PERU ENERGY UPDATE: MARCH 2008

UNCLAS LIMA 000516 SIPDIS SIPDIS DEPT FOR WHA/AND, EB/IEP COMMERCE FOR 4331/MAC/WH/MCAMERON TREASURY FOR MMALLOY USTR FOR BHARMAN AND MCARRILLO INTERIOR FOR USGS/RESTON DMENZIE AND AGURMENDI ENERGY FOR GWARD AND SBROWNE ENERGY INFORMATION ADMINISTRATION FOR CHARLES ESSER E.O. 12958: N/A TAGS: ENRG ECON EINV ETRD SENV PE SUBJECT: PERU ENERGY UPDATE: MARCH 2008 SUMMARY -------------- ¶1. This is an update on the following energy sector news from Peru: -- Natural gas consumption surges -- Distributing LNG within Peru -- Vehicular use boosts LPG sales -- Pisco-Lima LPG pipeline -- US firm to build Peru's first petrochemical plant -- Thermal power generation heats up -- $1 billion refinery modernization bids -- Fuel smuggling still a problem -- Uranium in Puno? End Summary. CAMISEA NATURAL GAS CONSUMPTION SURGED 78.6% -------------- ¶2. Pluspetrol, the operator of the Camisea gas fields, provided natural gas consumption statistics which show an increase of 78.6% in 2007 over the preceding year to 193.6 million cubic feet per day (cuft/d). Gas re-injection fell from 83% of total production when operations started in 2004 to 54% in 2007 (226.7 million cuft/d). Consumption by electricity generators almost doubled to 125.6 million cuft/d (a 92.4% increase),as two natural gas-fired power plants started up in 2007 in addition to one plant commissioned in December 2006. LNG TO BE TRUCKED WITHIN PERU -------------- ¶3. Irradia is going ahead with its compressed natural gas project, having closed a financial deal with two German banks to build Peru's first domestic natural gas liquefaction and distribution plant. The plant, located just south of Lima in Chilca, will have a 300,000-gallons-per-day capacity and will use Camisea gas. The liquefied natural gas (LNG) will be distributed by cryogenic trucks to areas in Peru not served by pipelines. Irradia is made of Applied LNG Technologies (U.S.),Inversiones Wineca (Venezuela/Peru) and Energy Partners (U.S.). LPG SALES CLIMB 12.1% IN 2007 -------------- ¶4. Motor vehicle use of liquefied petroleum gas (LPG) has boosted domestic sales. Peru's Association of Liquefied Petroleum Gas reported a 12.1% increase in 2007 LPG sales over the prior year to 2,237 metric tons per day (mtpd). The main driver of this result was the explosive growth of LPG for motor vehicles to 413 mtpd, 61.4% over 2006, which reportedly saves motorists over 60% in fuel 
costs compared with gasoline and diesel fuel. The number of LPG-fueled or dual LPG-gasoline vehicles rose to 82,600 in 2007, that is 31,600 above 2006. Residential and commercial sales of LPG rose 4.8% in 2007, totaling 1,825 mtpd or 81.6% of total sales. LPG PIPELINE FROM PISCO TO LIMA -------------- ¶5. The GOP's Private Investment Promotion Agency (ProInversion) awarded February 19 a concession to build a pipeline that will transport liquid petroleum gas (LPG) and other hydrocarbons from the Camisea project's Pisco fractionation plant to Lurin, just south of the principal market of Lima. ProInversion Executive Director David Lemor expects the pipeline will be a less costly alternative to truck and ship transportation from Pisco to Lima. The 30 year BOOT (Build, Own, Operate and Transfer) concession was awarded to a consortium of the local Grana y Montero Petrolera and German company Oiltanking. The estimated investment on the pipeline and related facilities is over $70 million. CF INDUSTRIES TO BUILD PETROCHEMICAL PLANT -------------- ¶6. U.S. firm CF Industries, one of the winners of a bid to procure natural gas from the Camisea consortium, is preparing to build Peru's first petrochemical plant. The plant will produce 2,100 metric tons/day of ammonia and the investment will be about $1 billion. The project has been delayed because ProInversion has postponed until April 30 the awarding of the Ica regional pipeline project, which will deliver the gas to the likely plant site in southern Ica. POWER GENERATION UP 9.1% -------------- ¶7. The Ministry of Energy and Mines (MEM) reported that power generation in 2007 showed an increase of 9.1% over 2006 to 29.86 million megawatt hours (MWh). Mining and manufacturing drove consumption, particularly in the departments of Arequipa and La Libertad. Hydroelectric generation declined slightly (0.5%) to 19.5 million MWh but thermal generation soared 33.2% to 10.35 million MWh. Thermal generation accounted for 34.7% of total generation in 2007, compared with 27.4% the prior year. Peak demand at year-end grew 10.8% in 2007 to 3,966 MW. Installed capacity in 2007 rose 6.0% to 7,059 MW. TAKING BIDS: $1 BILLION REFINERY MODERNIZATION -------------- - ¶8. On March 24 state-owned PetroPeru called for bids related to the $1 billion modernization of its Talara refinery, Peru's second biggest. Bidding will include the procurement of process licenses; extended basic engineering; detailed engineering; procurement of equipment and construction; and project management consultancy. The project would expand capacity and improve the quality of fuels produced to meet Peru's stricter sulfur standards (50 ppm for diesel by January 1, 2010, from 5,000 ppm maximum today, and 50 ppm for gasoline from 1,000 ppm maximum today). Arthur D. Little performed the feasibility study. SMUGGLING DEPRIVES GOP OF $88 MILLION OF UNPAID TAXES -------------- -------------- ¶9. Smuggling of gasoline, LPG and diesel from lower-priced Ecuador and Bolivia costs Peru's Treasury over $88 million/year in unpaid taxes, according to estimates by the Mining, Petroleum and Power Society (SNMPE). The SNMPE puts smuggled diesel and gasoline at about 160,000 gallons per day, worth almost $82.5 million/year in unpaid taxes, and 3 million cylinders/year of LPG, worth over $5.8 million/year in unpaid taxes. URANIUM PROSPECTS IDENTIFIED -------------- ¶10. Early in February, Australian firm Contact Uranium Limited reported having identified three new uranium prospects at its Kihitian project in Peru's southern department of Puno. In January, Cotact had also reported a very large resource potential resulting from its drilling program at its Corachapi project, also located in Puno. Based on positive exploration results, Canadian company Vena Resources announced it and its partner Cameco (also Canadian and the world's largest uranium producer) agreed to increase their uranium exploration budget for late 2007 and 2008 to almost US$4 million in the three regions they are exploring in Puno through their subsidiary, Minergia. MCKINLEY