Cablegate: Camisea Scorecard: Toledo's Great Legacy

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DE RUEHPE #3686/01 2581929
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R 151929Z SEP 06
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC 2317
RUEHQT/AMEMBASSY QUITO 0689
INFO RUEHBO/AMEMBASSY BOGOTA 3903
RUEHBR/AMEMBASSY BRASILIA 6980
RUEHBU/AMEMBASSY BUENOS AIRES 2581
RUEHCV/AMEMBASSY CARACAS 9782
RUEHLP/AMEMBASSY LA PAZ SEP SANTIAGO 0849
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUMIAAA/USSOUTHCOM MIAMI FL
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHDC

UNCLAS LIMA 003686

SIPDIS

SIPDIS

DEPT FOR WHA/AND, WHA/EPSC, OES
TREASURY FOR U/S TAYLOR, K. KOZLOFF, J. LEVINE
STATE PASS TO EXIM
DEPT OF ENERGY FOR S.LADISLAW
ENERGY INFORMATION ADMINISTRATION FOR CHARLES ESSER

E.O. 12958: N/A
TAGS: ENRG ECON ETRD EAID SENV PE
SUBJECT: CAMISEA SCORECARD: TOLEDO'S GREAT LEGACY

1. (U) SUMMARY: The Camisea natural gas project has been a
qualified success. Peru is increasingly using Camisea gas (cleaner,
cheaper than diesel) in power generation, industry, homes and
vehicles, with Peruvians benefiting from lower electricity rates --
even before construction of the project began. Camisea has thus
freed Peru from the energy crises several countries in the region
still face. Natural gas is a top priority for the Garcia
administration as a vehicle for poverty alleviation. Ongoing
"renegotiation" talks are mainly to solidify existing pricing
practices. We expect that the Garcia administration will carry out
a careful oversight of the existing Camisea operations, foster the
development of the domestic gas market and support a best practices
completion of the Peru LNG export project.

2. (U) Liquids pipeline breaks in the unstable jungle terrain have
caused short interruptions in flow and apparently minor
environmental effects. The IDB and GOP are commissioning
independent audits to determine the causes of the pipeline breaks
and their environmental effects. IDB-imposed conditions have helped
to meet the environmental and social challenges of the project, and
there have been lessons learned. Decades of pollution by fishmeal
plants of Paracas Bay, site of the fractionation plant and shipping
facilities, have begun to be reversed. Local concerns about ship
traffic are reduced but present; most local concerns about Camisea
center on getting funding for municipal projects. The Peru LNG
project appears well situated to learn from Camisea. Conflict of
interest allegations have not been substantiated. The real public
issues remaining are environmental related to the liquids pipeline
ruptures, social, and government regulatory and oversight capacity
-- challenges present but surmountable.

3. (U) This cable will focus on the natural gas and electricity uses
derived from the Camisea project. Septels will report updates on
the liquids pipeline ruptures; Paracas Bay; side effects in the gas
fields; an analysis of Camisea critics; and the Peru LNG project.
END SUMMARY.

GAS FOR THE MASSES, CHEAPER ELECTRICITY
---------------------------------------
4. (U) The Camisea natural gas project has been a success, qualified
by continuing concerns over environmental and social side effects.
Two years after the Camisea pipelines began to flow in August 2004,
the project has delivered natural gas and liquids products to Peru's
domestic market, and some liquid derivatives (naphtha, propane,
butane and diesel) to export markets. The main benefit Camisea has
afforded lower income Peruvians is through cheaper than diesel power
generation, yielding lower electricity rates for households and
industries. The availability of natural gas and condensates
products, in quantities above the local average consumption and at
prices below the world market, has saved Peru from undergoing the
energy crisis that has hit several other South American countries.

5. (U) Electricity rates for consumers were lower as early as 1996
due to the planned Shell Camisea project. The GOP sets rates for
regulated electricity users (less than 1 MW) based on the expected
supply-demand situation and marginal costs. The GOP lowered rates
from 1996-1998 based on the projected opening of a converted
gas-fired power plant. After Shell dropped out, the GOP again
lowered rates from 2000 on as Hunt/PlusPetrol took over the Camisea
project.

6. (U) An official of PlusPetrol -- the Camisea field extractor as
well as distributor -- estimated savings of $1.15 billion by
Peruvian electricity consumers from December 2000 to mid-2006. The
rationale is that power generators would have had to use diesel, at
ever-soaring world prices, while the Camisea consortium has sold
natural gas to power generators at $1.30 per million British thermal
units (Btu) since August 2005. Two electricity generating plants
(totaling a capacity of about 500 MW) have converted to natural gas,
with another 174 MW plant due to start up in November 2006, and
whose capacity will be doubled in 2007. These plants are vital
considering that Peru's annual power consumption is 3,200 MW; Peru's
installed power generating capacity is slightly less than 3,000
thermal MW and slightly over 3,000 hydroelectric MW.

