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