HUNT OIL SIGNS NEW HYDROCARBON EXPLORATION DEAL

UNCLAS LIMA 001742

SIPDIS

SIPDIS
SENSITIVE

DEPT FOR WHA/AND, WHA/EPSC, OES
TREASURY FOR U/S TAYLOR, K. KOZLOFF, G. SIGNORELLI
STATE PASS TO EXIM - A. FOLEY, C. O'CONNOR, R. WILLIAMSON
DEPT OF ENERGY FOR D. PUMPHREY/G. WARD/S. LADISLAW
ENERGY INFORMATION ADMINISTRATION FOR CHARLES ESSER
USTDA FOR ALBERT W. ANGULO

E.O. 12958: N/A
TAGS: ENRG ECON ETRD EAID SENV PE
SUBJECT: HUNT OIL SIGNS NEW HYDROCARBON EXPLORATION DEAL

REF: A) Lima 952 (B) Lima 742


1. (U) SUMMARY: Hunt Oil signed an agreement with the GOP
to explore for hydrocarbons northwest of the Camisea natural
gas fields. The remoteness of the area makes for challenges
in transporting hydrocarbons to market as well as dealing
with the expected opposition from some NGO's to drilling in
the Amazon. Despite uncertainties about hydrocarbon
policies under a new Peruvian president and Congress, the
GOP expects to sign a record number of exploration
agreements in 2006. End Summary.



2. (U) On May 2, the Ambassador attended the signing
ceremony between U.S. firm Hunt Oil Company and the GOP's
hydrocarbon contracting agency, PeruPetro, for exploration
rights in Block 76, southeast of the Camisea natural gas
fields. Although the GOP Supreme Decree approving the
concession was issued in October 2005, the license contract
was finally signed on May 2. Various factors caused the
delay, notably Hunt's focus on phase II of the Camisea
natural gas pipeline project (Peru LNG).


3. (U) Hunt has announced a commitment to invest an
estimated $40 million in the initial seven-year exploration
period. Block 76 comprises 1.4 million hectares and spans
three of Peru's Departments: Madre de Dios, Cuzco and Puno.
The block is in a line of hydrocarbon-rich basins stretching
from the Camisea fields to Bolivia. Industry experts
believe it is likely that significant natural gas reserves
will be found. When Mobil explored Block 76 in the 1990s,
it identified a trillion cubic feet (tcf) of proven
reserves; officials at PeruPetro now estimate an additional
two trillion cubic feet of probable reserves.


4. (U) If, as expected, additional reserves are discovered
these could exceed the proven reserves of the current
Camisea fields and lead to a Hunt Oil Company investment of
more than $2 billion. There is a good possibility that Hunt
will find liquids similar to those in the Camisea fields,
which are delivered via pipeline to the Peruvian coast (near
Paracas Bay) and converted into naphtha, butane, propane and
diesel.

Exploration Challenge: NGO Opposition and Difficult Access
-------------- --------------


5. (SBU) There are virtually no roads in Block 76, and the
few scattered indigenous villages in the area have little
contact with the outside world. GOP and industry contacts
told Econoff that in the seven months since the Supreme
Decree was signed, NGO's opposed to hydrocarbon extraction
in the greater Amazon basin (of which Block 76 is part) have
begun to mobilize local residents against the exploration
project. The NGOs express concerns about the project's
environmental impact and the effects on isolated indigenous
peoples. Hunt and GOP officials assure us that, by applying
lessons learned from Camisea and other jungle extractions,
this project will be carried out responsibly and according
to international standards.


6. (U) More problematic for Hunt, should viable hydrocarbon
reserves be found, will be the transportation chain. With
no roads and unstable, hilly jungle terrain that proved
challenging for the jungle portion of the Camisea pipeline,
the project will not be easy. Initial planning contemplates
a new pipeline to the west, South of Camisea, across the
Andes to the Peru LNG plant site north of Paracas Bay.
Another option would be to build a pipeline to Brazil
through Bolivia.

Record Exploration Contracts
--------------


7. (U) The Ministry of Energy and Mines (MEM) reports that
it is poised to break its 2005 record of fifteen hydrocarbon
exploration contracts signed this year. This is a
significant achievement for the GOP, which had attracted
only a few firms to carry out exploration over the past
decade. Following the Hunt deal, the second signed thus far
in 2006, PeruPetro will ink three contracts with Amerada
Hess this week. PeruPetro is negotiating nine other deals.
The MEM expects ten exploration contracts to be signed by
mid-2006.

Comment: So Far, So Good
--------------


8. (SBU) Oil and gas firms are moving ahead with exploration
projects despite calls for renegotiating hydrocarbons
contracts by both Presidential candidates Alan Garcia and
Ollanta Humala. Hunt continues constructing its Camisea II
plant and intends to start drilling in lot 56, near the
Camisea fields, later this month. So far neither
Presidential candidate has commented on the Block 76
agreement. Peru's predictable and stable hydrocarbon
concession process has made Peru an attractive place for oil
and gas exploration. However, any abrupt change to the
system by Peru's next president would disrupt this positive
investment trend and the goal of establishing Peru as a net
exporter of hydrocarbons by 2012.

STRUBLE