Mon, Feb

Natural Gas Backs Peruvian Power Play

Peru is moving aggressively to develop its natural-gas holdings while controversy over how to develop greater gas reserves in neighboring Bolivia has set off political crises that have now toppled two presidents.

LIMA, Peru — Peru is moving aggressively to develop its natural-gas holdings while controversy over how to develop greater gas reserves in neighboring Bolivia has set off political crises that have now toppled two presidents.

Officials from Argentina, Chile and Brazil -- all of which looked to Bolivia to supply their natural gas needs -- met with Peruvian President Alejandro Toledo last week to discuss getting access to Peru's gas.

While Bolivia stalls, Peru's advances are brightening its already strong economic outlook for the coming years.

These developments are important because natural gas -- cheaper to produce and less polluting than petroleum -- is emerging as the fuel of the 21st century.

Peru has 11 trillion to 13 trillion cubic feet of proven and probable natural-gas reserves while Bolivia has 48 trillion to 52 trillion cubic feet. Venezuela has the most in Latin America, 149 trillion cubic feet but has concentrated instead on developing its huge petroleum reserves.

Peru's natural-gas era began in August with the inauguration of the long-awaited Camisea project, a $1.6 billion investment by foreign companies.

A field first found by Shell in 1984 southeast of Lima but later abandoned, Camisea is sending gas to power plants and homes in Lima via a 400-mile pipeline from the jungle. Liquid byproducts from the gas production are being exported, producing about $80 million a year in taxes for the government.

The gas and byproducts are expected to boost Peru's gross domestic product by 0.8 percent a year, a significant figure in a country that enjoyed 5.1 percent growth in 2004 and is projected to grow by another 4.8 percent in 2005.

Peru's economy will grow by another 0.5 percent a year once private investors begin production from a second Camisea field, known as Block 56. Exports from this field are expected to begin in 2009.

"With the gas from Camisea and from Block 56, Peru will gain more independence," President Alejandro Toledo said in a September ceremony when the government signed a contract with a Hunt Oil-led consortium to develop the gas. "We will cease to import petroleum," he said, as Peru substitutes natural gas for petroleum.

The export project is more complex than the domestic stage of Camisea. It will require a $2.2 billion investment that would drill wells, extract the gas, expand an existing pipeline from the jungle to the coast, build an LNG plant south of Lima that would cool the gas and turn it into a liquid, construct at least two ships to transport the liquid gas to another country and finally build a plant in that country to re-heat the gas and turn it back into its natural form.

Hunt and its partners in the project have targeted Mexico as the most likely destination for Peru's gas. The Mexican power utility, Comision Federal de Electricidad, needs more gas to supply customers in western Mexico.

The power company is planning to seek bids for the gas in the next two months and choose its supplier by the end of the year.

"I think they [the Hunt-led consortium] have a very good chance of winning," Peru finance minister Pedro-Pablo Kuczynski said in an interview, noting that he had just returned from championing their proposal on a trip to Mexico. "The shipping costs from Peru are lower than from Japan or anywhere else. We have huge potential because of our location."

Block 56 is expected to have enough gas to permit the Hunt consortium to sign a 20-year contract with Mexico.

Repsol Argentina and Petrobras, a Brazilian company, hold the rights to two other blocks near Camisea that could yield additional reserves.

"This appears to be a gas-prone area," said Carlos del Solar, general manger of Hunt's Peru operation, adding that the consortium has put the necessary safeguards in place to protect the environment.

Camisea provoked an uproar among environmentalists in the United States and Peru because the project is located in an environmentally sensitive area with indigenous groups nearby, and the site of the plant for the gas liquids is near Paracas National Reserve. Officials with the Inter-American Development Bank, which loaned $75 million for the project, said the bank and others have insisted on environmental safeguards that are working but a pipeline spill in December has left environmentalists unconvinced.

Ironically, when foreign companies found huge natural-gas reserves in Bolivia in the late 1990s, they thought they would be supplying the Mexican market. Without access to the coast, Bolivia planned to build a pipeline to Chile, where some of the gas would supply Chile's needs and the remainder would go through the LNG gas conversion process and then be exported by ship to Mexico.

But Bolivians staged violent street protests against the plan because of enmity toward Chile dating from the 1879 war in which Chile captured and then kept Bolivia's coastline. The 2003 uprising in Bolivia toppled President Gonzalo Sanchez de Lozada and scuttled plans for sending gas to Chile or Mexico.

Peru has offered to ship Bolivia's gas out of the LNG plant Hunt is planning to build south of Lima, but no one has provided the money to build the pipeline from the gas fields in eastern Bolivia over the Andes to Peru's coast.

Bolivia's other options for its gas have become even less clear in recent weeks. On June 9, Eduardo Rodriguez, Bolivia's Supreme Court chief, became president following the resignation of President Carlos Mesa. At the heart of Mesa's resignation was the controversy over natural gas.

Congress and Mesa approved a law last month that unilaterally imposed sharp increases in taxes on gas profits and limited the companies' opportunities to sell the gas -- setting off waves of protests. Complicating the picture, many Bolivians want to nationalize the foreign-gas holdings.

Petrobras, which is the biggest foreign investor in Bolivia, announced afterward that it is freezing its investment.

An Argentine-led consortium that was supposed to build a pipeline to supply northern Argentina with Bolivian gas is also expected to halt its project.

Given the uncertainty on supplies from Bolivia, Brazil has begun to develop a new field near Santos, and the Argentine government is expected to create incentives for Argentine producers to find more gas.

Shortages in Argentina caused officials there last year to withhold some of the gas they had been sending via pipeline to Chile, which has been suffering its own shortfall.

Tractebel, a Belgian company, is studying the possibility of building a pipeline to send Peruvian gas south to Chile. This is the proposal that energy ministers from Brazil, Argentina and Chile discussed with President Toledo. Once the gas reached Chile, it could then be sent via existing pipelines to Argentina and Brazil.

Chilean government officials are also investigating whether to build a re-gasification plant that would allow the country to receive liquefied natural gas from anywhere around the globe.

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Source: Knight Ridder/Tribune Business News