GUEST COLUMN: Peru needs to define the state's role in the hydrocarbons sector

Tuesday, September 13, 2016

By Victor R. Saavedra

VSConsulting CEO / Hydrocarbons Business Management Profesor at ESAN

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The Peruvian government has sent to congress a bill covering measures in five areas. One of them corresponds to the reorganization of state company Petroperú and improving management of the infrastructure of the Norperuano oil pipeline. Added to the fact that the energy and mines minister was part of the presidential delegation addressing key problems of Peru with the government of China, it could be deduced that the greater concern of the current government in terms of hydrocarbons is the situation provoked by the deficiencies of Petroperú in the management of the oil pipeline. The problem of gas is not considered a priority issue, something I agree with.

There is no doubt that reorganizing a company or how infrastructure is managed are not solutions to the serious situation at hand, which is why mentioning the proposed solutions in that way is nothing more than metonymic rhetoric in order not to present the problem in its true magnitude. The problems have to be called by their names if we do not want to take the risk of finding incongruent solutions.

Reviewing, for example, the problem of the oil pipeline which is now in its seventh month since being declared inoperable, if it is believed that just by improving management of the infrastructure, then repairing the oil pipeline would be a solution. But if we consider the role of the oil pipeline in the development of the Marañón basin, that type of solution would only lead to failure.

To better understand the problem, let us consider the following facts. The Keystone oil pipeline that goes from Canada to the United States with a principal stretch of 3,500km, transports 860,000b/d and has a diameter of 30 inches. The Kazakhstan-China oil pipeline has 1,757km, transports 400,000b/d and its diameter is 32 inches. Compare those with the Norperuano oil pipeline that has over 800km of 36 and 24-inch piping and was designed to transport 500,000b/d, although before the latest spills it had capacity of 200,000b/d and really transported less than 15,000b/d.

The question that arises is, do we still need a 36/24-inch oil pipeline? If in the medium and long term, the expectations of production in the Marañón basin are in the order of 100,000b/d and 200,000b/d, respectively, and should be transported by a pipeline of A1 quality due to technical, environmental and social requirements, why insist in repairing an oil pipeline of 36 inches that will never reach the required A1 category?

For such volumes what is really needed is a new pipeline with a combination of diameters of 24/20 or 20/16. That would not only comply with the technical and sustainability requirements, but would also prove more economic than repairing a 36/24 pipeline. In effect, if the economic options are analyzed, for a length of 800km, a new 36/24 pipeline would be in the order of US$2.1bn, a 24/20 one at US$1.1bn, a 20/16 one at US$800mn, and repairs that involve replacing at least 50% of the piping would be in the order of US$700mn-US$1bn.

With respect to the proposed reorganization of Petroperú, I consider it insufficient and inadequate as a response consistent with the current situation in the industry. It is not possible to put the cart before the horse. The reorganization makes no sense if the strategic role of the company has not been defined. And that role will not be clear for as long as the role of the state sector has not been determined. That decision should be made in the context of a policy of state with the participation of actors from all sectors of the country.

With this focus, I consider that the proposed measure has no place in the bill. It is a topic that cannot be treated in a unilateral way and much less without congress.

Recently, studies have been carried out by prestigious companies into how Petroperú can be restructured. These can be used as reference but cannot be implemented precisely because the role of the state in the hydrocarbons industry has not been defined. If the current model continues where only the private sector participates, the reorganization is less of a problem and one that any company could solve internally without the need for new laws.

If not, and it is considered necessary to restructure the current business model and allow the state sector to participate in a competitive and efficient way, the inauguration of the new government is a good time to discuss calmly and without pressures what is the best future for the country.

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