PERU ENERGY BRIEFS - MAY 2008

UNCLAS LIMA 000906

SENSITIVE
SIPDIS

COMMERCE FOR 4331/MAC/WH/MCAMERON
TREASURY FOR MMALLOY AND MEWENS
INTERIOR FOR USGS/RESTON DMENZIE AND AGURMENDI
ENERGY FOR GWARD, SBROWNE AND RDAVIS
ENERGY INFORMATION ADMINISTRATION FOR CHARLES ESSER
BRASILIA FOR HUB ABRAGHETTA

E.O. 12958: N/A
TAGS: ENRG ECON SENV EINV ETRD PE

SUBJECT: PERU ENERGY BRIEFS - MAY 2008

SENSITIVE BUT UNCLASSIFIED, HANDLE ACCORDINGLY

SUMMARY
--------------

1. (U) This is an update on the following energy sector news from
Peru:
-- New Environment Minister sets conditions for sustainable biofuels
development;
-- Brazil and Peru sign 10 agreements on margins of EU-LAC Summit,
including biofuels;
-- Brazilian firms to build $2 billion hydroelectric plant in Peru
to export power to Brazil;
-- State-owned Brazilian and Peruvian companies explore
petrochemical project;
-- Another U.S. company submits proposal to build a natural gas
pipeline to southern Peru; and,
-- GOP ends subsidies to 95- and 97-octane gasolines.
End Summary.

SUSTAINABLE BIOFUELS ONLY
--------------

2. (U) The head of Peru's newly created Ministry of the Environment,
Minister Antonio Brack, wasted no time after being sworn in on May
16 in beginning to set guidelines for the future work of his agency.
To prevent biofuels production from creating a food production and
price crisis, Brack set three conditions for their development:
-- trees can not be felled in primary forests to make room for
biofuel crops;
-- no biofuel crops can be grown on lands currently producing food
crops, and,
-- biofuel crops cannot be watered by flooding -- as is usual in
Peru's coastal and highland farmlands -- and must instead use
efficient irrigation techniques (drip, pressure, etc.).

BRAZIL AND PERU AGREEMENTS
--------------

3. (U Presidents Garcia and "Lula" da Silva (Brazil) signed ten
cooperation agreements after the Peru-hosted European Union - Latin
American and Caribbean summit ended on May 17. One of these, the
Energy Integration Agreement, provides for the development of
hydroelectric projects in Peru for the export of power to Brazil.
The other complementary agreements include one to promote
alternative biofuels crops and one on the sustainable management of
Amazon forests.

BRAZILIAN FIRMS PLAN A $2 BILLON HYDROELECTRIC PLANT
-------------- --------------

4. (U) Brazilian firms Furnas Centrais Eletricas and Construtora
OAS Ltd. have filed an application with Peru's Energy and Mines
Ministry (MEM) for a temporary concession to build a $2 billon
hydroelectric plant at Inambari, in the Madre de Dios department
bordering with Brazil. The companies plan to carry out a
feasibility study so as to eventually obtain a definitive
concession. Brazil's Mines and Energy minister Edson Lobao said the
plant's capacity would be 3,400 megawatts/hour. Construction of the
plant would begin in 2009, and operations would start up in 2012,
with all of the power produced bound for export to Brazil.

BRAZIL-PERU PETROCHEMICAL PROJECT
--------------

5. (U) Presidents Garcia and Lula also witnessed the signing of a
Memorandum of Understanding between Petroperu (Peru's state-owned
petroleum company) and the Brazilian companies Petrobras and
Braskem, whereby the companies will evaluate the economic and
technical feasibility to implement in Peru an integrated
petrochemical project to produce ethylene and polyethylene.


6. (SBU) Project sponsors hope the gas will come from the Camisea


project, but this is far from certain. It is unclear what the
contribution of Petroperu will be as the company is relatively small
and lacks in-house technical manpower and the financial capability
required to undertake major projects. Petroperu already has
agreements with Petrobras for the development of a fertilizer
petrochemical plant (2007) and for the "technical evaluation" of six
blocks in the Maranon basin (2006). (Note: Technical evaluation
agreements often lead to entering into regular exploration and
production contracts with the licensing agency Perupetro. End
note.)

THREE COMPANIES VIE FOR SOUTHERN GAS PIPELINE
--------------

7. (U) A third company, Texas-based Energy Transfer Inc., has
joined two other companies that want to build a natural gas pipeline
linking Camisea with the southern port of Ilo, close to the Chilean
border. Associated with Panda Energy (U.S.),Energy Transfer is
proposing to build the pipeline along the same route earlier
proposed by Conduit Capital Partners' Kuntur Transportadora de Gas,
i.e. through the highlands passing through Cuzco, Puno and Arequipa
to end at the port of Ilo. This route is strongly supported by the
presidents of the local regions the pipeline would cross and serve.
France's Suez Energie filed an application with the Ministry of
Energy and Mines for a temporary concession (while it conducts a
feasibility study) for a $800 million pipeline from Humay (Ica,
close to Pisco) along the coast to Ilo, but the company has recently
also offered to build the pipeline along a route that passes through
the highlands.

SUBSIDIES TO HIGH-OCTANE GASOLINE TO END
--------------

8. (U) The MEM published a resolution May 20 ending the subsidies
to 95- and 97-octane motor gasolines. The GOP will maintain the
subsidies to all other fuels. Subsidies were given through the
"Price Stabilization Fund for Petroleum Products Fuels." The GOP
established the fund in 2004 to prevent the full effect of world
crude oil prices being passed on to consumers when prices increased,
with GOP funds to be recovered when prices decreased. The 95- and
97-octane gasolines are used by a small number of quality
automobiles, such as luxury sedans and recent SUV and minivan
models, mostly located in Lima.
MCKINLEY