Peru – Is the Glass Half Empty or Half Full?


Thoughts of Peru typically conjure up a land of mystery. From its most popular tourist destination of Machu Picchu high in the Andes Mountains, where visitors flock to witness the grandeur and beauty of the Incan culture and the magnificent ancient city constructed without the benefit of modern tools or technology, to the elaborate Nazca Lines in the deserts of the south, depicting huge figures that can only be seen from the air, people around the world see the country as an exotic and mysterious place. One would not expect this enigmatic quality to carry over to the country’s hydrocarbon industry but in many ways, it does.

Licensed acreage by operator

Licensed acreage by operator

Since 2003, when the country overhauled its hydrocarbon law to attract investment, industry analysts have touted the country as an under-explored prospective area, and with some success. Peru held record-setting bid rounds in 2005, 2006 and 2007, licensing a large percentage of the country. However, many of those blocks have spent long periods suspended in force majeure, have seen little or no exploration and are now being relinquished.

After the licensing boom of 2005-2007, five new exploration and production license contracts were awarded in 2011, and then none were awarded until 2017 when Anadarko signed three new offshore exploration and production license contracts in the Trujillo Basin as a newcomer to Peru. Later in early January 2018, it was announced that another newcomer to Peru, Tullow Oil, had agreed to terms and would soon be awarded five more exploration and production license contracts in the offshore.
It seems now the rush is on in Peru for offshore acreage, even though no one has ever drilled a commercial well in Peru in deeper than 200 meters of water. Meanwhile, 15 technical evaluation contracts were active at year’s end, with 13 of them awarded in 2017. On the other hand, 20 contracts were suspended due to active force majeure, with 10 relinquished exploration contracts and 18 active exploration licenses at year’s end 2017. So, what do we make of this muddled and contradictory picture? Are operators fleeing from Peru or flocking to it, and what is the rationale on both sides?
First consider those coming to Peru: Tullow and Anadarko. These license contracts for the offshore are obviously very exciting and enticing, offering large tracts of prospective frontier, virgin acreage in an attractive fiscal framework with reasonable terms and commitments. Why isn’t everyone chasing that acreage? In fact, Peru does not even have provisions in their hydrocarbon law for deepwater oil and gas operations. Legislation was submitted to Congress by center-right President Pedro Pablo Kuczynski in November to remedy this. This legislation also includes many other measures designed to make the sector more attractive. However, Congress is dominated by the opposition party Fuerza Popular, led by Keiko Fujimori, which has yet to address the legislation and may not consider it a priority.
It seems these operators are now looking at offshore Peru as a way to explore in the country while minimizing some of the issues with the prior consent law and the very difficult task of attempting to monetize discoveries in prospective basins in the jungles east of the Andes.
Regarding the 13 technical evaluation agreement (TEA) contracts awarded in 2017, operators seem to have found a good way to explore in Peru with minimal investment commitment. These two-year contracts carry no production or drilling rights and provide a way for operators to study the block with preferential rights to negotiate a license contract at the end of the TEA, if they like what they see. Eight of the TEAs were approved for Global Petroleum for blocks XLV, XLVI, XLVII, XLVIII, XLIX, L, LI and LII with a total area of 34,137 sq. km.
Most of these frontier blocks are concentrated in the south-central Andes and Titicaca Basin while one is in the Moquegua Basin. Repsol, a longtime Peru operator, was awarded the other five TEA contracts for 2017 in the frontier Pisco Basin of southern Peru. Repsol had been approved for eight TEA contract awards but has delayed the signing of three of them in the highly productive Ucayali Basin in proximity to the country’s world-class Camisea gas fields. Repsol may still sign for these blocks and get the awards, but Peru’s hydrocarbon regulator, Perupetro, has imposed a fast-approaching deadline to do this, and the company could miss out on what appear to be the most valuable TEA blocks in Peru’s most productive basin and area for unknown reasons.
TEA contracts awarded in 2017

TEA contracts awarded in 2017

After this abbreviated summary of the pro-Peru case for exploration and production in the country, it is also useful to look at the companies leaving the country and examine the whys in this scenario.
As stated earlier, Peru had great success with record-setting rounds in 2005, 2006 and 2007. However, these victories may have been less than they appeared to be at the time. Company qualification standards to bid in the round were quite low, enabling many small and undercapitalized companies to win blocks. These companies tended to underestimate the cost of their commitments in these Maranon and Ucayali basin blocks in the jungles east of the Andes.
For example, the comprehensive environmental impact statements (EIS) required before exploration activity can even begin on a block. These often require extensive benchmarking of parameters in both the rainy and dry seasons. They frequently take a minimum of 18 months to complete and may take another year to be approved by the government. This means a delay of 30 months and a few million dollars just to get started.
The regulator (and promoter of the round) added to these underestimations by the operators with unrealistically low cost estimates for some of the drilling commitments. For example, road infrastructure in Peru east of the Andes is virtually non-existent and the building of access roads to drill a well in those areas is usually prohibited. The process for most explorers in that region was to select the most favorable location and drill a well using a combination of river and helicopter transport to move the rig and supplies for drilling the well to the site, at a predicted cost of 100 million. However, this well-cost estimate was based on 10 years earlier when an operator in that region used a drill barge to target a prospect in or on the riverbank at maybe one-tenth of that cost.
This does not even address the cost of monetizing a discovery east of the Andes. This has not been done since the world-class Camisea gas fields in 1984, which took 20 years and was only completed after Shell abandoned the project after 14 years of getting nowhere. Two more recent examples of viable discoveries that have been abandoned were Gran Tierra on Block 95 in the Maranon Basin.
In early 2015, a potential 100 million bbl field was scaled back to 57 million and development plans halted after an appraisal encountered a productive zone much thinner than expected. In 2012 Pacific Rubiales, now Frontera, discovered oil in Ucayali Basin Block 126 with the Sheshea 1X. The Chonta Formation flowed 1,430 bo/d with no water cut and a reserve estimate of 14 to 140 MMbo (if structure filled to the spill point) for the discovery. However, the operator ultimately walked away without even drilling an appraisal well for the discovery. This was probably due mostly to the financial hardships of the operator, but it means there is a potential 140 MMbo of already-discovered oil out there waiting to be developed and marketed, and this may not be enough for a commercial onshore discovery.
In summary, the Peruvian government for the last 15 years has said and tried to do the right thing for the country’s hydrocarbon sector but for various and complex reasons has not always been able to deliver the desired results. The country remains vastly underexplored in its most prospective regions compared to, say, the United States.
However, some companies have recently identified opportunities in the offshore where giant discoveries are possible and which are likely to be much less impacted by the Prior Consultation Law and its resulting NGO leverage. This all leads back to the original question posed at the beginning of the article, “Is the glass in Peru half full or half empty?” Time may provide a clearer answer, but at this stage it is in the eye of the beholder.

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Scott Stewart

Scott Stewart has more than 27 years of experience in the oil & gas industry. He has been directing intelligence efforts in the Latin American region for the last 11 years. Scott has a Bachelor of Science in Geology from the University of Tennessee.