Daniel Saba de Andrea President of PeruPetro

This is a very important time for Peru. In the past six years, average growth for the country stood at 6.2%. Last year, the gross domestic product (GDP) rose 9%. Coupled with the lowest inflation rate in the region, this growth is highly encouraging for the future of the country. In addition, Fitch Ratings considers Peru to be of investment grade, and Standard & Poors is expected to do so this year as well. Bearing in mind the rise in oil prices and the significant opportunities for Peru, how do you see Peru's present and its medium- and long-term perspectives for the oil and gas industry?

The current situation is very encouraging, and we can expect to see this growth continue in the medium term. And this couldn't be better: Peru's hydrocarbons were under-explored throughout the entire 1990s and part of this current decade. The level of exploration in Peru was among the lowest in the region; in fact, I would go so far as to say that it was the lowest, due to various political and price factors. The privatization program created a series of uncertainties. As investments begin to roll in, we are now making up for lost time. As financing arrives, some projects will naturally begin to yield results. Oil and gas deposits are appearing, along with certain hydrocarbons that no one thought existed in Peru. The country was more or less resigned to not being an oil-producing nation. Yet this made no sense, as we are in the same corridor as Venezuela, Colombia, Ecuador and Bolivia. There was no reason why Peru could not be an oil-producing nation, and now we're seeing that this is indeed the case. This is a good situation for us. For now, we continue to import part of the internal demand for hydrocarbons, but we should have a net export balance by 2011.

The Economy Minister has said that the country is in a position to grow at 7% during the next 10 to 15 years. In addition, the investment grade rating generates confidence and encourages foreign investment. What are PerúPetro's expectations for these investment grades?

Past and present growth in Peru has been based on foreign investment. The greatest growth has come from investment in mining and energy, which require heavy outlays. Peru continues to present new opportunities. Personally, I think that the international market continues to be highly liquid, despite the current economic slump. There is still a lot of liquidity that must be invested. This is being seen in the rise in oil prices, which would be unexplainable in the case of a typical recession. Rather, we are currently in a very strange type of recession. I think the international economy will recover and investment flows will continue. Hopefully, this growth rate will characterize the Peruvian economy for the next 10 or 15 years. This is a far-reaching projection, but let's just say that growth in Peru is locked in for the next five years.

Record numbers of contracts have been signed. What expectations do you have for the coming years in view of the bidding process for 17 blocks?

With these 17 blocks, practically all available blocks were exhausted. Hopefully, the companies currently exploring for resources return part of the areas they were assigned in their contracts. These areas would then yield new blocks for new bidding processes. This year we hope to meet our goal of awarding concessions for all blocks in Basin 6.

Then, the blocks awarded will generate significant royalties.

Yes, when resources are discovered. The licensing process begins with a seven-year exploration phase, which can be extended to 10 years at the contractor's request. If resources are discovered, the exploitation phase starts (20 years for oil and 30 years in the case of gas). This is when royalties are generated. Although the exploration phase does not generate royalties, it does create employment and substantial investment in studies. The exploitation phase is now commencing in a number of blocks, especially in the northern rain forest where oil is heavier. In the Camisea area, new blocks with considerable reserves are appearing. There is very interesting potential for reserves here, and the oil industry is becoming more excited about Peru. Certain expectations are becoming a reality: Peru is an oil-producing nation, just like its neighbors.

There is a paradox in this country. Even though it has resources, and more and more gas deposits are being discovered, it continues to import oil.

Yes, but this is a result of a lack of exploration efforts during so many years. Previous production and production from oil discovered in the 1970s and 1980s has declined. Although volume is down, the increase in production in Camisea will take us to self-sufficiency this year. Supply and demand will balance out at more or less 150 thousand barrels/day. All future discoveries will be exported, along with those blocks that have been discovered but are merely waiting for the engineering know-how to bring it to the surface. That is, the country will become a net exporter around 2011. This is not just speculation: we are taking about proven models pending only the necessary infrastructure to transport oil - practically all of which is in the middle of the central rainforest - to the coast.

What is the timeline for this infrastructure?

Dr. Saba de Andrea. From now to 2011, between $1 billion and $1.5 billion will be invested in pipeline construction. This includes all drilling, block development, pipeline construction and possibly a plant to raise the API of crude oil. With an API gravity of 14 to 25, our crude oil is heavy, but not extra-heavy, and needs to be treated.

You mentioned that in the past Peru was not expected to be an oil-producing nation. Now that we know that there is oil in Peru, what do you think are the competitive advantages of investing in Peru, and specifically in this sector?

In terms of what geologists are most interested in, the geological pace has dropped significantly with the appearance of reserves and the existence of good perspectives in fields near places where oil was found. Geological perception improves significantly, so geological risk goes down. International prices help. I think these prices will remain high and not return to the level of a few years ago. This increases company profits. There could be interest in investing, as well as in the stability of the country. Peru has been economically and legally stable for the past 15 years, a milestone in our country. I think that it is rare to find a Latin American country that has maintained the same rules of the game over many years, despite three changes in government. This is especially noteworthy, because in Latin America, and especially Peru, government administrations usually change the rules of the game upon their arrival. However, despite being somewhat different ideologically, our past three governments have maintained and continue to maintain economic and legal stability. Compared to other countries, Peru seems to be a tranquil island in a sea of instability.

