisory Body of Private Plan. • Distribution of electric energy to Investment in Energy and Mines be provided as a public service (OSINERGMIN) to assign the

136 Tax and legal framework adjudication rate to projects of Contract for the supply of Regarding the aforementioned RER generation up to the limit of renewable energy price and premium, OSINERGMIN the required energy. This process is the entity that will determine The contract signed by awarded is conducted according to the such amounts according to each corporations once the Auction is document prepared and approved kind of energetic source. ended. This document establishes by the Ministry of Energy and the liabilities and conditions Mining (MINEM), and ends in the related to the construction, Granting geothermal closing date. operation, energy supply and rights Required energy rates regime applicable to RER generation plants. This document Geothermal sources This is the total amount of annual includes the conditions of the authorization energy in MWh that is being Auction. This Contract starts on auctioned. The required energy This authorization allows the the closing date and is valid until amount is established by the execution of exploration activities its end date. MINEM for each kind of RER on in a specific area of the Peruvian the basis of the estimated national Policies for the territory in order to search for consumption for the year. commercialization geothermal sources. Holders of this authorization has preferential Adjudication rate of energy and power right for the granting of a Consists of the offer made in USD/ generated by RER concession. This authorization MWh by interested corporations Electricity generated by RER has is valid for 3 years and can be during the Auction. This rate priority in the daily deliver of extended for 2 additional years. guarantees each awarded energy made by the Economic The request for a concession in corporation net energy injections Operation Committee of the the explored area can be placed at up to the limit of the offered and National Interconnected System any moment of this term. adjudicated energy. Offered rates (COES). As awarded corporations Geothermal sources are not modifiable and are valid have guaranteed transmission only during the date in which lines according to its offer, in concession commercial operations start until the case of extra capacity in The MINEM grants this kind of the due date of the contract, being the transmission or distribution concessions in order to allow adjustable by the correction factor systems of the SEIN, such the execution of exploitation and the update formula agreed in corporations will have preferential activities in a specific area where the conditions of the Auction. access to them. sources have been discovered during the exploration phase. Closing date In order to sell the production of These concessions are valid for RER electricity, this energy must The day in which all the 30 years from the publication of be placed in the short-term market requirements for the signing of the the correspondent Contract in El subject to its price. This price Contract are met according to the Peruano (state newspaper). Under ought to be complemented with conditions stated in the conditions some specific conditions, the term a premium to be determined by of the Auction. On this date, the of this kind of concessions can be OSINERGMIN in case the marginal Auction also ends. extended. cost is lower than the estimated price.

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Climate change Mitigation of climate actions framework change Human intervention to reduce Law the sources of greenhouse effect The diversification of the energy emissions or to enhance sinks matrix guided by a greater use of (processes, mechanisms and clean energy (RER) requires a joint activities that eliminate gases in action of all sectors of the country, the atmosphere) in order to limit therefore, in April of 2018 the the effects of climate change. Climate change actions framework Law was approved. The purpose of Resilience this Law is to establish principles, Capacity of social, economic and approaches and general provisions environmental systems to face to coordinate, articulate, design, a dangerous situation, trend or execute, evaluate and disseminate alteration by reorganizing or public policies in order to reduce giving an answer in such way the country’s vulnerability to that its characteristics, structure, climate change, taking advantage identity or special functions of opportunities for low carbon are maintained and its capacity growth. In this regard, we list of adaptation, learning and some useful concepts below: transformation are preserved. Climate change Changes in the climate due to direct and indirect action of human beings, causing changes in the composition of the atmosphere, increasing the natural variability of the climate. Adaptation to climate change Process of adjustment to the current and foreseen climate and to its effects on environmental and human systems in order to moderate or avoid consequential damages or, in some cases, take advantage of its effects.

138 Tax and legal framework Tax and legal framework

4 Secc B | Peruvian general fiscal terms

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The economic attractiveness of are not fully deductible for tax related penalties not paid by a country is strongly influenced purposes. Business transactions the due dates are subject to by the fiscal system that applies must be recorded in legally interest charges, which are not to oil (especially upstream), gas authorized acounting books that deductible for corporate income and energy activities. If tailored must be in full compliance with tax purposes. properly, fiscal terms are able the International Accounting Advanced payments to achieve the overall objective Standards (IAS). Contractors of collecting an adequate share (Peruvian corporations and Companies and branches must of the economic benefit for the branches) –as an exception- are make monthly advance payments government generated by these entitled to keep their accounting of their annual corporate income indutries, while maintaining records in foreign currency as tax. Advance payments will be high levels of investments in the long as they receive and/or equal to the greater amount activities related to them. make foreign direct investment that results from comparing in foreign currency, according the quotas obtained from the Keeping in mind those objectives the requirements established application of the following and considering that the levels by Supreme Decree No. 151- methods: of investment required in the 2002-EF and other rules for early stages of those industries in specific industries as mining, itself involves a great associated hydrocarbons and geothermal • Percentage method: by risk, Peru has established a fiscal resources, but taxes must be paid applying 1.5% to the total net framework that promotes all in Peruvian Soles (PEN). revenue of the month. types of private initiatives, and in parallel special tax incentives in The general corporate income • Ratio method: by dividing the order to reduce the tax impact of tax rate for 2017 tax calculated in the previous oil, gas and energy activities. (onwards) is 29.5%. year by the total accrued net revenue of the same year Basic aspects In addition to this, Dividend and applying the ratio to Tax at a rate of 5% is imposed Resident companies (incorporated the net accrued revenue of on distributions of profits to in Peru), are subject to income the month. This ratio must non residents and individuals tax on their worldwide taxable be multiplied by a factor by resident companies and income. Branches and permanent of 1,0536 to determine by branches, permanent establishments of foreign advance payments in 2017 establishments and agencies of companies that are located in and January-February 2018. foreign companies. Peru and nonresident entities are taxed on income from Peruvian This tax is generally withheld at Income Tax prepayments apply sources only. its source. However, under certain as credit against the annual circumstances, the company must Taxable income is generally income tax obligation or they are pay the tax directly. computed by reducing the gross refunded at the end of the fiscal revenue by cost of goods sold The mandatory closing date year (once the tax return is filed), and all expenses necessary to for business enterprises is if requested by the taxpayer. produce the income or maintain December 31st. Tax returns Capital gains its source. Certain types of must be filed between March revenue, however, must be and April according to the Capital gains are treated as computed as specified in the schedule established by the ordinary income. Under this tax law and some expenses Tax Administration. Taxes and consideration, capital gains

140 Tax and legal framework determined by resident entities Capital allowances are subject to a 29.5% tax rate. Trade or business expenses Starting from January 1, 2016, capital gains derived from In general terms, all corporate the sale of shares and other expenses incurred in the securities representing shares generation of taxable income or (i.e. ADR, GDR, and ETF) carried the maintenence of its source out through the Lima Stock are deductible for corporate Exchange are Income Tax exempt. income tax purposes. This rule is To claim the exemption, the subject to certain exceptions and taxpayer and its related parties limitations expressly provided in must not transfer more than 10% the income tax law. of the shares or “securities that Tax depreciation represent shares” issued by the company whose shares are sold. Depreciation rates apply to the acquisition cost of fixed assets. Shares should meet a liquidity The following are some of the threshold: 180 working days prior maximum annual depreciation to their sale, they should have rates allowed by Law: been traded at least in 27 days (not necessarily consecutive) for a daily fee of US$5,123 (equivalent Data processing equipment 25% to 4 Tax Units). Machinery and equipment for construction, mining and oil 20% Under the latest Tax Reform, activities effective since January, 2017, the aforementioned exemption Vehicles 20% was extended to December 31, Machinery and equipment for 10% 2019. other activities Also, by means of this Buildings and constructions* 5%* amendment other securities (bonds, participation certificates Other fixed assets 10% in Mutual Investment Funds, Real Estate Investment Trusts *This is a fixed rate rather than a (REITs), Securitization Trusts for maximum rate. the Investment in Income of Real State, and Negotiable Invoices) Taxpayers may apply any have been included in the scope depreciation method for their of this exemption, provided fixed assets other than buildings that they are listed and traded and constructions, as long as the on the LSE, and (depending resulting depreciation rate does on each case) fulfill the other not exceed the maximum rates requirements states in Law No. stated above. In general, except 30341 and its regulations. for buildings and constructions, tax depreciation must match financial depreciation.

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Valuation of inventory with a significant pre-operating Definitive recovery VAT system stage and for which no advance Under this regime, VAT paid on Inventory is valued for tax invoice (transferring the VAT the acquisition of goods and purposes at the acquisition or burden) can be issued periodically services used directly in oil & production cost. Financial charges to the client. are not allowed to be part of the gas exploration activities can cost. Taxpayers may choose any of The law provides a general and be recovered without having to the following methods to calculate a specific early recovery system; wait until a commercial discovery annual inventory for tax purposes, each one with its own scope and takes place or production begins. provided that the method is requirements: This regime will be applicable consistently used: first-in, first-out from the contract signing date (FIFO), daily, monthly or annual • General early recovery VAT until the end of the term of the average, specific identification, system: This regime applies exploration phase. detailed inventory, and basic to companies that are in a Goods and services included inventory. preoperative stage, allowing in the regime should be them to recovery the VAT Pre-operative expenses incorporated in a list and paid on the acquisition of approved by the Ministry of Enery capital goods. This regime Pre-operative expenses may and Mines. The validity of this does not require companies to either be expensed in the year regime has been extended until sign an investment contract, production commences, or may be December 31, 2018. amortized over a period of up to nor specific amount of ten years from the year in which investment. Amazon promotion investment production commences. regime • Specific early recover VAT Early recovery VAT system system: This regime applies • VAT and ISC exemption on the to companies that are in sale of hydrocarbon products: The early recovery VAT system a preoperative stage, and oil & gas companies (principally allows obtaining an early recovery that also meet the following those dedicated to oil refining of the VAT paid on the acquisition conditions: (i) they enter into and storage activities) located of goods, services, construction investment contracts with in the regions of Loreto, Ucayali contracts, importations, etc.; Peruvian government, to and Madre de Dios will be executed for carrying out invest in economic Industry; VAT and ISC exempted when taxable operations or exports. and (ii) they make a minimum selling oil, natural gas and by- VAT is reimbursed through investment commitment of products to retailers or to direct negotiable credit notes (which US$5 million for projects with consumers. For this purpose, it are redeemable in exchange for a preoperative phase of at is required that retailers must a check). This system prevents least 2 years. also be located in the regions waiting to recover such amount of Loreto, Ucayali and Madre de from a client when the invoice, If the previous conditions are met, Dios, and should perceive third including VAT, for the sales of companies will be able to recover category income mainly from goods, services or construction VAT paid on the acquisition or commercializing oil, natural contracts is issued to the client. imports of capital or intermediate gas and/or its byproducts. goods, services, and construction In other words, this regime Direct consumers include contracts. The use of one system provides relief of from financial corporations and individuals does not preclude the possibility costs (cost of money) for projects located in the regions of Loreto, of using the other, as they have a different scope (items).

