Peru to Auction Last 'Virgin' Oil, Gas Exploration Lots

LIMA (Dow Jones Newswires), June 19, 2008

Rising oil prices and political stability are helping Peru in its push to become a more important producer of natural gas and oil.

For years Peru has trailed far behind neighboring Ecuador and Colombia in exploration and production, but in recent years the government has made a concerted effort to boost exploration.

The coming on stream earlier this decade of the Camisea natural gas project, in Block 88, has helped boost interest in Peru, as have some recent petroleum finds in the north.

Perupetro, the government agency in charge of negotiating contracts, has been steadily increasing the number of exploration and production contracts.

Currently Perupetro has a record 84 concession contracts outstanding, with 24 signed last year, and another 22 could be on offer to be awarded this year.

"It is a record. There have never been so many," Perupetro Chairman Daniel Saba told Dow Jones Newswires in a recent interview in the company's head office.

Pointing to a map of the various lots under exploration and up for grabs, Saba says the upcoming round of concessions will be the last one of relatively untouched areas of the nation.

"What we have are basically the virgin lots, the last ones," he said.

The government expects to award the concessions later this year.

"There is a lot of enthusiasm from groups that want to invest in Peru," Energy and Mines Minister Juan Valdivia said this week.

For example, representatives of India's Reliance Industries Ltd. will buy about 30% group recently met with President Alan Garcia in Government Palace to discuss increasing investment in Peru's energy sector. Reliance already has concessions for two exploration lots in Peru.

Perupetro offers 30-year contracts for petroleum and 40 year contracts for gas. If work commitments aren't met then parts of those concessions revert back to the state.

"Since 2006 there has been a combination of discoveries and high prices. Also Peru is being seen as a stable nation in the region, alongside Colombia. In other nations like Ecuador, Bolivia and Venezuela, things can be a little more complicated," Saba added.

Developments Weakened By Mismanagement, Terrorism

Some of the first producing oil wells in Latin America were in Peru, but decades of political and economic instability cut interest in exploring and producing oil in the Andean nation.

A left-wing military government that ruled from 1968 to 1980 nationalized much of the industry. Government mismanagement of the economy and internal terrorism in the 1980s also scared away many investors.

That started to turn around in the 1990s, with the defeat of terrorism, although petroleum prices remained low.

In 2000, a consortium led by operator Pluspetrol Peru Corporation SA won a 40-year license to develop Camisea's upstream sector.

That spurred heavy drilling in other lots in the same area, especially in Block 56. Gas has been found following drilling in nearby Block 57, while Brazil's Petroleo Brasileiro SA. (PBR) is set to start drilling in Block 58.

"All the area around Camisea is a world class gas zone," Saba said.

A consortium led by Hunt Oil has started a multi-billion dollar construction project aimed at exporting LNG by the end of the decade, likely to Mexico. Peru is also promoting the construction of various pipelines to move gas more easily around the nation.

Current Production Low

Current hydrocarbons production remains weak, however.

Peru produced an average of 104,862 barrels of oil equivalent a day in May. The country's average daily output of natural gas last month rose 21% from April to 338.8 million cubic feet.

Pluspetrol Peru led oil production in May with 28,872 barrels a day from Block 88.

That amount could increase sharply near the end of the year due to an $800 million expansion plan at the Camisea project.

Production capacity of natural gas liquids is expected to increase to some 85,000 barrels a day compared with current output of some 50,000 barrels a day, operator Pluspetrol has said.

Another project that could boost production is in lot 67 in the Maranon Basin, controlled by a subsidiary of France's Perenco SA.

Perenco said earlier this year the fields there have the potential to produce up to 100,000 barrels of oil per day. The company has forecast the first oil in January 2011.

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