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