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Peruvian operational challenges

12 December 2018 Diego Moya-Ocampos, LLB

A new oil spill has forced the temporary suspension of oil production from Block 192, Peru's second-largest, underlying the main challenges state-owned Petroperú is facing as it prepares to assume a larger upstream role in the Northern Loreto region.

  • Petroperú, the operator of the Norperuano pipeline, declared a force majeure event over sabotage damage to a section of the pipeline in the Loreto department caused by an "attack".
  • Petroperú claims that the Mayuriaga indigenous community damaged the pipeline following a protest, with the event leading to an oil spill of nearly 8,000 barrels.
  • The forced interruption underlines the adverse impact of local and indigenous population demands, driven by environmental and community compensation grounds. These are likely to hinder operations in the region for any private company or Petroperú. The latter's production also will be hurt by shortcomings in securing, maintaining, and operating its aged pipeline network: these have become more evident following more than 100 reported oil spills (mostly not related to attacks) in the last five years.

Canadian oil company Frontera Energy Corporation issued a statement on 3 December 2018 reporting that it has been forced to shut down oil production from Block 192, currently Peru's second largest (after Chinese CNPC's Block X). Oil production from Block 192 is approximately 8,950 barrels per day (b/d). The shutdown follows a declaration of Force Majeure by state owned company Petroperú, the operator of the Norperuano pipeline, claiming damage to a section of the pipeline located at Kilometer 193 in the Morona district of the Datem del Marañón in the northern Amazonian Loreto department. According to Petroperú, the damage was caused by an "attack" during a community protest staged by the Mayuriaga indigenous group demanding the paralisation of oil activities there and questioning the results of municipal elections there on 7 October. Locals also staged a similar protest in early November in which they retained 20 workers of the Norperuano pipeline in the Morona pumping station for four days.

Local and Mayuriaga indigenous communities currently are blocking access to the site of the accident, located 200 Km from Block 192 (and 1,000 Km northeast of the capital Lima), delaying clean-up and pipeline repairs. The Norperuano pipeline connects Peru's Loreto department with the Port of Bayóvar in the northern Piura department. The Norperuano pipeline suffered an earlier prolonged suspension, following a succession of oil spills in 2016, which disrupted production from several oil-producing companies operating in the department of Loreto. According to the Peruvian Ombudsman, more than 100 oil spills have affected the Norperuano pipeline in the last five years, with most of these not being related to "attacks". Instead they are most likely to reflect lack of maintenance and the failure to upgrade existing oil pipeline infrastructure. Peru's oil basins are in areas populated by local and indigenous communities primarily engaged in agricultural and fishing activities, which they perceive to be at risk due to hydrocarbon-sector activities. In March 2018, the government reported it was considering sending the Peruvian army to secure the Norperuano pipeline following sabotage attacks by local and indigenous groups during the last two years.

Petroperú to participate in Block 192

On 21 November, Congress approved legislation to allow state-owned oil company Petroperú to explore and exploit oil at the Block 192 directly or in partnership with a private company. This is key as oil regulator Perupetro confirmed in late September that Petroperú intends to assume operatorship of Block 192 after the current contract of Frontera Energy expires in September 2019. The block has been operated by Frontera Energy since August 2015, and the company had been seeking to extend its contract. Demands from local and indigenous communities in areas surrounding Block 192 include requests for an environmental remediation project following 40 years of oil production in the Corriente, Pastaza, and Tigre river basins, the creation of jobs, and compensation for the use of land by Frontera Energy.

Outlook and implications

Annual investment in Peru's oil and gas sector has declined sharply from almost USD2 billion in 2012 to approximately USD490 million in 2017, while the number of exploration and production contracts has decreased from 80 to 44. This decline reflects lower global oil prices in recent years, which has affected the viability of many planned developments, but environmental and social protests issues also have been a key driver for this decline.

The suspension of oil production and transport activities from Block 192 is affecting Frontera Energy and increasing operating costs in Loreto - with Petroperú sources reporting may be generating estimated economic losses of approximately USD200,000 per day. Repairs are likely to lead to resumption of oil production in Block 192 in the one-month outlook. Block 192 is located in an area where the population is likely continue making demands on environmental and community compensation grounds, often in the form of protests blocking access to projects, making it difficult for any private company or for Petroperú to operate there. Whatever the causes of the repeated spills from the 40-year old pipeline, they underline shortcomings in Petroperú's operational capacity to secure, maintain, and operate its pipeline infrastructure and its unpreparedness to take a stronger upstream role there, including directly assuming operations of Block 192 - once Frontera Energy's contract expires.

One of the main infrastructure priorities of the government in the remaining two years of President Martín Vizcarra's term is likely to be upgrading the Norperuano pipeline. This is critical to reach the government goal of increasing oil production to 100,000 b/d by 2021 (from the November 2018 level of approximately 48,500 b/d).

Further spills not attributable to "attacks" would indicate Petroperú's failure to adequately maintain and operate the Norperuano pipeline, increasing infrastructure disruption risks for producing blocks. An indicator of increasing protest risks would be local and indigenous groups blockading the Marañón River, disrupting hydrocarbon, fuel, and cargo transport.

IHS Markit E&P Terms and Above Ground Risk principal research analyst Juliette Kerr contributed to this article.

Posted 12 December 2018 by Diego Moya-Ocampos, LLB, Principal Analyst, Country Risk Americas, IHS Markit

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