With Barrett's Heavy Crude Proposal, Could Peru Become an Exporter?

LIMA (Dow Jones)

Larger reserves and high oil prices have made a heavy-oil project in northern Peru a much more attractive proposal than when it was originally discovered eight years ago, government officials said Wednesday.

Late Tuesday, the government said U.S.-based Barrett Resources LLC will proceed with production at block 67 near the border with Ecuador, and could start pumping by 2010. Privately-held Barrett discovered heavy crude in 1998 but decided at the time that production was not economically viable.

The officials said the projected reserves on the block are higher than initially estimated, without providing specific details.

Crude oil prices ranged between about $10 and $20 per barrel in 1998, but have since soared, trading this year at between $57 and $80 per barrel. The rise has helped turn a number of once uneconomical oil fields around the world into viable projects.

"At the time, the volume and international oil prices did not justify that it move to production and it remained in exploration," the director of hydrocarbons at the Ministry of Energy and Mines, Guillermo Navarro said in an interview Wednesday.

Barrett did not return calls made Wednesday.

The firm's decision to move forward was hailed by the government as a validation of its efforts to attract private-sector investments, and could help turn the country into a net exporter of crude oil in five years. Peru currently produces some 120,000 barrels per day of oil liquids but consumes 150,000 b/d, according to Navarro.

"This is excellent news for Peru. It is definitely very positive," Jose Chavez, general manager of state licensing firm Perupetro, told Dow Jones Newswires.

The block is expected to produce 100,000 barrels of heavy crude oil a day "at peak," according to the officials.

Barrett has invested $100 million to explore block 67, but, according to the officials, the next step may require significantly larger resources. Both Chavez and Navarro said that developing the block would likely cost more than $1 billion, given its geographic isolation and the heavy nature of the crude.

As well as production and processing, the firm will have to build a 400-kilometer pipeline to link up with the existing Norperuano pipeline in northern Peru.

Barrett drilled two appraisal wells this year, the Paiche Sur X-2 and the Dorado Norte X-2, and will now carry out extensive three dimensional seismic testing, the government said in a statement, citing Barrett. The U.S. firm must also prepare environmental impact studies.

The oil officials, meanwhile, were upbeat about the possibilities for the entire northeastern area of Peru, where a number of companies are undertaking exploration activities.

"It could become a significant heavy-crude oil producing area," said Chavez.

Barrett's block 67 lies adjacent to block 39, which is operated by Spain's Repsol-YPF SA (REP). In mid-2005, Repsol said its Buenavista IX well had tested at a production level of 3,000 barrels per day of low-grade, heavy oil of 13 to 14 degrees API.

"This year they have also drilled two wells with favorable results," said Chavez about Repsol's operations.

That said, U.S. based Occidental Petroleum Corp. last week said it was relinquishing three blocks in northern Peru, as it emphasizes operations in the U.S. and the Middle East. There had been extensive criticism by non-governmental organizations, which claimed Occidental and other oil companies operating in the area were polluting the rainforest.

Peru has already swung into self-sufficiency in natural gas, with the start-up of the Camisea natural gas project in mid-2004. Production from a number of other natural gas fields that are starting up will be converted into liquid natural gas for export.

Perupetro has signed a record 16 contract for exploration and production this year, which brings to 61 the total number of those contracts currently in force.

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