142 Tax and legal framework Ucayali and Madre de Dios, that Withholding taxes purposes of the application of perceive third category income the dividend tax, including the due to activities different from Dividends distribution of cash or assets, the hydrocarbon commercialization. A dividend tax at a rate reduction of the capital of the company or the liquidation of the The law also states that retailers of 5% applies to profits company. will only be allowed to sell the distributed to nonresidents exempted hydrocarbon product and individuals. The dividend This law also provides that if a to the public, or for its own tax applies to distributions by resident company or branch, consumption; and that the direct Peruvian companies, as well permanent establishment or consumer will also be limited to as to distributions made by agency, pays expenses that are use the exempted hydrocarbon Peruvian branches, permanent not subject to further tax control product only for the activities establishments and agencies or does not report any income, carried out in the regions of from foreign companies. Peruvian the amount of the payment or Loreto, Ucayali and Madre de Income Tax Law specifies various income will be subject to dividend Dios. transactions that are considered tax (i.e. it will be treated as a as profit distributions for the deemed dividend distribution).

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It should be noted that the effect Technical Assistance Services located outside Peru that, directly of the reduction of the dividend or indirectly, holds shares (or Payments for technical assistance tax rate combined with the participation interests) in one or services used within Peru are increase of the corporate tax rate more Peruvian subsidiaries (i.e. subject to withholding tax at an results in a total tax burden of an “indirect transfer”) on one of effective rate of 15%, regardless 33.03% (approximately). the following situations: of the country the services Interest are rendered. To ensure the application of the 15% rate, • Where 50% or more of Interest paid to non-residents is the local service recipient must the fair market value of generally subject to a withholding obtain and present to the Tax the nonresident holding tax at a rate of 30%. For interest Authorities upon request a report company’s shares is paid to unaffiliated foreign issued by an audit firm certifying derived from the shares or lenders, the rate is reduced that the technical assistance was participations representing to 4.99% if all the following effectively provided. However, the equity capital of one or conditions are satisfied: this is only required when the more Peruvian subsidiaries fees under the corresponding at any time within the 12 • For loans in cash, the agreement for the technical months preceding the proceeds of the loan are assistance exceed 140 tax units disposition. brought into Peru as foreign (each tax until is equivalent to • The overseas holding currency through local banks PEN S/4,050 or approximately company is located in a tax or are used to finance the US$1,242). haven or low- tax jurisdiction, import of goods. Royalties unless it can be adequately demonstrated that the • The proceeds of the loan are Peruvian source royalties paid for scenario described above did used for business purposes in the use of intangible property are not exist. Peru. subject to withholding tax at an • The participation of the effective rate of 30%. New Law No. 29757, which foreign bank is not primarily Indirect transfer of shares intended to avoid the tax amends Law No. 29663, clarifies treatment applicable to Law No. 29757, which amended that the transaction described transactions between related Law No. 29663 introduced in the preceding paragraph will parties (i.e. the use of back- a new category of Peruvian only be taxable where shares to-back loans is consequently sourced income that may lead or participation interests precluded). to a scenario under which a representing 10% or more of the nonresident will be levied with nonresident holding company’s • The interest rate does not income tax. Broadly, Law No. exceed LIBOR plus 7 points. equity capital are transferred 29663 provides that 30% income within the 12-month period. This tax is imposed on any capital means that the transfer of shares gain realized upon the transfer (or participations) representing of the shares of a company

144 Tax and legal framework less than 10% of the nonresident One or more legal entities are holding company’s equity capital related parties if one of them are not subject to taxation in participates directly or indirectly Peru even when 50% or more of in the management, control the fair market value of those or equity of the other entity, shares is derived from the shares or whenever the same person (or participations) representing participates directly or indirectly the equity capital of one or more in the direction, control or equity Peruvian subsidiaries at any time of diverse related entities. within the 12 months preceding On 31 December 2016, Peru the dispositions. published Legislative Decree Transfer pricing N°1312 amending the Peruvian transfer pricing (TP) reporting Peru has adopted transfer pricing requirements by implementing guidelines, based on the arm’s- the changes proposed by the length principle. The accepted OECD under BEPS Action 13 methods are the comparable final report. The bill expands the uncontrolled price (CUP) method, TP documentation requirements the resale price method, the by introducing an obligation to cost plus method and the submit both a local file (2017) transactional net margin, as well and a master file (2018), as as other related methods based well as the implementation of on margins. The OECD guidelines country- by-country reporting can be used as a complementary (2018), provided that certain source of interpretation. Advance revenue thresholds are reached. Pricing Agreements (APA) Failure to comply could result in may be negotiated with the tax penalties. authorities. Regulations were enacted In Peru, these rules do not only in November 2017 for the apply to transactions between preparation and submission of local and international related the TP formal requirements.To parties, but also to transactions a great extent, the contents of with entities that reside in tax the local file, master file and the havens. Note that adjustments CbCR adopted in Peru are largely to the value agreed between the in line with the recommendations related parties would apply only in specified in Action 13 of the the case where the value agreed BEPS Action Plan. These three between the parties would lead to documents, taken together, will an underpayment of taxes.

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require taxpayers to articulate new transfer pricing rules, the group services. In such cases, the consistent TP positions and commodity prices and quotes to provider of the services shall apply will provide SUNAT with useful be considered, the international a profit mark-up of no more than information to assess TP risks. market, the commodity exchanges 5% to the relevant costs incurred They will also help the Peruvian or similar markets that may be in performing the low value-adding Tax Authorities in determining taken as a reference, and finally services. where audit resources can most the adjustments that shall be Low value-adding intra-group effectively be deployed, and, in accepted to reflect the commodity services for the purposes of this event audits are called for, provide features and the economically approach are services performed information to commence target relevant characteristics of the by one member or more than audit inquiries. This marks a new particular transaction. one member of an MNE group on era of TP documentation and In addition, it introduces general behalf of one or more other group disclosure requirements in Peru transfer pricing guidelines for members which that is much more comprehensive, intra-group services and in more detailed and more thorough particular for services that qualify than those required before, in as low value-adding intra-group • Are of a supportive nature terms of both depth and breadth. services. • Are not part of the core Legislative Decree N° 1312 also Specifically, it requires that business of the MNE group introduces revised guidance for the “benefit test” should be pricing cross border commodity • Do not require the use satisfied to demonstrate that the transactions. It provides that of unique and valuable services were in fact received the CUP method can be the intangibles and do not lead in order for the cost or expense most appropriate transfer to the creation of unique and to be deductible. The test will pricing method for commodity valuable intangibles, and be met by considering whether transactions between associated an independent company in • Do not involve the assumption enterprises using a quoted price as comparable circumstances would or control of substantial risk a reference to determine the arm’s have been willing to pay for the by the service provider and do length price. activity if it was performed by an not give rise to the creation of These rules establish that the independent company or would significant risk for the service arm’s length price for Peruvian have performed the activity in- provider. income tax purposes shall house for itself. be determined by reference The tax regulations will provide The deduction of cost or expenses to the quoted price of (i) examples of services that would for services received should be the date of shipment of the likely meet the definition of low determined based on the total commodities exported or (ii) the value-added services. cost and expenses incurred by date of disembarkation of the the service provider entity, plus Controlled Foreign commodities imported. the applicable mark-up, for its Corporation Rules (CFC Additional guidance and deductibility. Rules) clarification is expected to be The bill provides specific guidance As of January 1, 2013, the established in forthcoming tax relating to a particular category “International Fiscal Transparency regulations as to the products of intra-group services referred Regime” is applicable to all that will be covered by these to as low value-adding intra-

146 Tax and legal framework Peruvian residents who own a Mexico, South Korea, Portugal “controlled foreign corporation” and Switzerland. (CFC). Under these rules, passive The principal purpose of this income earned by CFC’s in other double tax treaty network is to jurisdictions, must be included prevent taxes from interfering and recognized in the taxable with the free flow of international income of resident taxpayers in trade and investment by Peru, even though there has been mitigating international double no effective distribution. taxation with respect to certain A non-resident subsidiary income items. company will constitute a CFC of This, however, is not a static a Peruvian company if: list. Some existing treaties are • The Peruvian company owns still under renegotiation and more than 50 percent of the others are in various stages subsidiary’s equity, economic of negotiation with countries value or the voting rights. such as France, Italy, Thailand, Sweden, Singapore and the UK. • The non-resident entity must be a resident of either: i) a Except for the double tax tax haven jurisdiction; or, ii) treaty with the other Andean a country in which passive Community countries, tax treaties income is either not subject to entered into by Peru generally CIT or is subject to a CIT that follow the OECD Model, although is equal or less than 75% of they incorporate provisions the CIT that would have been from the UN Model, to give more applicable in Peru. weight to the source principle than does the OECD Model. For the application of this Regime, the Law has established Each of the treaties currently an exhaustive list of items that in force between Peru and qualify as passive income (i.e. other countries deals with dividends, interest, royalties, the same matters. Many of capital gains from the sale of the treaties contain common properties and securities, etc.). provisions addressing the same issue. It should, however, be Tax treaties noted that Peru’s tax treaties Peru has entered into a show a remarkable degree of multilateral tax treaty with the individuality, considering that Andean Community countries almost every treaty is different in (Bolivia, Colombia and Ecuador), at least some respects. For that which calls for exclusive taxation reason, it is essential to analyze at source and double tax treaties the specific treaty that may apply with Brazil, Chile, Canada, to a particular tax issue.

