ANALYSIS: Petrogate's lasting impact

- Monday, October 27, 2008

ANALYSIS: Petrogate's lasting impact

A funny thing happened - or perhaps more accurately didn't happen - at the INGEPET oil and gas conference in Lima earlier this month: little was said about the oil scandal dubbed Petrogate rocking Peru at the time.

The same day President Alan García replaced his cabinet over the controversy, Daniel Saba, the head of hydrocarbons promotion agency Perupetro, characterized Petrogate as a "small problem" when launching the conference. Reporters were not surprised when he declined to give interviews after his speech.

Privately, however, participants of the conference were worried about Petrogate's lasting impact. Some wondered at INGEPET's outset whether the controversy would force the government to rethink existing oil contracts, while some in the government questioned if it would tarnish Peru's image as a safe place to invest.

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However, as the five-day conference went on, it became clear the government is committed to protecting existing contracts and foreign companies are keen to invest in the country's potentially gas and oil-rich fields. The lingering question mark is whether the scandal will hurt state oil company Petroperú's upstream strategy.

In fact, it was Perupetro's Saba at the conference who publicly reassured E&P companies their investments were safe despite the fact congress had threatened to review concessions in the country to make sure they had been awarded properly. In other words, contracts are "untouchable," he said, likely putting a number of listeners at ease.

Meanwhile, foreign operators focused on future investments, showing no signs Petrogate would put companies off the country. Companies like Petrobras, Repsol YPF, Perenco, Pluspetrol and CNPC were eager to discuss ambitious investment plans for Peru that involve exploring in and around Camisea for gas and tapping into the Marañon basin's heavy crude fields.

Although the controversy clearly raises doubts about transparency in some parts of the government, companies are keen on Peru's promising geography and investment terms that are quite business friendly on a regional basis.

But some at the conference rightly wondered whether the scandal would delay Petroperú's plan to expand its upstream operations as the state company was part of the Discover Petroleum joint venture accused of bribing the government for deals. The controversy resulted in the ousting of Petroperú's president and likely will usher in a period of organizational change that could slow the firm down. Petroperú, which is busy with a major expansion of its refining capacity, could be reluctant to compete in new bidding rounds considering its reputation has taken quite a beating.

But as the controversy evolves, the more it seems to have been an isolated incident that should not reflect on all of Petroperú or Peru for that matter. In fact, one of the major news stories that came out of INGEPET was that Peru would reach energy self-sufficiency by 2011 thanks to Camisea production and new oil finds, especially off the coast and in the Marañon basin.

Peru will achieve this milestone largely thanks to smart government policies that have succeeded in attracting foreign capital. All that remains to be seen is whether Petroperú will play a role in the E&P or just refining.