DIRECT GAS USE INCREASING
-------------------------
7. (U) The initial $100 million GOP financial assistance program to
stimulate conversion to natural gas of homes, vehicles and
industries has spurred such conversions in private vehicles (at the
current rate of 100 cars per week), especially the Lima commuter
transportation system that is wholly private. Peru inaugurated last
year the world's first natural gas-powered freight train, used to
transport minerals and metals from the central highlands to the port
of Callao.

8. (U) From the $100 million fund, administered by state-owned
development bank COFIDE, the average taxi owner receives a $900 loan
without downpayment. S/he leaves the fuel conversion plant with a
"smart charge" chip installed in the taxi, which gradually pays back
the loan each time s/he fills the tank. The savings on fuel
consumption are so great -- 50 to 60 percent -- that the average
taxi owner pays back the conversion cost in two to four months of
operation. In the first half of 2006, gas distributor Calidda had
converted 1,600 vehicles, compared with 1,200 in all of 2005 and 900
in 2004.

9. (U) One limitation had been too few conversion facilities. Until
six months ago, many taxi drivers complained to Econoff of a 3-month
wait for conversion. Now, there are 22 conversion facilities and
same-day service. Another factor that inhibits conversions is the
number of retail fuel stations - only two in a city of over 8
million. Four more stations will operate by September, with another
four in the planning stage, to open by December. Nevertheless, at
least one commercial long-distance bus company has converted its
vehicles.

10. (U) At the end of June 2006, Peru also had 116 industrial
consumers using Camisea natural gas (producing ceramic tiles, paint,
food, cement, steel products, tin metal, etc.), compared with two
power plants and 67 industries at the end of 2005 and one power
plant and six industries at the end of 2004. Still, there are many
factories that use liquefied petroleum gas (LPG). Residential and
industrial use of LPG has boomed since last year as Camisea sells
(from the fractionation plant) blends of propane and butane to local
distributors of LPG at a 20 percent to 25 percent discount compared
to export prices.

11. (U) Home natural gas connections in Lima (housing 1/3 of Peru's
population) have proceeded at a steady pace, with about 3,300
residential clients at the end of June 2006, compared with 1,400 at
the end of 2005 and none at the end of 2004. Many Lima households
have used LPG in their homes for many years for cooking and water
heating, using large or small cylinders. A methodical laying of
pipelines in Lima's more affluent neighborhoods has been underway
for over a year. Subscriptions from homeowners would have been
higher in the absence of some Municipalities' obstructionist
regulations, some of which charged high permitting fees or stopped
pipeline-laying work even after granting permits.

12. (U) In conversations with Calidda and with homeowners in
Econoff's neighborhood where gas lines were recently installed, it
appeared that high upfront connection costs (around $1,100 per
single family home and $900 to $1,100 per apartment, excluding the
purchase of new appliances or water heaters) were one negative
factor. A distributor of the meters that are sold with the gas
contracts complained to Econoff that Calidda is neglecting to give
potential customers information that explains their cost savings
over time. Another factor were the weeks of media coverage of
explosions in the liquids pipeline over the past year, leading the
consumers interviewed to express fear that a home explosion was a
danger.

GAS DEMAND
----------
13. (U) The domestic market remains relatively small for a project
the size of Camisea, as foreseen from its inception, and has not
grown at the pace the parties involved had wanted. Although the
liquids pipeline is meeting demand for the four liquids products,
gas is reinjected into the Camisea fields due to lack of demand.
Gas may continue to be reinjected at the Camisea fields for seven or
eight more years according to current estimates of field operator
PlusPetrol. The Peru LNG export project will offer an outlet for
Camisea natural gas production that exceeds domestic demands,
providing additional revenue as well as eliminating the waste of gas
attendant upon reinjection.

U.S. OPPORTUNITIES AND SUCCESS STORIES
--------------------------------------
14. (U) The International Gas Fair is going on in Lima now, and many
U.S. and other service providers and manufacturers are represented.
The Embassy welcomes a trade mission facilitated by the Department
of Commerce that will survey gas opportunities in October. In
addition to the many U.S. firms that have supplied or will supply
inputs to the Camisea and Peru LNG projects, other firms are already
making use of Camisea gas. Caterpillar earth moving machines use
natural gas power. The Yanacocha mine (majority owned by U.S. firm
Newmont) is powered by Caterpillar generators that run on Camisea
gas. Almost all of the naphtha produced at the fractionation plant,
and some of the LPG, are shipped to the U.S.

COMMENT
-------
15. (U) Peru's poor, middle-class, large industries and
entrepreneurs have gotten cheaper, cleaner energy from the Camisea
project. As Septels will report, there have been some limited
environmental and social costs in remote areas. These costs will
probably pale beside the air quality improvements from natural gas
vehicle power that will eventually inure to the benefit of the one
third of Peru's population that lives in Lima. For a country
desperately in need of job creation, poverty alleviation, affordable
energy and improved health, there has been no benefit as great as
the environmentally friendly energy self-sufficiency that Camisea
will bring.
STRUBLE

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