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Financing considerations such as jewelry, cars, cigars, International Free Trade cigarettes, liquor, soft drinks, fuel, Agreements and other Thin capitalization etc. ISC rates range from 10% to commercial agreements Debt to equity rule: Interest on 100 , generally based on the CIF The main agreements executed by loans from related parties in excess (imports) or sale value, depending the Peruvian government in order of a 3:1 debt to equity ratio is not on the goods. However, for certain to gain access to international deductible. goods, such as soft drinks and fuel, the ISC is calculated on a specific markets are the following: Indirect taxes basis depending on the amount of Andean Community (CAN): A 18% Value Added Tax goods sold or imported. Peru fully enjoys the benefits from (VAT) applies to the following Taxable persons for ISC purchases the free trade zone established by transactions: are producers and economically this agreement for all its member related enterprises engaged in countries (Bolivia, Colombia, Peru • Sale of goods within Peru. domestic sales of listed goods, and Ecuador). Since Venezuela is importers of listed goods, no longer a member of the CAN, • Services performed or used importers and economically related Peru has celebrated a Bilateral within Peru. enterprises engaged in domestic Agreement with Venezuela, which sales of listed goods and organizers • Construction contracts has been in force since August, of gambling activities. performed within Peru. 2013. Also, Peru, as member of Liability to ISC arises under the the Andean Community, has other • First sale of real estate by the same rules that apply to VAT. obligations and commitments builder. regarding other topics besides the To avoid double taxation, a credit is • Importation of goods from free trade zone. granted for the ISC paid on imports outside Peru, regardless of and in other specific cases. Southern Common Market the status of the importer. (): Custom Duties • VAT paid upon acquisition Partial agreements executed by of goods or services can be • Rates and Tax bases the Peruvian government with deducted from VAT related to each of the member countries The applicable customs duties and the sale of finished products (Brazil, Argentina, Paraguay and taxes are summarized below: or services. Uruguay) are in force. By means of the aforementioned agreements, Exporters are reimbursed for any Tax Rate Tax bases Peru and Mercosur member VAT paid on the acquisition of countries have reciprocally Custom 0%, 6% CIF Value** goods and services. Also, exporters Duties* and 11% granted each other preferential can apply such reimbursement as a customs duty rates. credit to offset VAT or income tax CIF Value + Customs Pacific Alliance liabilities. VAT 18% Duties + Peru, Mexico, Colombia and Selective Consumption Tax (i.e. Excise Tax (if Chile are members of the Pacific Luxury Tax or “Impuesto Selectivo applicable) Alliance which grants their goods al Consumo”) * Customs Duties rates depend on the kind of items imported. Capital goods are preferential tariff treatment The selective consumption tax generally subject to a 0% rate. (ISC) applies to luxury goods ** (WTO) rules are applicable to arrive to customs value.

148 Tax and legal framework as long as they meet certain requirements, including origin and direct expedition. Bilateral Free Trade Agreements Bilateral Free Trade Agreements with the United States, Canada, China, Chile, EFTA States (Iceland, the Principality of Liechtenstein, the Kingdom of Norway and the Swiss Confederation), Mexico, Japan, Singapore, Thailand, Republic of Korea, Panama, , Costa Rica and Honduras are already in force. In addition, Peru has celebrated the Partial Agreement with Cuba (ACE 50). In order to apply these preferential treatments, goods must meet certain requirements, including origin and direct expedition requirements. Peru has also concluded Free Trade Agreement negotiations with Australia, Brasil and Guatemala, as well as with the Trans Pacific Partnership Agreement´s members (Australia, Darussalam, Canada, Chile, Japan, New Zealand, Singapore, United States (under review), , Vietnam and Mexico). Furthermore, Peru maintains negotiations with Turkey, El Salvador, India and is negotiating the Comprehensive and Progressive Agreement for Trans- Pacific Partnership (with Australia, Brunei Darussalam, Canada, Chile,

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Japan, New Zealand, Singapore, production and distribution The amount paid is allowed as a Malaysia, Vietnam and Mexico), of electricity; production of tax deduction for corporate tax which incorporates the provisions gas; transportation services purposes. Not all foreign of the Trans-Pacific Partnership and services related to air governments recognize this as a Agreement and suspends the transportation (such as travel creditable tax and as such double application of some of those agencies, storage and deposit); taxation can occur. provisions (such as intellectual financial services of insurance property) set out in the Annex to and real estate; legal, audit General Anti-Avoidance this Agreement. and accounting activities; Rule business consulting, consulting Finally, it is important to mention related to informatics and data As of July 19, 2012, an anti- that Peru is a founding member processing; and advertising, avoidance rule was introduced of the World Trade Organization health and medical services, and in the Peruvian Tax Code to (WTO). Therefore, the WTO’s education. assist the Tax Administration regulations regarding antidumping in responding to situations of practices, subsidies, countervailing Many oil & gas companies tax avoidance and simulated duties and service market calculate this employee benefit transactions. liberalization, among others, are using the 5% rate that applies to applicable in Peru. the “other” group of activities. Indeed, when facing tax avoidance This has been a matter of situations, the Tax Administration Worker’s profit discussion at the judiciary level. will be able to coercively request the corresponding tax debt, Employers are required to Profit sharing is calculated on reduce tax credits, tax losses or distribute a share of their profits pretax income, and the amount eliminate a tax benefit (including among their employees. The is deductible as an expense for the restitution of the taxes rate depends on the company’s determining income tax. An unduly refunded). To exercise activity, as follows: example of the combined-effect powers under the GAAR, Tax • Fishing — 10% calculation using a 5% profit- Administration must determine sharing rate is as follows: that the taxpayer has: a) • Telecom — 10% performed artificial or improper • Industry — 10% acts to achieve a specific tax result • Net income: 100 - whether individual or jointly with • Mining — 8%, including • Profit sharing: 5 others; and, b) the use of such exploitation of coal mines; artificial or improper acts creates production of petroleum and • Net income for CIT purposes: legal or economic results different natural gas; and extraction of 95 than regular tax savings obtained iron, uranium, thorium, iron- • Income tax (30 * of 95): 28.5 from the routine or proper acts. free minerals, construction stone, clay, talc, sand and • Combined effect: 28.5 + 5 = Despite the aforementioned, gravel, feldspar and salt. 33.5 (33.5% of net income) recently the government has suspended the application of the • Commerce and restaurants — 8% *Tax Rate plus 2% premium General Anti-avoidance Rule, with aapplicable to upstream oil & • Other — 5%, including farming, exception of the provisions of the gas and mining activities. stockbreeding and forestry; first and last paragraphs, to acts,

150 Tax and legal framework facts and situations produced prior to July 19, 2012. Other tax issues. Tax Unit (UIT) The UIT is the reference value employed for tax purposes to determine the taxable income, deductions and penalties, between others. This value is modified every year. For the year 2018, the UIT amounts to PEN S/4,150.00 (US$1,273 aprox.) Temporary net assets tax The Temporary Net Assets Tax (ITAN) is equivalent to 0.40% of the value of total assets determined as of December 31st of the previous year over PEN S/1,000,000. The amount paid is usable as credit against the Corporate Income Tax, or subject to refund. Pre-operative entities are exempt from of this tax, during their first year of operations, but will be subject to the tax the following year. Tax on financial transactions A 0.005% tax is generally imposed on debits and credits in Peruvian bank accounts. • Stamp tax Not applicable. • Exchange controls Not applicable.

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4 Secc C | Special fiscal rules

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01 Oil & gas At a glance The fiscal regime that applies to the oil & gas industry in Peru consists of a combination of corporate income tax, royalties and other levies. Hereunder, we provide a brief char on this matter:

Income Tax rate 29.50%(1)(2)

Hydrocarbon 5% imposed on the value of the hydrocarbons produced Royalties in certain block

Ring-fence rules and preoperative investment Capital allowances amortization Tax losses can be carried forward for 4 years or Investment indefinitely; stabilization agreements; VAT recovery; incentives VAT exemptions on imports of goods for exploration activities

(1) Oil & gas companies with license or service agreements are subject to a 2% premium. These 2 points should be added to the current Income Corporate Tax rate, resulting in an Income Tax rate of 31.5%.

(2) In addition, they must pay a 5% employee profit sharing.

In general terms, oil & gas of hydrocarbon starts) can be companies are subject to the accumulated in an account. At the general corporate income tax contractor’s option and regarding regime; nevertheless, there are each contract, the amount is certain special tax provisions for amortized using either of the the oil & gas sector. methods below: Special rules for investments in • On the basis of the production hydrocarbon activities unit. Hydrocarbon law provides that • Through linear amortization, exploration and development deducting the expenditures in expenditures, including the equal portions during a period investment contractors may of no less than five fiscal make up to the production date years. (when the commercial extraction

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Any investments in a contract case (subject to the tax stability area that did not reach the • Investments for drilling, provisions for contract activities commercial extraction stage and completing or producing and based on the regular regime that were totally released, can be start-up wells of any nature, for the related activities or other accumulated with the same typeof including stratigraphic ones, activities). investments made in another and excluding acquisition costs The total income tax amount that contract that is in the process of surface equipment. the contractor must pay is the of commercial extraction. These sum of the amounts calculated investments are amortized in • Exploration investments, for each contract, for both the accordance with the amortization including those related to related activities and for the other method chosen in the letter geophysics, geochemistry, activities. The forms to be used contract. field geology, gravimetry, aerophotographic survey and for tax statements and payments If the contractor has entered into seismic surveying, processing are determined by the tax a single contract, the accumulated and interpreting. administration. investments are charged as a loss If the contractor has more than against the results of the contract one contract, it may offset the for the year of total release of the tax losses generated by one or area for any contract that did not The Manual of Accounting more contracts against the profits reach the commercial extraction Procedures to be filed before resulting from other contracts or stage, with the exception of Perupetro must detail the related activities. Likewise, the investments consisting of accounts considered as tax losses resulting from related buildings, power installations, expenditures without any activities may be offset against camps, means of communication, recovery value. the profits from one or more equipment and other goods that contracts. the contractor keeps or recovers Ring-fence rules for oil & to use in the same operations or gas contracts It is possible to choose the in other operations of a different The contractor determines allocation of tax losses to one or nature. the tax base and the amount more of the contracts or related activities that have generated the Once commercial extraction of the tax, separately and for profits, provided that the losses starts, all amounts corresponding each contract. If the contractor are depleted or are compensated to disbursements with no recovery carries out related activities (i.e., to the limit of the profits available. value are deducted as expenses activities related to oil & gas, but This means that if there is for the fiscal year. Expenses with not carried out under the terms another contract or related no recovery value occur at the of the contract) or other activities activity, the taxpayer can continue start of commercial extraction for (i.e., activities not related to oil & compensating tax losses until they the following purposes: gas), the contractor is obligated to determine the tax base and the are totally used. amount of tax separately and for A contractor with tax losses from each activity. one or more contracts or related The corresponding tax is activities may not offset them determined based on the income against profits generated by the tax provisions that apply in each other activities. Furthermore, in

