PERU AND ENERGY RING: THREE ELECTIONS AWAY

C O N F I D E N T I A L SECTION 01 OF 02 LIMA 005284

SIPDIS

E.O. 12958: DECL: 12/12/2015
TAGS: EPET ENRG ETRD PREL ECON CI PE
SUBJECT: PERU AND ENERGY RING: THREE ELECTIONS AWAY

REF: A. LIMA 4748

B. LIMA 3093

C. LA PAZ 3570

Classified By: Charge D'Affaires Phyllis Powers. Reason 1.4 (B,D)


1. (C) SUMMARY: In discussions on November 21 and December
6, GOP Hydrocarbons Director Gustavo Navarro told Econoff
that the GOP needs two elements in place to consolidate a
"South American energy ring" deal: the participation of
Bolivia and more proven gas reserves in Peru. The Energy
Ring is effectively on hold until after national elections in
Bolivia, Chile and Peru. Peru continues to talk to Bolivia
and the GOP is optimistic that it will have enough new
natural gas reserves to satisfy the GOP and the Peruvian
public that Peru has natural gas to spare for export to Chile
and other South American countries. Navarro said that
political sensitivities have put signing of the framework
agreement on hold, probably until after Peruvian elections in
April 2006. END SUMMARY.

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LEGAL FRAMEWORK FINISHED, BUT TIMING BAD
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2. (SBU) Econoff met with Ministry of Energy and Mining (MEM)
Hydrocarbons Director Gustavo Navarro on November 21 and
again on December 6. Navarro reviewed ongoing talks about a
draft legal framework agreement for a South American "Energy
Ring" that would include Peru, Chile, Bolivia, Argentina and
other South American countries. He explained that the
framework agreement would not obligate parties to buy or sell
natural gas, but would only set out the legal obligations of
participating countries in future buy/sell deals. The
framework would permit participating countries a secure
environment in which to negotiate supply and purchase
agreements. The framework would also make participation
comfortable for investors, energy firms and pipeline
construction firms; it would formalize an accounting system
for "swaps," address tax issues and detail the mechanisms for
dispute resolution.


3. (SBU) Navarro agreed with press reports that the
agreement was basically finished, with all major elements
agreed to by the parties. (Note: Energy Vice Minister Juan
Miguel Cayo has stressed repeatedly in public that the
framework agreement is not a natural gas sale/purchase
agreement but a purely legal framework that would allow
investors to lay a gas pipeline crossing international
borders. Many press reports still treat the framework
agreement as though it was a buy/sell deal that would imperil
Peru's ability to meet its growing domestic demand. End
note.)


4. (C) The political climate remains inopportune for a
public signing of even a framework agreement, Navarro said,
let alone the substantive supply agreement that would follow
the framework. Bolivia's internal debates on its
hydrocarbons sector has made it difficult to get the GOB to
discuss natural gas exports. The various political issues
with Chile -- e.g., Fujimori, the maritime boundary -- that
continue to appear on media front pages, Navarro said, make
the framework agreement risky to discuss in public.


5. (C) Contrary to some media reports, Navarro said that
Peru did not stymie finalization of the framework agreement
with a purposeful absence from an energy ring meeting in La
Paz on November 8. Foreign Minister Maurtua was to attend
the meeting, but could not at the last minute once the news
broke that former President Fujimori had landed in Chile (Ref
A). He continued that it would not have been proper to have
had top Peruvian officials discussing energy supply to Chile
two days after Fujimori's arrival there. Peruvian officials,
including Energy and Mines Minister Glodomiro Sanchez,
participated with other South American energy officials in
the November 19-22 meeting of the Regional Energy Integration
Commission (CIER) in Santa Cruz, Bolivia at which the Energy
Ring was one of the main topics discussed.

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BOLIVIAN, AND MORE PERUVIAN GAS NEEDED FOR SUCCESSFUL DEAL
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6. (C) Serious consideration of a supply agreement among
Peru, Chile and others is on hold for the time being, said
Navarro, and probably would not receive serious consideration
until after the upcoming elections in those countries. With
political complications continuing between Chile and Peru,
and Chile and Bolivia, the national elections for all three
nations within the next four months make an energy ring the
sort of political issue that no presidential candidate will
want to support publicly. Peru and Bolivia have less high
profile issues, but the prevalence of liquefied petroleum gas
(LPG) smuggling from Bolivia in to Peru remains an issue for
both. While the framework agreement is possible in the
coming months, Navarro predicted that no serious substantive
supply deal could be considered until after Peru's new
president is sworn in on July 28, 2006.


7. (C) Navarro stressed that for a substantive agreement to
be acceptable to both the Peruvian public and the GOP, Peru
needs two elements to fall into place. One is confirmation
of sufficient natural gas reserves in Peru; government and
industry officials say that exploratory drilling continues to
be promising but the hard evidence is still lacking. With
increasing Peruvian demand (still way below what the GOP had
forecast) and the Hunt export project to North America,
Navarro said that Peru simply needs more proven reserves to
be comfortable with an agreement to export to a South
American network. Peru's Block 56 and other blocks
surrounding the Block 88/Camisea field are almost certain to
show great reserves but the proof is not yet in; exploration
work is still in the early stages.


8. (C) The second element Peru needs is Bolivia's commitment
to be a supplier along with Peru in the Energy Ring.
(Bolivia has South America's second-largest proven natural
gas reserves and it is relatively close in proximity to
Peru's Camisea pipeline.) Even after Peru can confirm more
gas reserves, the expected demand by Chile, Brazil, Argentina
and other countries makes Bolivian participation essential.
The GOP Minister and Vice Minister of Mines and Energy met
with counterparts in La Paz on November 22 to discuss natural
gas integration between the countries, Navarro reported; the
GOP and GOB energy ministries continue working coordination.


9. (U) After the CIER Energy Ministers meeting, Peruvian
Minister of Energy and Mines (MEM) Glodomiro Sanchez issued a
press statement in which he stressed the great promise of the
Energy Ring and the importance of Bolivia as a participant.
He reaffirmed the importance of Peru proving more natural gas
reserves and the necessity of the framework agreement as a
first step. Sanchez outlined two stages of a proposed energy
ring, the first with Peru supplying MERCOSUR and the second
having Bolivia, Brazil and Argentina becoming suppliers for
the Ring. Other public statements by MEM officials have also
continued to advocate for the Energy Ring.


10. (C) Comment: Peru continues to publicly tout the
advantages of the Energy Ring despite potential political
risk. The GOP is careful to assure the public that domestic
supply will be guaranteed, and emphasizes publicly that
Bolivia needs to get on board. Media mention of the Energy
Ring is diminishing in the Peruvian press, and President
Toledo appears to have given up on promoting the Ring for the
time being.
POWERS