MINING AND ENERGY SECTOR REACTS TO INCOMING GARCIA

C O N F I D E N T I A L LIMA 002438 SIPDIS SIPDIS DEPT FOR WHA/AND, WHA/EPSC, EB/OIA/IFD COMMERCE FOR 4331/MAC/WH/MCAMERON USTR FOR BHARMAN E.O. 12958: DECL: 06/19/2016 TAGS: ECON EINV ENRG PGOV PREL PE SUBJECT: MINING AND ENERGY SECTOR REACTS TO INCOMING GARCIA ADMINISTRATION Classified By: Ambassador J. Curtis Struble for reasons 1.4 (b) and (d) ¶1. (C) Summary. Mining and Hydrocarbons contacts are generally optimistic about their prospects for working with President-elect Alan Garcia. They believe that the in-coming President,s desire/need to maintain a stable investment climate will restain any undue zeal to extract excessive revenue from the companies. The officials expect that Garcia will press them for concessions such as a windfalls tax or a social programs tax credit, but they do not expect that Garcia will try to force them to accept something that will significantly harm their businesses. Camisea officials expect the incoming Administration to seek changes in the pricing structure and extend the period in which the company guarantees that it will meet domestic demand. The company is reasonably confident that a mutually acceptable solution can be worked out. End Summary. Mining Sector Opines -------------- ¶2. (C) We met with mining company officials, mining consultants and Embassies with mining related interests to discern what the industry expects under another Garcia Administration. The officials expressed guarded optimism that Garcia will not push them further than they can go. Garcia was clear during the campaign that he will seek additional revenues from the industry and use those revenues for social purposes. The officials appear to recognize that their sizable profits, resulting from an extended period of record mineral prices, make them an attractive target for greater government revenues. At the same time, they believe that Garcia will not push too hard, since he wants to sell Peru as an attractive destination for international investment. Therefore, the companies believe that Garcia,s proposals will be within reasonable bounds and the companies can currently afford to give up some additional revenue in return for stability. A Tax By Any Other Name - Windfall and Other Taxes -------------- -------------- ¶3. (C) Industry officials anticipate that the Garcia Administration may propose some sort of windfall profit tax, payable while prices are high and deductible when prices decline. While the larger companies may be able to accept this, the smaller, mostly Peruvian, companies are strongly resistant. The smaller companies have less available capital, and they are more vulnerable to downturns in prices. Those companies would prefer an income tax pegged to prices. As prices declined, so would the tax burden. ¶4. (C) Two other possibilities exist, according to mining officials. One is a law to divert (especially with the firms that have tax stability agreements) other income taxes (mine workers, contractors, for example) to become part of the tax revenue that is shared with the municipalities. Another possiblity is a type of voluntary payment, in which companies would pay a fixed percentage of profits into a social programs fund. Again, this type of payment would be resisted by the small companies. In addition to revenue concerns, many of these firms do not have the tradition of social responsibility that is seen in the larger multi-national companies. ¶5. (C) One of the officials Post consulted was Carlos del Solar, President of the Mining and Energy Society (SNMPE) and President of Hunt Oil/Peru LNG (a majority shareholder in Camisea). Like the other officials, del Solar was generally optimistic about working with Garcia. He noted that there is great social pressure for change in mining communities, and opined that mining companies need to increase the scope of their social programs. Del Solar expects that Garcia will privately work with the mining companies to find some solutions before introducing legislative changes to Congress. Camisea - Renegotiation By Any Other Name -------------- ¶6. (C) Del Solar was similarly optimistic about Camisea and the renegotiation issue. He reported that Garcia does not want to nor plans to renegotiate the Camisea I contract. When pressed about how Garcia will deliver on public statements that he will renegotiate, del Solar said that perhaps Garcia would modify the pricing structure. Del Solar noted that the consortium had agreed to freeze natural gas prices until the end of 2006 for power generation, thus forestalling the need for higher electricity costs for consumers. He also explained that the consortium has never applied the contractual price schedule, and has sold natural gas at lower prices to the domestic market. Econoff noted that none of this will get Garcia much political capital. Del Solar thought perhaps a law or "contract renegotiation" that would fix a price schedule at more or less what PlusPetrol is already doing (and thus not allowing the full possible contractual price) would be a win for Garcia and not hurt the consortium. ¶7. (C) Another way in which Garcia could show he has achieved renegotiation as promised would be to legislate the guaranteed minimum years that the Camisea consortium must reserve for domestic consumption. Under the current contract, Camisea must reserve 20 years of domestic predicted consumption (from the Camisea field, block 88) for domestic consumption. By renegotiating that to 25 years, for example, Garcia could show that he is ensuring that domestic demands are met (one of the criticisms of Peru LNG) through renegotiation. Since domestic demand is not large, this would not be a significant burden for the company, especially if it can be delayed until Hunt or Petrobras strike gas in adjoining fields. Exploration - Not in the Crosshairs -------------- ¶8. (C) Rex Cannon, President of Maple Gas, informed us that he believes Garcia poses no obstacle to the sector, as the president-elect wants to encourage exploration. Other than Camisea, oil and gas exploration is low on Garcia's radar screen. Some industry representatives mentioned that Garcia's economic advisors may want PetroPeru to get back into oil and gas exploration. However, Cannon noted, there is no indication yet that Garcia himself wants to do this. Comment -------------- ¶9. (C) The mining and energy sectors appear ready to engage the incoming Administration to ascertain what reforms, if any, will be made by Garcia. Signals from the APRA party indicate that the President-elect will coordinate closely with the mining and energy sectors before implementing reforms. We believe that Garcia understands the need to improve Peru's investment climate to attract future investment in the extractive industries. By not revising tax and juridical stability agreements but encouraging companies to take a more active role in promoting social programs, Garcia will put the mining and energy sectors at ease while sending an important message. STRUBLE