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no case may tax losses generated in order to establish the quality minimal percentage of royalty is: by the other activities be offset and volume of hydrocarbons, Percentage against the profits resulting from according to API (American “R” Factor the contracts or from the related Petroleum Institute) and ASTM of royalty activities. (American Society for Testing and • From 0.0 < 1.0 15% Materials) regulations. Hydrocarbon Royalty Based on the scales of production, • From 1.0 < 1.5 20% As mentioned before, oil & gas the percentage of royalty is: exploration and production • From 1.5 > 2.0 25% activities are conducted under Scales of produc- Percentage • From 2.0 or license or service contracts tion (per barrels 35% of royalty more granted by the Government. per calendar day) Under a license contract, the The definitive percentages will < 5 5% investor pays a royalty, while be negotiated and established in under a service contract, the each Contract. Government pays remuneration to 5-100 5% to 20% the contractor. On the other hand, in the case > 100 20% of Cumulative Production per In both cases, however, the Oil Field with price adjustments, distribution of the economic rent the royalty is calculated based (royalty or remuneration) between • Economic results (RRE) on a specific percentage per Oil the Government and the investor Field of a Contract. The royalty is determined based on the According to this methodology, is adjusted based on two factors: following methodologies: the royalty percentage is the the cumulative production of result of adding the fixed royalty • Production scales each Oil Field and the average percentage of 5% to the variable price per barrel of such This methodology establishes a royalty percentage. The variable production. percentage of royalty (or brackets royalty percentage is calculated of royalties starting at 5 ) over once the ratio between revenues Hydrocarbon royalties paid by certain scales of production and expenditures, as of the oil & gas companies shall be (volume of barrels per calendar previous year, is at least 1.15. considered a deductible expense day) for the fiscalized liquid The variable royalty will be for income tax purposes. hydrocarbons and the fiscalized applicable in a range between 5% Incentives natural gas liquids, and other and 20%. • Relief for losses (consolidation royalty percentages for the • Other Methodologies fiscalized natural gas for each of losses on hydrocarbon valuation period. “R” Factor and Cumulative activities): Production per Oil Field with Tax losses can be carried forward Note that the fiscalized price adjustments are alternative and offset against net income hydrocarbons (i.e. liquid methodologies. In the case of “R” derived in future fiscal years. hydrocarbons, natural gas, etc.) Factor, the royalty is calculated means those produced and by applying a ratio between The provisions currently in force measured in a specific fiscalized revenues and expenditures within require the taxpayer to elect one production point set between a certain period established in the of the following procedures to the investor and the Government contract. For these purposes, the offset the tax losses:

156 Tax and legal framework of a block “freezes” the tax regime in force at the date in which the • Offset the total net tax losses contract is signed for the entire contract applicable term. Taxes from Peruvian sources covered by this provision are the taxes in which the responsibility rests incurred in a tax year against on the contractor as a taxpayer. net income derived in the Specifically, tax stability covers the following: four fiscal years following its generation. The amount of losses not offset after this • Income Tax, but an additional two percentage points must be term is cancelled. applicable to the rate in force at the signing date (i.e. current • Offset the total net tax losses Income Tax rate of 29.5% plus 2%). Taxes that affect profit from Peruvian sources distributions arising from the contract activities (i.e., dividend obtained in the tax year tax or branch profits tax) are also covered by the tax stability. against 50% of the net income • Indirect taxes (Value Added Tax, Municipal Promotion Tax, and obtained in the following Selective Consumption Tax), but only as to its transferable years, without limitation. nature. • Tax exemptions and other tax benefits, but subject to the term and conditions established in the provision that contain such The election should be made benefits. when the annual income tax • Tax recovery regimes, temporal admission regimes, export return is filed and it cannot be regimes and other related. changed until the accumulated losses are fully utilized. Loss carrybacks are not allowed. • Special incentives for It is important to note that tax hydrocarbon investors: stability is, in essence, granted Peru’s tax system for the contract activities and Stability regime not directly for the entities that has included signed the contract. Therefore, The Organic Law for certain specific changes in the contractor’s Hydrocarbons and the related ownership will not affect the tax tax regulations foresee that the rules for oil & stability. The tax stability only signing of an oil & gas agreement covers the contract activities (i.e., gas companies implies the guarantee that the the exploration and exploitation tax regime in effect at the date (ring fence of hydrocarbons) and no other of signature will not be changed related or distinct activities during the life of the contract. rules, expense that may be performed by the This is intended to preserve the legal entity (e.g., downstream amortization, economy of the contract so that activities). Revenues obtained no further tax costs are created from the sale or exports of etc.) for the contractors. the extracted hydrocarbon are The signing of an agreement for included in the activities covered the exploration or exploitation with tax stability.

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• Special custom duties: Temporary importation VAT exemptions on import of Goods required for the execution goods for the exploration phase of hydrocarbon contracts may be brought into Peru on a temporary The import of goods and basis for a period of 2 years supplies required for carrying without the payment of duty or out exploration activities in the taxes and re-exported afterwards exploration phase is exempted in the same state as they were from all taxes. The list of goods at import. This term can be to which this exemption applies extended for a one-year period, is published by the Ministry of up to two times. Economy and Finances (MEF). There are conditions placed on This exemption will not be temporary imports. The most applicable if the imported goods important condition is that you are used in other activities rather export the goods within the time than exploration or if they are limits approved. In addition, a sold to third parties, unless: guarantee needs to be filed at the time of import.

• They are sold or delivered The guarantee is an amount equal been introduced regarding the to third parties for use in to the duty and taxes that would goods affected by the Selective exploration activities. have been payable at import, plus Consumption Tax –among compensatory interests. If the • They are re-exported with them fuels- and the applicable goods are not exported within the previous authorization of tax rates. These modifications Perupetro. the time limit you will have to became effective the day after pay an amount equal to the duty they were published. • They are used in exploration and taxes that would have been In the case of fuels, the activities during the payable when you first imported exploration phase of another modifications were approved the goods, as if the goods had taking into account the Index of hydrocarbon contract for the not been treated as temporary same contractor. Noxiousness of Fuels prepared imports, plus interests. by the Ministry of Environment, • They are sold or delivered Selective Consumption Tax in order to discourage the to a company authorized to consumption of fuels that pollute import those goods free from (ISC) the most and encourage the all taxes. It is important to On May 9, 2018, Supreme substitution of less polluting mention that this must be Decrees approved by the ones, and the use of cleaner previously communicated to Ministry of Economy and Finance technologies. Users must pay the Customs Administration. were published, by means more taxes for using one fuel of which modifications have more polluting than another.

158 Tax and legal framework Selective Consumption Tax applicable to fuels

US$per Tariff heading Products S/ per gallon gallon* 2701.11.00.00 Anthacites for energetic use 51.72 (per ton) 170.16 2701.12.00.00- Bituminous coal for energetic use, and other coals 55.19 (per ton) 181.58 2701.19.00.00 2710.12.13.10 2710.12.19.00 Gasoline for motors with Research Octane Number (RON) less 1.27 0.39 2710.12.20.00 than 84 2710.20.00.90 2710.12.13.21 2710.12.19.00 Gasoline for engines with RON equal or over 84, but less than 1.22 0.37 2710.12.20.00 90, and with 7.8% volume of fuel alcohol 2710.20.00.90 2710.12.13.29 2710.12.19.00 Gasoline with RON equal or over 84, but less than 90 1.27 0.39 2710.12.20.00 2710.20.00.90 2710.12.13.31 2710.12.19.00 Gasoline for engines with RON equal or over 90, but less than 1.16 0.35 2710.12.20.00 95, and with 7.8% volume of fuel alcohol 2710.20.00.90 2710.12.13.39 2710.12.19.00 Other fuels with RON over or equal to 90 but less than 95 1.21 0.37 2710.12.20.00 2710.20.00.90 2710.12.13.41 2710.12.19.00 Gasoline for engines with RON equal or above 95, but less than 1.13 0.34 2710.11.20.00 97, and with 7.8% volume of fuel alcohol 2710.20.00.90 2710.12.13.49 2710.12.19.00 Other fuels with RON over or equal to 95 but less than 97 1.17 0.36 2710.12.20.00 2710.20.00.90 2710.12.13.51 2710.12.19.00 Gasoline with RON equal or above 97 and engines with 7.8% 1.13 0.34 2710.1.20.00 volume of fuel alcohol 2710.20.00.90 2710.12.13.59 2710.12.19.00 Other fuels with RON equal or above 97 1.17 0.36 2710.12.20.00 2710.20.00.90

2710.19.14.00 / Kerosene and Jet Fuels (Turbo A1), except certain sales in the 1.93 0.59 2710.19.15.90 country or imports for airships. 2710.19.21.10 / Gasoils, except Diesel B2 1.47 0.45 2710.19.21.90 2710.19.21.11 / Gasoils 1.58 0.48 2710.19.21.99

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US$per Tariff heading Products S/ per gallon gallon* 2710.19.21.11 / Rest of gasoils, except Diesel B2 and Diesel B5 1.26 0.38 2710.19.21.99 2710.19.21.20 Diesel B2 1.44 0.44 2710.19.21.21 Diesel B2 with sulfur content equal or below 50 ppm 1.04 0.32 2710.19.21.29 Rest of Diesel B2 1.24 0.38 2710.19.21.31 Diesel B5 with sulfur content equal or below 50 ppm 1.01 0.31 2710.19.21.39 Rest of Diesel B5 1.20 0.36 Residual 6, except sales in the country or imports by certified 2710.19.22.10 0.92 0.28 seacraft fuel marketers. 2710.19.22.90 Other fuels 1.00 0.30 2710.20.00.11 Diesel B2 with sulfur content equal or below 50 ppm 1.70 0.52

2710.20.00.12 / Diesel B5 and Diesel B20 with sulfur content equal or below 1.49 0.45 2710.20.00.13 50 ppm 2710.20.00.19 Other mixes of Diesel B2 with Biodiesel B 100 1.70 0.52 2711.12.00.00 / Liquefied Oil Gas 0.00 0.00 2711.19.00.00

*US$1 = S/3.29

160 Tax and legal framework • Reimbursement on oil products • OEFA Contribution Its financing sources come from acquisitions: the great electricity consumers Oil & gas companies that import (mining and industry, mainly), Oil & gas companies located in or produce fuel, including natural gas transport service the region of Madre de Dios can liquefied petroleum gases, or through pipelines (Camisea), and obtain a reimbursement on the carry production and imports of fuels. ISC that levied their oil products out transport and distribution The hydrocarbon and electricity acquisitions. activities should pay this companies, which carry out these In both cases, oil & gas companies contribution to the Enviromental activities, are responsible for should be located in the Audit and Evaluation Agency collecting these contributions mentioned regions, be registered (OEFA). The rate of this and transferring them to the in the Public Registry of such contribution for years 2017- Supervisory Body of Private location, and must have more 2019 is 0.09% (for import or Investment in Energy and Mines than 70% of its shares and/or production activities) and 0.11% (OSINERGMIN). activities in the Amazon region. (for transport and distribution OSINERGIM is the entity in charge These requirements do not apply activities) applied on their of managing these contributions. to oil & gas extractor and refining monthly billing after deducting The FISE contribution can companies. VAT. be executed in any of the Special Contributions • FISE Contribution aforementioned goal through a myriad of diverse energy projects • Osinergmin Contribution The Energetic Social Inclusion established by the Energy and Fund (FISE) is a fund established Mines Ministry. Oil & gas companies that import by the Peruvian State, which or produce fuels, including originally worked as a mechanism Recently, the Government issued liquefied petroleum gases to promote the inclusion of the Legislative Decree No. 1331, and natural gas, or carry out population in need to the supply by means of which it added transportation and distribution of energy, with the following dispositions in order to expand activities should pay this objectives: the application of FISE goals. contribution to the Supervisory Body of Private Investment in 1. To massify natural gas for Certainly, with the implementation Energy and Mines (OSINERGMIN). housing and vehicle purposes of those dispositions, funds from The rate of this contribution FISE could now be used to finance 2. Extend the energy frontier by connections to the gas supply is 0.36 % for 2017, 0.35 % for the use of renewable energy 2018 and 0.34% for 2019 (for that may be available by new import or production activities) 3. Generate access to LPG to distribution concessions. and 0.57% for 2017, 0.56% vulnerable sectors of the In this way, natural gas for 2018 and 0.55% for 2019 population distribution concessions through (for transport and distribution 4. Work as a compensation pipelines could benefit from activities), applied on their mechanism related to FISE by the promotion of gas monthly billing after deducting residential electricity connections subsidized with funds VAT. from the latter.

