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. �A; 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