Peru represents a potentially expanding market for U.S. and other foreign energy companies, although privatization is proceeding more slowly than in the 1990s. Although Peru's huge Camisea natural gas field project is temporarily on hold, it has great potential.

Note: Information in this report is the best available as of February 2000 and can change.

GENERAL BACKGROUND
After a decade of economic liberalization, the pace of privatization in Peru is slowing. As the April 2000 presidential elections -- in which the current President Fujimori is expected to run -- approach, President Fujimori has decided against selling state refineries, hydroelectricity plants, and water companies. Government revenues from privatization in 1999 amounted to some $350 million, rather than the $800 million that had been targeted originally.

Peru's economy has weathered recent global economic difficulties better than many of its neighbors. In the wake of the Asian financial crisis, many of Peru's Latin American neighbors experienced economic downturns. Throughout the 1990s, Peru maintained positive economic indicators, such as gross domestic product (GDP) growth, despite fallout from the Asian financial crisis, El Nino weather-related problems, and low prices for mining exports, a major revenue source for Peru. GDP growth for 2000 is predicted to reach 6.5%.

Peru is a member of the Andean Community (ANCOM), set up in March 1996 by leaders of Bolivia, Colombia, Ecuador, Peru, and Venezuela. At that time, the five national leaders expressed their intent to move towards a single market along the lines of the European Union, although significant policy differences need to be worked out. In November 1997, Peru joined the Asia Pacific Economic Cooperation (APEC) forum.

Peru and neighboring Ecuador have fought over a disputed 50-mile stretch of highland jungle in the Cordillera del Condor region along Peru's northeastern border 3 times in the last 47 years, most recently in 1995, when 19 days of fighting left hundreds of casualties. The two nations almost went to war a fourth time in August of 1998, but pulled back and negotiated a border settlement and peace treaty -- brokered by the United States, Brazil, Argentina and Chile -- in October 1998. In August 1999, the countries signed bilateral agreements to build bridges and roads between the neighbors.

OIL
Peru's crude oil production fell sharply in the late 1980s and early 1990s, before a modest recovery beginning in 1993. In the late 1990s, however, Peru's oil production flattened out. In 1999, oil production was 107,000 barrels per day (bbl/d), down from 119,000 bbl/d in 1998. Over half of Peru's oil is produced by U.S.-based Occidental Petroleum and Argentina's Pluspetrol, which operates Block 1-AB on the border with Ecuador. Argentina's Pluspetrol, Peru's state company Perupetro, U.S.-based Petro-Tech, and U.S.-based Barrett Resources Corporation account for most of the remaining production.

Perupetro's predecessor, Petroperu, was partially privatized in 1993 and its role as negotiator and supervisor of contracts was assumed by Perupetro. The main areas of current and potential oil activity are in the northern jungle as well as some offshore areas located from the northern city of Tumbes to Pisco, south of Lima.

Perupetro had planned to hold an offshore bidding round for 14 offshore blocks and two onshore coastal blocks beginning in August 1999. Technical offers and financial bids are now slated for early 2000, with winners to be announced by March 2000. Peru's 37 million acres of offshore basins are largely unexplored. Most of Peru's ten coastal basins are entirely offshore, but at both ends of the 1,500-mile coastline the sedimentary basins stretch from onshore across the continental shelf and down the continental slope. Two of these basin areas, in the north, have commercial production. The main basins are the Tumbes-Prugreso basin in the north at the Ecuadorean border, the Talara basin just south of Tumbes, and the Mollendo-Moquegua basin in the south. In the northern jungle area of Marañon and Ucayali basins, YPF and Perez Companc signed exploration contracts in 1998.

Oil exploration efforts in Peru ran into problems in 1999. Shortly before the August 1999 bid round was to begin, Repsol-YPF revealed that it had dug two dry wells. The U.S. company Anadarko withdrew from Peru after spending three years exploring its Block 84. Pan Energy Exploration, associated with Peruvian companies, withdrew from Block 85 after drilling dry wells. Coastal Peru, which was a partnership including the U.S.-based Hunt Corporation, is no longer operating after three test wells failed to produce any oil.

Pipeline
Peru's Norperuano pipeline runs from the Amazon to the Pacific Ocean. While the pipeline has a capacity of 200,000 bbl/d, it currently carries only about 80,000 bbl/d of crude oil, mostly for domestic consumption. The settlement of the Ecuador-Peru border dispute has led to the possibility of Ecuador exporting crude from its southern borders area through Peru's pipeline. In May 1999, the pipeline was ruptured by a mudslide but was quickly repaired and resumed normal operations.

Refining
Peru has five main active refineries. The largest, La Pampilla, with a capacity of 100,000 bbl/d, underwent a 60% privatization in 1996 and is controlled by Repsol-YPF and others. It handles over half the total production of refined products. Petroperu owns the other major refineries: the 62,000 bbl/d-capacity (about 35% of total production) Talara refinery, located in the region of Piura on Peru's northwest coast, as well as the Iquitos Loreto (10,500 bbl/d) refinery in the northeast, the Conchan refinery (6,500 bbl/d), and the Pucallpa refinery (3,250 bbl/d). The state-owned refineries had been slated to be privatized in the late 1990s. Despite considerable interest from international companies, privatization of the refineries has been put on hold indefinitely.

