CHINESE INVEST IN PERU,S ENERGY SECTOR

C O N F I D E N T I A L SECTION 01 OF 02 LIMA 004539 SIPDIS DEPT FOR EAP/CM, WHA/AND, WHA/EPSC DEPT PLS PASS TO NSC E.O. 12958: DECL: 10/20/2015 TAGS: EINV ENRG ECON ETRD PREL EFIN PE SUBJECT: CHINESE INVEST IN PERU,S ENERGY SECTOR REF: A. A) LIMA 3743 ¶B. B) LIMA 436 Classified By: Economic Officer Samantha Carl-Yoder for Reasons 1.4 (b) and (d) ¶1. (C) Summary. Chinese investment in Peru in 2004 totaled $122 million and several Chinese companies have recently expressed their interest in increasing investment in Peru in the next year. Sapet Development Peru, a subsidiary of China National Petroleum Corporation (CNPC),recently inked a hydrocarbons contract with the GOP to invest $70 million over five years to explore Block 111 in Peru's jungle area. Sapet is currently negotiating an additional contract for Block 113, worth an estimated $80 million. In addition to hydrocarbons, several Chinese firms are examining possibilities of investing in the Peruvian transport sectors. End Summary. Previous Investment Centered on Mining Sector -------------- ¶2. (U) Up until several months ago, Chinese investment in Peru, totaling $122.16 million, had remained the same since ¶1999. The majority of this investment was centered in the mining sector, particularly the iron ore mine Hierro Peru, which is 98.5 percent owned by Shougang Corp. Hierro Peru, located in Marcona, Ica Department (approximately 500 kilometers south of Lima),is Peru's sole iron ore mine and is an open pit operation. Shougang Hierro Peru (SHP) sold 6,315,458 dry long tons (dlt) of iron ore and iron ore pellets in 2004, a 17.5 percent increase from the 5,373,951 dlt sold in 2003. 95 percent of iron ore from SHP is sold to China, with minor quantities sold to local consumers (Ref A). Chinese Now Interested in Energy Sector -------------- ¶3. (SBU) On October 12, the GOP announced, in Supreme Decree 040-2005-EM, that the Ministry of Energy and Mines (MEM) approved Sapet Development Peru's hydrocarbons contract for the exploration and exploitation of Lot 111 in Madre de Dios Department (Peru's southeast jungle area). A subsidiary of China National Petroleum Corporation (CNPC),Sapet Development Peru will coordinate its efforts with the GOP's oil and gas agency PetroPeru to tap into Peru's natural gas and oil reserves. According to Antonio Cueto, chairman of PetroPeru, Sapet Development Peru will invest approximately $70 million during the five-year exploration phase. ¶4. (C) Sapet Development Peru continues to negotiate a hydrocarbons contract for Block 113, also in Madre de Dios. PetroPeru officials believe that Chinese investment could total as much as $80 million during the exploration period. Sapet Development officials predict that negotiations should conclude in the next few weeks, with the GOP issuing a Supreme Decree by the end of October. MEM officials informed us that once the Supreme Decree is published, the Chinese would send a delegation to sign both contracts, perhaps in early November. ¶5. (SBU) The Chinese are also working on a deal with Peruvian sugarcane farmers to export sugar to China. Corporacion Miraflores, an organization of sugarcane farmers in Piura, met with officials from the China National Machinery and Equipment Import Export Group (CMEC) in early August to discuss the possibility of CMEC investing in 5,500 hectares of sugarcane. According to Luis Ortis, Deputy Mayor of Piura, the CMEC is interested in importing sugar to make ethanol for energy purposes. Rumors of Involvement in Transportation Sector -------------- - ¶6. (SBU) The Chinese have a history of involvement in Peru's transportation sector. In 2003, Chinese firms contracted engineering projects and labor services in Peru totaling more than $202 million. Most of these projects focused on the transportation sector. The GOP, which is working on several large infrastructure projects including the construction of the Inter-Oceanic Highway to connect Brazil and Peru, as well as the concession of Peru's largest Port in Callao, continues to tout such programs as golden opportunities for Chinese investment. ¶7. (SBU) Abraham Barreda, representative of Chinese-owned Poly Technologies, noted to the press in August that the company is interested in investing in the Lima/Callao public transportation bid for new natural gas-powered buses. Barreda stated that Poly Technologies could provide up to 5,000 buses at a cost of $832 million for the city of Lima. (Note: The Lima government inked a deal with MarkHeavy, a U.S. company, for 3,600 natural gas buses over six years in February 2005. Although Lima needs additional buses, the municipal government has not yet opened another tender (Ref B). End Note.) Comment -------------- ¶8. (C) The Peruvian Government in the past 10 months has actively pursued improved political and economic ties with China, with high level visits in January and June. Only recently, however, has China realized the economic potential of Peru, at least in the mining and energy sectors. The signing of two hydrocarbons contracts will be the first of many in the next few years, particularly as the MEM opens new opportunities for exploration. We believe, however, that the Chinese will not invest in Peru's infrastructure projects unless there is a clear economic benefit to China. The GOP expects to open the last two concessions for the Inter-Oceanic Highway by the end of the year; perhaps if both the Peruvian and Brazilian governments tout how China's access to Brazilian natural resources will improve due to the highway, one or two Chinese companies may consider investing. STRUBLE