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02 Energy

In general terms, electricity that have a construction period companies are subject to the between one year and a year and general corporate income tax a half and average investment regime described previously; cost of US$0.4 million per MW, nevertheless, there are certain which makes the hydroelectric special tax provisions for the plants a long-term business. electricity generation with water On average, a large hydroelectric resources and other renewable plant operates only in the sixth resources. In addition, certain year in order to obtain profits benefits have been approved for from the sale of electricity, holders of geothermal resources however, gas thermal power concessions. plants begin to make their All these special rules have been business profitable in two years approved in the framework of from the beginning of the the energy matrix diversification investment. Thus, a hydroelectric policy, articulating the power station has a construction instruments of environmental time and an investment cost management with the promotion three times greater than that and development of a low carbon of thermal power plants. This economy, promoting relations situation required the creation and coherence between the of fiscal incentives to guide regulatory policy of clean energy investment in the construction use in development of any private of hydroelectric power plants, initiative and the tax policy. instead of thermal power plants. Considering that investors make Accelerated decisions evaluating lower depreciation benefit costs and shorter periods of investment recovery, the benefit The generation of electricity of accelerated depreciation was with renewable resources approved in 2008 for projects such as, hydroelectricity is that use renewable energy as characterized by low production source for generating electricity. costs (operating stage) but very high investment costs Legislative Decree No. 1058 (construction stage), compared provides that accelerated to other types of technologies. depreciation shall be applicable Certainly, the large hydroelectric to the machinery, equipment plants have a construction and civil works necessary for the period that on average is 4 to installation and operation of the 5 years and an investment cost plant, which are acquired and / or per MW of installed power quite constructed. For these purposes, expensive, between US$1.2 the annual depreciation rate will to 1.4 million, compared with be no greater than 20% as annual other technologies such as the global rate, and the rate may be natural gas thermoelectric plants changed annually by the holder

162 Tax and legal framework The benefit of accelerated depreciation was approved for renewable energy projects.

of the generation concession When these holders are branches Ring fence rules for prior communication to the Tax of companies incorporated activities of exploration or Administration (SUNAT). abroad, the income tax will only exploitation of geothermal be collected on their taxable This benefit will be valid until income from a Peruvian source. resources December 31, 2025. Stability regime The holders of authorizations Guarantees and concessions that carry The State guarantees to the out activities of exploration of investment holders of geothermal rights that or exploitation of geothermal promotion in the tax regime in force at the resources, in more than one moment that the authorizations concession contract and that also geothermal are granted or the contracts develop other activities related for the geothermal resources to geothermal resources and resources concession are signed, will related energy activities, will The only renewable resource remain unchanged during the determine the results of each that has a special promotion validity of the same for the exercise independently by each law is geothermal energy. Law purposes of each authorization contract and for each activity for No. 26848 and its Regulations or concession contract. As in the the purpose of calculating the establish special rules for oil industry, taxes covered by this income tax. holders of geothermal resources provision are the taxes in which If one or more concession concessions, which are pretty the responsibility rests on the contracts or activities generate similar to the fiscal rules provided contractor as a taxpayer. carryover losses, these may be for oil operations described compensated with the profit above.

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generated by another or other Once commercial exploitation Holders of geothermal rights may concession contracts or related starts, all items corresponding to not export the goods entered activities, at the option of the expenses that have no recovery under the exemption regime concessionaire. This means that value will be deducted as an described before, nor may they if there is another contract or expense for the year. The wear be used for other purposes, related activity, the taxpayer can that suffered depreciable assets except as provided in the General continue compensating tax losses will be compensated through the Customs Law and its regulations. until they are totally used. deduction of penalties that will be computed annually, according The corresponding tax is Special to the common system of income determined based on the income tax, on the date of subscription of Contributions tax provisions that apply in each each contract. case (subject to the tax stability Osinergmin Contribution provisions for contract activities The expenses for services Electricity companies that and based on the regular regime rendered by non-domiciled are holders of generation, for the related activities or other entities shall be deductible from transmission and distribution activities). income tax subject to compliance concessions of electric power, with the requirements established Investments amortization as well as of the entities that in the respective regulations. exclusively develop generation Exploration expenses, as well Note that the investments made activities through authorization, as the investments made by in a concession contract, in which should pay this contribution to concession holders until the the commercial exploitation stage the Supervisory Body of Private date on which the commercial has not been reached, can be Investment in Energy and Mines exploitation of the geothermal accumulated to the same type (OSINERGMIN). The rate of this resources begins, including of investments made in another contribution is 0.52 % for 2017, the cost of the wells, will be contract in which this stage has 0.51% for 2018 and 0.50% for accumulated in an account whose been reached and the total will be 2019, applied on their monthly amount, at the option of the amortized in accordance with the billing after deducting VAT. owner and for each contract, amortization method chosen in will be amortized based on the OEFA Contribution the contract. production unit; or by linear Electricity companies that amortization, deducting them in Special custom duties: are holders of generation, equal portions, for a period of not Importation transmission and distribution less than five years per year. concessions of electric power, The importation of goods as well as of the entities that The concession contract must and supplies required by the exclusively develop generation specify the amortization method holders of geothermal resources activities through authorization, used by the owner, which can authorizations for exploration should pay this contribution not be varied. In the case of activities, are exempt from all to the Enviromental Audit and opting for the linear amortization taxes, including those that require Evaluation Agency (OEFA). The method, the period in which the express mention, for the duration rate of this contribution for years amortization will be made must of such authorization, according 2017-2019 Is 0.11 % applied be agreed in the same contract. to the list of goods to be approved on their monthly billing after The depreciation made by the by Supreme Decree. holders must be communicated to deducting VAT. the Tax Administration (SUNAT).

164 Tax and legal framework FISE Contribution or the one that later replaces it. As we described for the oil Its financing source comes from industry, FISE is a national fund a surcharge on the monthly for promoting the inclusion of billing of power, energy and the population in need to the fixed monthly charges invoiced supply of energy, whose financial to public electricity service incomes come from the surcharge users of the interconnected on the monthly billing of the great systems not included in the electricity consumers (mining scope of FOSE beneficiaries. This and industry, mainly). Thus, the surcharge will be established companies that provide electricity based on a percentage that to this group of consumers are will be determined by the responsible for collecting these Supervisory Body of Private contributions and transferring Investment in Energy and Mines them to the Supervisory Body of (OSINERGMIN) based on the Private Investment in Energy and sales projection of the following Mines (OSINERGMIN). period. OSINERGMIN is the entity in charge of managing these FOSE Contribution contributions. The Electric Social Compensation The electricity distribution Fund (FOSE) is aimed at allowing companies must present to access and permanence OSINERGMIN a detailed monthly of electricity service to all settlement of the surcharge residential users of the public for FOSE transferred to energy electricity service whose monthly consumers because they are the consumption is less than 100 responsible for collecting these kilowatt hours per month included contributions and transferring in the BT5 tariff, residential tariff them to OSINERGMIN.

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5 matters Miscellaneous

166 Miscellaneous matters Peru's oil & gas investment guide 2018 - 2019

01 Labor legislation Hiring personnel Termination of Indefinite term contracts are employment the legal default scheme for hiring in Peru, although as an contract exception, fixed term contracts In accordance with the Peruvian can also be signed. The fixed Legislation, employees are term contracts require an protected against arbitrary objective cause established by dismissal. the law to enter into this type In the event of unjustified of contracts (for example, start dismissal, an employee may claim up of a new business, works or a severance payment equivalent specific services, substitution, to one and a half months salary etc.) and its validity is subject to per year of service (under an compliance with certain formal indefinite term working contract); requirements. or, one and a half months salary These contracts provide per pending month (under a employees with all the rights and fixed term work contract).The benefits granted to employees maximum severance payment hired for an indefinite term. is twelve salaries. Alternatively, the employee can claim the There are also other types restitution to the same job he of hiring schemes that grant had. The law allows collective different benefits, such as Labor dismissals under certain Training Modalities or the Law circumstances such as acts of that Promotes Youth Access God or force majeure, financial to the Labor Market and Social or technical streamlining, Protection, among others. dissolution, bankruptcy or The trial period is counted operating downsizing without from the first day of the labor having to grant the severance relationship and must have payment. a maximum term of: i) three months for all employees Employees’ benefits in general; ii) six months Employers are required to provide for qualified or confident the following personnel, and iii) 12 months for management personnel. benefits for employees: Once this period is completed, • Family allowance: equivalent the employees are regarded to 10% of the Minimum salary as permanent and can only be (PEN S/ 85 since May, 2016). dismissed under circumstances concerned with their behavior at • Vacation: equivalent to 30 work or their ability to carry out calendar days of paid rest. their duties.