After the EU / LAC summit and seeing the interaction of presidents in the region, do you think Peru is in a conciliatory position with respect to the problems seen in the region?

In Peru we have already experienced many of the situations happening now in other countries. During the military governments of the 1970s, we went through a state-centered stage. We also had a fully neo-liberal phase in the 1990s. I believe that we are now sustaining a balance. Compared to other countries, our economic situation is very good and the social situation is beginning to improve. We shouldn't forget that Peru has grown through internal consumption, which is considered an important factor for GDP growth.

When you mentioned recent discoveries, we imagine you were referring to block 57 with extension of the gas reserves, which would form part of Camisea. How important is Camisea and the other fields in order to modify the country's consumption patterns and transform the energy matrix?

The change in the energy matrix that is being talked about would entail a considerably greater use of gas, which has not been traditional in Peru. Currently, this is at 4 TC, every 20 years, and is expected to grow at 6 in the coming decades. Potential for growth in gas use is not high in Peru because, except for in industry and vehicles, domestic use of gas is not common, especially in the coastal areas where there is more general demand. Temperatures are not extreme in Peru: it doesn't get hotter than around 85°F. Consequently, heating and cooling systems are not commonly used. I don't think that greater demand will be generated in those areas. However, this leaves a significant surplus for export and makes room for projects such as LNG, petrochemicals, etc.

Will the country shift from being a fuel importer to a net exporter of fuel in the next five years, or is this an unrealistic estimate?

I don't think so. This year we will strike a balance. I calculate that although it will not be a very big amount, by 2010 or 2011 we will be exporting around 50,000 barrels, and from there this volume will increase. This trend will not revert in the medium term.

President Alan García has indicated that gas consumption is on the rise. Can this be considered a step toward reducing dependency on oil?

Gas is going to be used massively in transport, namely through greater use in vehicles. There will also be a rise in industrial use. Currently, a number of industries have switched to gas, such as the cement industry, which requires a significant energy supply and is now using gas. There is a big switch-over to gas in vehicles along the Peruvian coast. However, gas use is not as extensive in other areas, such as the Andean highlands, due to the altitude. Use of gas might not be as extensive there than as along the coast. In addition, Peruvians do not see a need for domestic use of gas, so there is a significant surplus ready for export. The energy matrix will be changed, particularly in terms of vehicles and especially on the coast, where a lot of vehicles currently using gasoline will be switched over to natural gas. The greatest use of gas will be in this sector and in industry.

With the implementation of the US-Peru free trade agreement, the trade balance between these two countries is expected to increase by $1.5 billion per year. A number of large companies have considerable interests in Peru, such as Hunt Oil and Occidental Petroleum. Agreements have recently been reached with Petro Resources and GX Technologies. How would you assess the US-Peru free trade agreement?

Peru's relationship with the US has always been interesting, except for during one era, although luckily they never turned sour. This is demonstrated by the free trade agreement, which is not a cause but rather a consequence of a long-term stable relationship. Naturally, investments will increase thanks to the free trade agreement. This is why I think the figure of $1.5 billion per year will increase.

Do you think implementation of the free trade agreement will affect the energy sector? It has been said that the agreement will affect non-traditional export sectors, which is where trade between the countries could increase.

The oil sector already exports and gold is exported. It would be strange for the US to place high tariffs on such trade. However, investments in the sector, which are already considerable, could increase further.

What US investments in Peru would you like to cite as examples?

In the oil sector, the ones you mentioned, as well as Occidental and the LNG project. $3,800 million has been invested in this initiative, which is one of the largest projects carried out with Camisea recently. North American companies also participate in this project. However, in addition to the energy sector, North American companies have always been present in the mining sector. Peru is not new to North American investments. If they are stepped up some, that would be even better. North American funds have always been present in the basic resources sector. Free trade agreements are always most beneficial to companies that add greater aggregate value to a product. There are North American companies, among others, that are interested in the petrochemicals industry. They are looking to generate greater aggregate value from gas.

What have been PerúPetro's greatest achievements in recent years?

Considering the state of the country just four years ago and how it has advanced in recent years, it is safe to say that we have fulfilled PerúPetro's mission to make Peru an attractive country for investments in hydrocarbon exploration and exploitation. This is what we have done in recent years, particularly in 2007, when a record number of contracts were signed (24 contracts). We currently hold the greatest number of contracts. This achievement, and compliance with our mission, was made possible thanks to our relationship with different North American governments. When we didn't have contracts in the area, evaluations were carried out with the support of the Canadian and US governments, especially the US Trade and Development Agency. A number of million-dollar studies were carried out, especially in offshore and other areas. These studies, made with this support, were presented in 2007 and were helpful in preparing geological investment reports. Before we had a small block, Z2B, where Petrotech cornered production and the rest were uncontracted. The new studies have opened the door to new possibilities. Our future challenge is to turn the investments we have attracted into discovery of new deposits. It is important that these investments become reality. In addition, the group of North American companies operating in Peru represents the largest in the world. We hope that other companies in this large group will join those already working in Peru. Our prospects are good.

Thank you for your time and your comments.