NATURAL GAS
In July 1998, a consortium of Shell and Mobil halted development of the giant Camisea natural gas field, the largest in South America, which contains an estimated 13 trillion cubic feet (Tcf) of gas and over 600 million barrels of condensate. Camisea gas reserves are found in two reservoirs, San Martin and Cashiriari, lying on either side of the Camisea River in the Ucayali basin, in the remote jungle east of the Andes, about 300 miles from Lima.

The project has been split into two 40-year concession contracts. One covers exploration and production, while the other covers transportation. The Peruvian government is interested to get the project onstream as soon as possible. After delays throughout 1999, including delayed policy decisions over tariffs and royalties and structural delays such as the lack of gas infrastructure in Peru, the government now is taking steps to encourage development. In October 1999, a new energy minister, Jorge Chamot, was appointed. Chamot is known to be in favor of more market-oriented development strategies for Camisea than his predecessor, Daniel Hokama. This was seen by international investors as a positive sign. In early 2000, government managers of Camisea signed a 15-year contract with Electroperu to supply the utility's thermal power stations with Camisea gas. The government also offered to delay bidding on the project if private companies that have prequalified for the bidding request it. Auctions for concessions for gas distribution scheduled for the last week of January 2000 were postponed, at the request of several energy companies, and are now expected in February 2000. Some experts, including the president of Peru's National Mining, Petroleum, and Energy Society, believe that development of the project has become politicized and should be delayed until after the April presidential elections.

Shell had estimated that Camisea eventually could produce up to 500 million cubic feet per day (MMcf/d) of gas and 50,000 bbl/d of condensate. Gas and condensate were to be transported across the Andes to Lima (via Pisco on the southern coast) by at least two parallel pipelines. In the Pisco area, the fish industry and an iron-carbide plant represented potential customers. In Lima, the cement industry would have been the largest customer; Lima's private electric generating company Etevensa also promised to be a customer for the Camisea gas. The gas would have been used in Etevensa's 480-megawatt (MW) power plant (the country's largest) at Ventanilla, just north of Lima. Besides field development, development of Camisea would have involved construction of a private 300-MW power plant to serve Peru's central northern grid and the south. Customers were planned to include large mining companies, utilities, and cement manufacturers. It had been hoped that Camisea could have made up to $1 billion a year and attract billions of dollars worth of new industry to Peru.

The Aguaytia natural gas project was the first development initiated under the current hydrocarbons law. The project has produced 55 MMcf/d since it came onstream in June 1998. Gas from Aguaytia fires a 160-MW power plant that feeds Peru's North Interconnected Power grid. It also produces about 1,300 bbl/d of liquefied petroleum gas and 2,500 bbl/d of natural gasoline. Aquaytia could increase production from its estimated 440-billion cubic feet (Bcf) reserves, but it remains unclear whether Peruvian electricity demands will warrant an increase. Furthermore, the unresolved future of the Camisea project is relevant to Aguaytia. The project is operated by Maple Gas Corporation, in consortium with Duke Energy International, El Paso Energy International Company, Illinova Generating Company, Power Markets Development Company, and Scudder Latin America Power Fund.

ELECTRIC POWER
Peru has about 5.2 million kilowatts of installed electric generation capacity. About half of Peru's power production is hydroelectric, with thermal plants fired by diesel, fuel oil and coal supplying the remainder. Construction of a new 525-MW hydroelectric plant at Cheves, north of Lima, is under consideration. The rate of electrification in Peru remains low (about 65%), with much room for growth. Fujimori hopes to have 75% of the country electrified in 2000. Due to the country's diverse geographical characteristics and scattered population centers, the nation is composed of two interconnected systems and several smaller isolated systems.

Much of Peru's electric sector remains in the hands of the government. Many utilities are wholly- or partially-state-owned, including ElectroPeru, Electrica del Sur, Egasa, and Edegel. Mining and industrial self generators and private companies also generate electricity. Much of the focus of Fujimori's overall privatization plans has been on the electricity sector, and price subsidies to electricity consumers have been reduced in recent years. In 1992, an Electricity Concessions Law was passed, which allowed for private generation, transmission, and distribution of electricity in Peru. The state utility ElectroLima and most of ElectroPeru's assets were privatized in the wake of the law. In November 1997, Peru's Congress approved legislation limiting firms to a 15% market share in electricity generation, transmission or distribution. The law also allows the government to block any acquisition giving a private company more than a 5% market share in more than one electric power sector. Finally, the legislation gives Peru's government the right to veto any acquisitions deemed contrary to the "national interest." About 80% of generation capacity and 50% of distribution now is handled by private companies. The pace of privatization in 1999 was slower than expected, as Fujimori decided to retain government control over key hydroelectric plants.

International companies involved in Peru include: Entergy, Duke Energy, Sempra Energy International, Endesa, Chilectra, Banco Santander, and Tractebel. U.S. companies have had mixed results in their involvement in Peru. Duke Energy gained a controlling share of Egenor in the fall of 1999. Sempra Energy International and PSEG Global attempted to win greater shares of Luz del Sur after their acquisition of Chile's Chilquinta gave them Chilquinta's 37% stake in Luz del Sur, but the companies ran into unexpected obstacles that prevented any deal.