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• Legal bonuses: 2 bonuses per system (named EsSalud in employer on a voluntary basis year, one paid in July and one in Peru), which provides health to employees that have three December, each one equivalent care services and pay subsidies months of service. The premium to one monthly salary approx. in case of employee disability. depends on the number of Additional Extraordinary Bonus It is collected by the Peruvian insured employees, the risk of equal to 9% of the legal bonus Tax Administration (SUNAT). the work they carry out, and in must be paid. The amount contributed is general, on the terms agreed equal to 9% of the employee’s with the insurance company. • Compensation for Time of remuneration. Services (CTS): equivalent to • High Risk Labor Insurance approximately 1.16 months’ • If the company provides health (SCTR): This is a mandatory salary per year. 50% has to coverage to its employees using insurance to be paid by be deposited in May and the its own resources or through an companies whose activities remaining 50% in November, EPS (in Spanish, the acronym have a certain level of risk, in the bank elected by the means Entidad Prestadora de such as fishing, construction, employee. Salud) it can request a credit of air transport, manufacturing, up to 25% of the Health Care among others described in • Profit sharing: the amount to be contribution, subject to certain Appendix 5 of Supreme Decree distributed ranges between 5% limits established by law. No. 009-97-SA and provides and 10% of the taxable income, additional coverage for health depending on the activity of the • Pension System Contribution: and pension plans. The contract employer. This benefit does not The employee can alternatively for health services may be apply to companies employing join the Government Pension entered with EsSALUD or with less than 20 individuals. System (GPS) or the Private a Private Health Care Provider Pension System (PPS). In All these benefits are deductible (EPS); a contract for the pension the GPS, the employee must for corporate income tax coverage can be entered with make contributions equal to purposes. the Government Agency for 13% of his remuneration. In Pension Fund (ONP, due to its the PPS, the employee has Employers can negotiate a acronym in Spanish) or with to make contributions equal total annual compensation a private insurance company. to an average of 12% of his that includes all the benefits The rates depend on the type of monthly remuneration paid described above, except for activity and/or the terms agreed in cash. Regardless of the the profit sharing, in a fixed on with the insurance entity. monthly installment, as long as system chosen by the employee the employees earn a monthly (GPS or PPS), the employer • Other contributions: Additional salary higher than 2 tax units is responsible to withhold contributions are applicable (PEN S/8,300 during 2018, employees’ contributions from based on the company’s approximately US$2,515). their salaries. activities, such as the Complementary Retirement • Mandatory Life Insurance: Fund, which applies to mining, Social contributions This is a mandatory insurance metal and steel companies; paid for employees with four • Health Care Contribution: among other contributions. This contribution is paid by years of services with the same the employer and its purpose employer. It is also possible is to finance the social health for it to be granted by the

168 Miscellaneous matters Expatriates Foreign individuals that enter Immigration into Peru to perform dependent Foreigners can enter Peru under the following migratory activities for a local employer qualifications, among others: need to submit their work contract for approval to the Labor Visa Rate Tax bases Authorities, and obtain their work visa. These employees have the This visa does not allow the holder to right to receive the same labor perform paid activities. benefits as Peruvian employees, This visa does not allow the holder Tourist visa Temporary to perform activities that can be and are subject to the same considerate Peruvian source income. taxes and contributions. As a This visa allows the expatriate to sign general rule, foreign employees contracts. should not exceed 20% of total personnel. Additionally, wages This visa allows the holder to work in Peru. In the case of a work contract Business paid to foreign employees Temporary with a Peruvian company. It should visa should not exceed 30% of total be duly registered / approved by the payroll cost. Such limits can labor ministry. be waived for professionals This visa allows the holder to work in and specialized technicians or Peru. (as dependent or independent). management personnel of a new In the case of a work contract with a Work visa Temporary entrepreneurial activity or in Peruvian company, it should be duly case of a business reconversion, registered / approved by the labor among others. ministry. This is a visa that applies to an No restrictions apply to foreign employee of a foreign company. individuals working in Peru The service agreement and with Peruvian immigrant visa, assignment letter must be submitted individuals married to Peruvians Designated to the migratory authority. Those Resident or employee documents must be legalized by the or having Peruvian children, Temporary parents or siblings and foreign visa Peruvian consulate and the Peruvian foreign minister. In order to obtain investors with a permanent the Designated resident visa, the investment in Peru of at least documents will need to granted for an US$151,060 (PEN 500,000.00). assignment of a minimum of 1 year. Bear in mind that foreigner Visa for cannot support investment independent Resident Investment or independent work. through share transfer. This also foreign applies to Spanish citizens and national countries members of the CAN, This visa is granted to foreign which is a regional organization nationals who get into the country Immigrant Resident that aims Andean Integration of with purpose to develop activities on their members such as Bolivia, a permanent basis in Peru. Ecuador, Colombia and Peru and citizens of Mercosur members or associates.

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Individual taxes Immigration According to the Peruvian Income Also, the following migratory qualifications are currently Tax Law, the compensation available, among others: received for services rendered within Peruvian territory will be Visa Type Activities considered as Peruvian Source Income regardless of the location of the entity or individual that is This visa allows the holder to study paying the income. Hence, the Resident or salary received by the employees Training in Peruvian institutions or to be an Temporary intern in a Peruvian company in or the expatriate for services activities related to his career. rendered in Peru will be the taxable basis for Peruvian Income Tax. This visa allows the holder to It must be noted that the Investor Resident establish, develop or manage investments according to Peruvian employers will be liable to law. withhold and remit to the Tax Authorities the employee’s This visa is for foreigners with income tax. For such purpose, it knowledge and experience in must determine the employee’s Resident or science and technology fields, income tax debt and withhold the Investigation Temporary that comes to Peru through the National Authority in Science and appropriate amount on a monthly Technology. They are allowed to basis, and pay the income tax work. to the Tax Authorities, based on the tax resident condition of This visa is for foreigners from the individuals and procedure countries that have international established by law. International treaties and agreements with Peru Agreements Temporary on immigration matters. With the In case the employee is (Ex. Mercosur) possibility to apply to a permanent considered as non resident for tax visa 90 days prior the expiration of purposes, a fixed tax rate of 30% the residency. will be applicable over the salary received for his work in Peru, This visa is for foreigners who as of the first day of service, had been residents for a period of Permanent Permanent three years with economic support regardless where of it is paid. by their own or a family member In the case of tax residents, (Peruvian or foreigner resident). apply a five bracket accumulative income tax rate: 8% (for the first

170 Miscellaneous matters PEN S/ 20,750), 14% (from would not be taxed for revenues S/20,751 to S/83,000), 17% obtained in their home country, (from S/83,001 to S/145,250), since they are not considered as 20% (from S/145,251 to Peruvian source income: S/186,750) and 30% rate to • Acts that precede a foreign excess of more than S/186,750. investment or any other Note that the tax unit used in business. fiscal year 2018 is S/4,150. • Supervision or control of an In addition to the 7 tax units investment or business (i.e. deduction to be applied on the gathering data or information, residents gross income, as of meeting public or private sector year 2017, an additional 3 Tax personnel, etc.) Units can be deduced, subject to specific limits and requirements, • Hiring local personnel. for expenses incurred due to lease/sublease contracts, • Signing agreements or similar mortgage interest credit for the documents. first home, professional fees for If foreigners come from countries doctors and dentist, payments for that have agreements with Peru services rendered that qualify as in order to avoid double taxation self-employed retribution (fourth (Chile, Canada, Brazil, Mexico, category income) for specific South Korea, Switzerland and professionals and payments made Portugal) or countries from the to EsSalud in favor of domestic Andean Community (Ecuador, workers, if reported through an Colombia and Bolivia) other tax Annual Income Tax Return. regulations may apply. It is important to mention that Finally, notice that domiciled all the expenses mentioned individuals will be liable to file above have to be paid through a tax return, provided they payment methods approved by receive income other than Tax Administration, that is to employment income and the law say, through the financial system establishes such obligation (i.e. a in bank transfers, credit and/or domiciled individual who receives debit cards payments (not cash). remuneration and interest from In the case of taxing non- a bank account abroad). Hence, resident individuals entering the there is no obligation to file a tax country temporarily to perform return if domiciled individuals the following activities, they receive only employment income.

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02 Accounting standards The Peruvian Business Companies supervised by Corporation Act (LGS) establishes this institution must issue that the financial statements their financial statements in of companies incorporated in accordance with the International Peru must follow the general Financial Reporting Standrads accounting principles accepted (IFRS), issued by IASB; they are in Peru and other applicable as effective in Peru as they are legal provisions. The Peruvian worldwide. Accounting Standards Board The annual financial information (CNC) has established that the given by companies supervised general accounting principles by the SMV must be audited and are the standards issued by include the previous year for the International Accounting comparative purposes. Quarterly Standards Board (IASB) and the reports do not need to be audited. specific provisions approved for The audit must be conducted particular businesses (banks, according to regulations of insurance companies, etc.). the International Auditing and Likewise, on a supplementary Assurance Standards issued by basis, the U.S. - General the International Federation of Accounting Principles (GAAPs) Accountants (IFAC). are applicable. The Peruvian Accounting Standards Board (CNC) is responsible for issuing the accounting standards and methodologies that apply to both private business and government entities. The CNC adheres to the standards approved by the IASB, which are explicitly approved by the CNC and published in the official gazette El Peruano, indicating their date of approval. Companies that issue debt or shares in the capital market are subject to regulation by the Stock Exchange Superintendency (SMV).

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03 Environmental obligations According to the regulation the imposition of right of way; of the Environmental Impact distribution of electricity as a Assessment System (SEIA), all public electricity service, when the public, private or mixed capital demand exceeds 500 Kw; and the investment projects that involve generation of electrical energy activities, constructions, works with renewable energy resources and other commercial and with installed power greater than service activities that may cause 500 Kw. significant negative environmental If any of the aforementioned impacts must necessarily have activities resulted in an extension an environmental certification, of their scope after the EIA prior to their execution. These was already approved, the projects can not be initiated and environmental obligations of the no national, regional or local investor vary according to the authority can approve, authorize, environmental significance of the allow, grant or enable them if proposed modification. In the case they do not previously have an of the hydrocarbon sector, the EIA environmental certification, approved should be subject to a being within the scope of this modification process that requires regulation the activities related fulfilling more or less the same to hydrocarbons and electricity steps for a new EIA; however, with projects. the publication of the Supreme In this sense, specific rules were Decree No. 054-2013-PCM the approved for the hydrocarbons Sustainability Technical Reports activities (Supreme Decree No. was created as an expeditious 039-2014-EM) and electrical mechanism for the approval of activities (Supreme Decree No. minor changes to the activity 029-94-EM). In the case of the granted in concession. In the hydrocarbon sector, the investors case of the electricity sector, the must present an Environmental approval of a new EIA is required if Impact Assessment (EIA) before the change in the activity granted executing exploration and in concession implies an expansion exploitation activities. In the of its facilities in more than fifty case of the electricity sector, the percent of its installed capacity investors must present a EIA when and / or an increase in twenty- requesting a definitive concession, five percent of its current level of that is when they are dealing with emissions and / or involving the electric generation activities that use of new areas. use hydraulic resources with an The EIA is a crucial document installed power greater than 500 that incorporates technical, Kw; transmission of electrical environmental and important energy, when the facilities affect social matters that contribute to state property and / or require

174 Miscellaneous matters the evaluation and determination develop the following types of EIA: to a period of evaluation by the of the necessary mechanisms for competent authority. • Environmental Impact preventing, minimizing, mitigating Statement (EIS): If the negative For a long time, the competent and remediation of the possible environmental impact is authority to evaluate the EIA was negative environmental impacts qualified as not significant, a the Ministry of Energy and Mines that the hydrocarbon or electrical sworn statement is presented (MINEM). However, for increasing activities will trigger. and its approval is almost the trust of the population in the That is why a relevant aspect immediate. evaluation of the EIA, the more of this is participation of the complex studies are evaluated for • Semi detailed Environmental population that inhabits the area the Environmental Certification Impact Assessment (EIA-sd): of influence of the project, which National Service for Sustainable If the negative environmental may be affected by the impacts Investment (SENACE) since impact is qualified as moderate that could occur in its context that December of 2015. This means and liable to be eliminated or can produce a variation of their that EIS and EIA-sd are still minimized by adopting easily living conditions. This participation evaluated by the MINEM, and applicable measures, a study must occur effectively through EIA-d are evaluated by SENACE. should be present subject to informative workshops in non- a period of evaluation by the The principal advantages of the technical language where the main competent authority. creation of SENACE is that a lot aspects of the project are detailed, of environmental authorization and through a public hearing • Detailed Environmental Impact could be obtained in one single where agreements are established Assessment (EIA-d): If the process when the EIA is presented between the investors and the negative environmental impact (global certification process), members that represent the is qualified as significant due to manage a National Registry of communities in order to reconcile the characteristics, size and / or Environmental Consultant that interests. relocation that the project can can help the investor and whose produce, a study is required that Bear in mind that depending on work is documented, and qualified involves in-depth analysis to the magnitude of the impact that people in social matters and with review its impacts and propose the hydrocarbon or electrical more technical understanding the management strategy. The activity will produce in the guide the evaluation process of study should be present subject environment, the investor could the EIA presented.

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04 Prior consultation In order to start an investment of the community if –for example- project which may require the concessions granted could impact utilization of natural resources, their life in a negative way. the investor must evaluate if the This process is meant not only area of the future project will to protect the rights of the be located between lands of an indigenous people, but also to indigenous community, or near prevent eventual social conflicts to these lands, because special in the investment projects regulations exist in our country in that may affect them directly. order to protect the rights of the Hence, this legal instrument’s indigenous community. goal is aimed towards achieving In the 90s, Peru endorsed consensus between the promoting Convention No. 169 of the entities, such as the Presidency International Labor Organization, of the Cabinet, Ministries or through which the recognition Administrative Organisms, and of indigenous community as the indigenous or native peoples’ a vulnerable group makes it representatives. an internal regulation of the In the case of hydrocarbon country to integrate a special and energy projects, the right to be consulted in favor of General Bureau of Energetic these communities. Indigenous Environmental Affairs of the people have the right to be Ministry of Energy and Mines has consulted about any legislative been chosen as the authority or administrative measure that responsible to conduct the can disturb their life conditions in administrative proceedings that connection with the use of their are part of the Prior Consultation. lands. In the case of hydrocarbons, the Moreover, Law No. 29785, Law of timing to develop this process the Indigenous and Native Peoples by the competent authority Right to Prior Consultation, and is prior to the issuance of the its Regulations approved by Supreme Decree approving the Supreme Decree No. 001-2012- subscription of Contracts for 2012-MC, recognize this special Exploration and Exploitation right of indigenous people that is (Ministerial Resolution No. 209- different than the regular citizen 2015-MEM/DM), however, it could participation. The Government be considered an early stage for as an obligation and/or the informing the community about community as a right may require the real magnitude of the project following a process of consultation because it is before the grant of for integrating the considerations the concession.

176 Miscellaneous matters In the case of electricity, there is It must be noted that if a no special rule but the process consensus is not met in the is usually carried out after the last stage of the process, the concession is granted and in promoting entities will do their parallel with the elaboration best effort in order to adapt of the Environmental Impact the legislative or administrative Assessment, in order to integrate means so that it guarantees the all the opinions and observations indigenous peoples’ rights and of the community in the study the improvement of their living and the investor will be in a better conditions. Thus, the lack of position to inform about all the consensus does not imply a veto impacts analyzed in connection right in favor of the latter. with the project. The decision must take into Now, the prior consultation consideration the following process has seven stages, which aspects: (i) Be in accordance to the are: promoting entity’s competences; (ii) respect the Constitutional (i) Identification of the legislative and legal frame; (iii) comply with or administrative mean matter the environmental legislation; of consultation. (iv) preserve the survival of the (ii) Identification of the indigenous peoples and their indigenous peoples and their collective rights; (v) guarantee representative organizations. communal property and land rights of the indigenous peoples. (iii) Publicity of the legislative or administrative mean matter of Once a decision is reached, a consultation. report of the process is submitted to the Interculture Viceministry, (iv) Information. which is the public entity in charge (v) Internal evaluation by the of supervising the full process. indigenous peoples. As of December 31, 2017, 34 prior consultation processes have (vi) Dialogue between the taken place. More than ten of Government and indigenous them are directly related to the peoples. hydrocarbons industry, and just (vii) Decision. two of them are related to the electricity industry.

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05 Anti- corruption Since 2016, Peru has the specific for entering into Public-Private regulations Law No. 30424 that regulates the Partnership contracts. This type of administrative responsibility of contract could not be celebrated corporations in case of corruption by persons convicted, in the crimes stated in the Criminal Law. country or abroad, or who, directly This Law establishes the scope of or through their representatives, the responsibility of corporations had admitted the commission for actions that its partners, of corruption crimes, the same directors, managers and other limitation being applicable empowered related subjects may to legal persons whose legal have done on its behalf or for its representatives or related persons benefit. would have been convicted or had admitted the commission of In case of guilt, according to this corruption offenses. Law, corporations are subject to fees, become disqualified In addition, Emergency Decree entities when contracting with the No. 003-2017 was enacted Government, or are subject to the in February of 2017 for a one cancellation of specific licenses year term. The purpose of and authorizations. this regulation was to approve measures that prevent the In this regard it is important to paralysis of the execution of mention that Law No. 30424 also public works or public-private states that corporations that may partnerships and the breakdown have developed a “Compliance of the chain of payments that put Program” according to its activity, the economic performance of needs and risks in order to prevent the country at serious risk, as a the commission of corruption consequence of acts of corruption crimes will be exempted from carried out by or through of the administrative responsibility. concessionary companies or Due to the recent corruption acts contractors, or of their partners or detected in the infrastructure parts of the consortium, that have sector during 2017, the been condemned or have admitted Government introduced measures the commission of crimes against to assure the continuity of the public administration or investments in the country. In money laundering, in order January of 2017, Legislative to contribute to economic Decree No. 1341 established in sustainability and to protect the its Fifth Final Complementary interests of the State. Provision that certain A month later, in March of 2017 impediments regulated in the the Supreme Decree No. 068- State Contracting Law would 2017-EF was approved with be applicable to the processes

178 Miscellaneous matters the objective of obligatorily This recently enacted regulation establishing that Public-Private is Law No. 30737 and its purpose Partnership contracts should was to introduce new measures include an anti-corruption and liabilities for corporations clause, under sanction of nullity. related (as partners, joint-parties Being that when the contract or any other form stated in ends due to causes attributable the Corporate Act) to other to the investor derived from corporations that are subject to the application of the anti- judicial processes for corruption corruption clause established breaches according to Law No. in the respective contract, no 30424. compensation would be paid in Another relevant consideration favor of the investor, for damages. of the Decree consists of the All these anti-corruption liability and responsibility of regulations were approved as a related corporations to create reaction to the Lava Jato scandal “Compliance Programs” according and its implications in our country. to each corporation’s needs, risks This explains why the application and characteristics to prevent of the aforementioned temporal the commission of violations and Emergency Decree was extended corruption crimes in the terms by means Emergency Decree No. and conditions stated in Law 003-2018 for one month, during 30424. This Compliance Program March 12, 2018. After this, in also entails responsibiliy to hand March 13, 2018, a proper Law to in information to Authorities avoid collateral negative effects periodically regarding the was enacted. development of the business and its financial status.

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6 Appendix

180 Appendix Peru's oil & gas investment guide 2018 - 2019

01 Regulators and AMCHAM conditions within a free market, The American Chamber of which will make Peru an stakeholders Commerce of Peru (AmCham attractive destination for private Peru) is and independent and investment. non-profit organization, founded (www.comexperu.org.pe) onJanuary 17, 1968, that represents Peruvian, American CONFIEP and foreign companies. It The National Confederation of has about 3,000 members Private Business Institutions representing more than 580 (CONFIEP) brings together and associated companies. represents private business (www.amcham.org.pe) activities within Peru and abroad. Its principal objective National Council of Science, is to contribute to the process Technology and Technological of sustained economic growth, Innovation- CONCYTEC based on investment and job Leading institution of the creation from the perspective National System of Science and of individual effort and Technology and Technological initiative, and the promotion of Innovation (SINACYT), integrated entrepreneurship and private by the Academy, the State property. Research Institutes, business (www.cofiep.org.pe) organizations, communities and civil society. Its purpose Economic Operation Committee is to regulate, direct, guide, of the National Interconnected encourage, coordinate, monitor System - COES and evaluate the actions of the Private entity conformed by State in the field of Science, all generators, transmitters, Technology and Technological distributors and free users of Innovation and to promote electricity, whose facilities are developments through concerted interconnected. Purpose of and complementarity action the COES is to coordinate the between the programs and operation of the Interconnected projects of the public, academic, Electrical National System (SEIN) business, social organizations and at the lowest cost and give safety individuals. and quality to the supply of (https://portal.concytec.gob.pe/) electricity to the country. (www.coes.org.pe/portal) COMEXPERU COMEXPERU is the private Environmental Assessment and association that comprises the Supervisory Board – OEFA leading companies involved in The OEFA is the guiding entity foreign trade in Peru. Its main of the National Environmental purpose is to contribute to the Assessment and Supervisory improvement of competitive System (SINEFA) and is

Appendix 181 Peru's oil & gas investment guide 2018 - 2019

responsible as such for the chains, in order to achieve an authority in environmental evaluation, supervision, and agriculture that is fully developed matters in reference to auditing of the compliance in terms of economic, social and hydrocarbons-mining-energy with environmental laws environmental sustainability. activities. nationwide, integrating the (www.minagri.gob.pe) (www.minem.gob.pe) efforts of the State and society in a coordinated and transparent Ministry of Culture Ministry of Environment – manner to ensure the effective This is the nation’s cultural MINAM management and protection of authority in charge of the This is the nation’s environmental the environment. establishment, execution and authority, the overseeing entity (www.oefa.gob.pe) supervision national policies of the National Environmental related to cultural matters. It is Management System (SNGA), and General Bureau of also in charge of the arrangement a part of the Executive Branch. Environmental Health - DIGESA and coordination of the national Its main functions are focused This is the technical-regulator policy of the prior consultation in promoting environmental body in aspects related to basic right. sustainability by preserving, sanitation, occupational health, (www.cultura.gob.pe) protecting, recovering and hygienic food, zoonosis and securing the environment, environmental protection. It Ministry of Economy and ecosystems and natural issues regulations and assesses Finance – MEF resources. environmental health processes The Ministry of Economy and (www.minam.gob.pe) in the sector. It is an entity under Finance is an entity of the the Ministry of Health. Executive Branch responsible Ministry of Foreign Affairs: (www.digesa.minsa.gob.pe) for planning, directing, and Executive Office for Economic controlling matters related to Promotion - DPE Lima Chamber of Commerce – the budget, treasury, debt, The Executive Office for CCL accounting, fiscal policy, public Economic Promotion (DPE) is The CCL, founded in 1888, is spending, and economic and the institution of the Ministry of a private entity that promotes social policies. It also designs, Foreign Affairs (MRE) responsible free enterprise and business establishes, performs, and for coordinating with Peruvian development by enforcing its supervises national and sector missions abroad in an effort legitimate rights, facilitating policies under its competence, to promote Peru as a country new business opportunities, assuming a guiding role therein. capable of providing goods providing assistance and (www.mef.gob.pe) and services in international services and improving their markets, as well as positioning competitiveness. It is one of the Ministry of Energy and Mines - it as a world-renowned tourist most representative business MINEM destination, and a country associations that has more than This is the central and with interesting business and 13,500 associated companies. governing body for the Energy, investment opportunities in (www.camaralima.org.pe) Hydrocarbons and Mining Sector, different economic sectors. a part of the Executive Branch. It should be noted that the DPE Ministry of Agriculture - Its purpose is to formulate and has a Quality Management MINAGRI assess national policy in matters System certified with ISO This is the entity that promotes of sustainable development in 9001:2008 International the development of organized mining- hydrocarbon-power Standards, governed under agrarian producers in productive activities. It is the governing the values of equality, social

182 Appendix commitment, honesty, functions in 2014 with the aim transparency, and teamwork, of promoting the sustainable National Society of Mining, thus ensuring that the needs and participatory management Petroleum and Energy - SNMPE of its national and international of forest and wildlife resources, This is a nonprofit organization, users are met. and the use of their ecosystem which groups the companies (www.rree.gob.pe) services. related to the mining, oil & gas (www.serfor.gob.pe/) and energy related activities in Ministry of Labor and the country. Employment Promotion - MTPE National Fund for the Finance (www.snmpe.org.pe) This is the body governing labor of the Corporate Activity of in Peru, with all powers necessary the Peruvian Government - National Superintendency of to lead the implementation FONAFE Tax Administration - SUNAT of policies and programs for A Public Law company attached A decentralized public entity in the generating and improving to the Economy and Finance Economy and Finance Sector that employment, and also responsible Sector created by Law No. enjoys economic, administrative, for enforcement of legislation for 27170 in 1999, responsible functional, technical and financial labor matters. for regulating and directing the autonomy. It is the main tax- (www.mintra.gob.pe) State’s business activity. collecting agency in the Peruvian (www.fonafe.gob.pe/) economy. National Environmental (www.sunat.gob.pe) Certification Service for National Service for Natural Sustainable Investment – Areas under State Protection – National Water Authority – ANA SENACE SERNANP This is the nation’s water authority. The SENACE is a public This is a public specialized entity Its purpose is the conservation specialized entity in charge responsible for directing and and development of the hydric of the review and approval of establishing the technical and resources within a hydrographic the detailed Environmental management criteria for the river basin. Impact Studies (EIA-d) related preservation of Protected Natural (www.ana.gob.pe) to nationwide public, private Areas (ANPs), and overseeing or mixed capital investment the conservation of biological Peruvian Association of Solar projects which contemplate diversity. It is an entity under de energy - APES activities, constructions, building Ministry of Environment. Non-profit institution, created sites and other commercial (www.sernanp.gob.pe) in 1981 with the purpose of activities or services that may promoting, disseminating and cause significant environmental National Society of Industries encouraging training, research, impacts. This entity is under the – SNI development and applications of Ministry of Environment. The SNI is a non-profit private renewable energy, the rational (www.senace.gob.pe) organization created to use of energy, and respect for the promote the development of environment in Peru. National Forest and Wildlife manufacturing industry in Peru, (www.perusolar.org/) Service - SERFOR guaranteeing the freedom and National Forestry and Wildlife responsibility required to perform Peruvian Chamber of Renewable Authority of Peru and the business activities according Energies - CPER governing body of the National to Peruvian market economy National organization of civil Forestry and Wildlife Management assurance. society whose purpose is to System (SINAFOR). Started (www.sni.org.pe) support the fight against climate

Appendix 183 Peru's oil & gas investment guide 2018 - 2019

change through the promotion of dedicated to exploration and public as an efficient and strategic renewable energies, and support exploitation activities in the option for the development of the process of transition from country. investments in Peru. fossil energy investments to (www.sphidrocarburos.com) ProInversion provides information renewable energies investments. to potential investors regarding (www.camaraperuanade Peruvian Renewable Energies the incorporation of a legal energiasrenovables.org.pe/) Society - SPR entity, identifying investment by Non-profit civil industries and investment projects Peruvian Chamber of Vehicular association composed of (granted and pending), among Natural Gas - CPGNV companies and organizations that other topics. The CPGNV, founded in 2004, are committed to the development (www.ProInversion.gob.pe) is a private nonprofit institution of non-conventional renewable that promotes the development energies. Supervisory Body of Private and use of natural gas for vehicles (spr.org.pe/) Investment in Energy and Mines in Peru, providing facilities to - OSINERGMIN companies dedicated to the Presidency of the Cabinet – This is the regulatory, supervisory production, transportation, PCM body that regulates, enforces and distribution, supply and marketing This is the technical-administrative oversees the activities undertaken of the vehicular natural gas and body covered by the Executive by internal public-or-private-law related products. Law; its highest authority is legal entities and individuals in (www.cpgnv.org.pe) the President of the Cabinet. It the electricity, hydrocarbons and coordinates and conducts a follow- mining sub-sectors. Perupetro up on the Executive’s multi-sector (www.osinergmin.gob.pe) Perupetro is the state-owned policies and programs, coordinates Company that promotes, actions with Congress and negotiates, signs and supervises independent constitutional bodies, exploration and production among other roles. contracts, on behalf of the (www.pcm.gob.pe) Peruvian State. (www.perupetro.com.pe) ProInversion ProInversion is the Peruvian Petroperu investment agency in charge Petroperu is a state-owned of the promotion of business company of private law that opportunities with high growth carries out exploration, and profitability expectation in exploitation, transport, and Peru. Its purpose is to promote refining activities. investment unrelated to the (www.petroperu.com.pe) Peruvian government by private parties in order to boost Peru’s Peruvian Hydrocarbons Society competitivity and development – SPH and to improve the well-being of The SPH is the main hydrocarbons the population. guild in Peru. Founded in 2013, Likewise, its vision is to be it groups the main companies considered by investors and by the

184 Appendix Appendix 185 Peru's oil & gas investment guide 2018 - 2019

02 EY services Our strength in the Our services hydrocarbon and EY Peru has a global focus on energy sector hydrocarbons and energy, with over 1,300 specialist global EY’s hydrocarbon and energy professionals including engineers, professionals combine accountants, economists, technical capabilities with a administrators and lawyers. Our thorough understanding of the global team is closely networked industry’s operating processes, and shares industry and technical strategic and operating risks, knowledge to provide our growth drivers, regulatory clients with seamless global considerations, and market service. Some of our specialist dynamics. hydrocarbon and energy-based We use our wide experience services include: of working with the world’s Environment and largest hydrocarbon and energy sustainability companies to help you address your key business issues. This Providing an extensive range might involve helping you to of services in areas such as overcome current sector issues sustainability reporting and such as rising costs where we can assurance, sustainability strategy, help you streamline operational reputation issues, environmental and business processes and risk management, greenhouse improve productivity on key profit gas emissions advisory, drivers. In this environment of renewable energy and emissions increased sector consolidation, trading. we can assist you with your Hydrocarbons and energy divestment strategies, to ensure advisory that you realize your full value upon exit. If you are looking to Improving supply chain expand your operations to new responsiveness to demand regions, you can draw on our volatility; delivering core business deep understanding of how to re- engineering (e.g., merging manage operational risks – both a number of blocks mines into political and otherwise. one management structure), and delivering projects aimed EY has a number of multi-service at reducing costs or increasing line solutions to help our clients production. meet these challenges.

186 Appendix Mergers and acquisitions ranging from valuations of and comprises over 7,000 advisory businesses and intangible assets professionals. These transaction to specialized oil & gas capital professionals work across many Mergers and acquisitions, at equipment and real estate. elements of the transaction life either the holding company Further V&BM has deep expertise cycle dealing with critical areas or asset level, require specific in model building and review and of financial due diligence, tax knowledge and skills in order is able to construct or review life due diligence and structuring, to complete transactions. The of mine cash flow models as part valuation and business modeling knowledge and skills required of an acquisition strategy. and transaction integration. relate to the regulatory Transaction integration environment, including the rules Project finance advisory and regulations of each country’s Providing commercial and stock exchange, accounting, Advising on the development, operational due diligence, legal, structuring and taxation optimization and implementation integration planning and disciplines, in addition to an of finance plans covering the methodology development, understanding of transaction full range of project financing synergy assessment, value-drivers. options for resources projects, and integration program Valuation and business non and limited recourse debt management, corporate strategy modeling (V&BM) and tax effective leasing, as advice on market opportunities well as a number of associated and areas to exploit along the Providing a range of services to infrastructure projects such as companies value chain, as well companies in the hydrocarbon preparation plants, conveyor as practical operational advice sector including valuations systems, electric transmission in areas such as overhead for purchase price allocation lines, and gas pipelines. and capital expenditure cost reduction, process efficiency, / acquisition accounting, tax Transactions advisory planning, finance and stamp supply chain and procurement, duty purposes and containing Our global transaction capability and in functional areas such as specialists with extensive skills covers over 80 countries finance and human resources.

Appendix 187 Contacts EY Contacts

Beatriz De la Vega EY Energy Leader Partner in Peru

Alfredo Alvarez EY Energy Leader Partner Latam North

Hector Rocha EY Deputy Energy Leader Partner Latam North

188 189 Editor: Beatriz De La Vega

Co-editors: Paulo Pantigoso Andrés Reyes Geraldine Izaguirre María Angela Ortecho

Design and layout: Benjamín Gómez Karla Ramírez

Additional collaborators: Claudia Alva Dionis Arvanitakis

Acknowledgements Acknowledgements guide investment Martín Aliaga Javier Aguirre Antonio Benites Jose Ignacio Castro Samuel Chauca Rodolfo Devercelli Jacquelin Duffoo Marcial García Fabiola Jiménez John Mark Kolb Miya Mishima Silvana Olcese Claudia Perea Leyla Pérez Carla Puente Brando Reyes Giancarlo Riva Ministry of Foreign Affairs Perupetro S.A. ProInversion MINEM

190 Declaration

This work is limited in scope. This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional guidance. It is also not intended to be tax or legal advice and hence cannot be relied upon for any such purpose. In order for EY to issue an opinion or tax advice, additional steps are required including (but not limited to) verifying the facts and assumptions upon which the opinion or tax advice would be based. Moreover, additional research and analysis may be required prior to issuing any tax opinion or advice. EY does not guarantee the accuracy of the data from publicly available sources included in this document. Neither the local EY entity nor any other member of the global EY organization can accept any responsibility or liability for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

191 Peru's oil & gas investment guide 2018 - 2019

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192 Background information