Cablegate: Peru Oil Boom Continues; Exploration Spreads to Heavy Oil

VZCZCXYZ0001
PP RUEHWEB

DE RUEHPE #4773/01 3561959
ZNR UUUUU ZZH
P 221959Z DEC 06
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC PRIORITY 3455
INFO RUEATRS/DEPT OF TREASURY WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHBJ/AMEMBASSY BEIJING 0380
RUEHBR/AMEMBASSY BRASILIA 7146
RUEHBU/AMEMBASSY BUENOS AIRES 2721
RUEHSG/AMEMBASSY SANTIAGO 1021
RUEHBO/AMEMBASSY BOGOTA 4206
RUEHLP/AMEMBASSY LA PAZ DEC QUITO 0906
RUEHCV/AMEMBASSY CARACAS 0034

UNCLAS LIMA 004773

SIPDIS

STATE FOR EB, WHA/AND, WHA/EPSC, EB/ESC, OES
TREASURY FOR A. JEWELL, J. LEVINE
STATE PASS TO EXIM - A. FOLEY, C. O'CONNOR, R. WILLIAMSON
DEPT OF ENERGY FOR PUMPHREY/LADISLAW;DOBRIANSKY/RICHARDS
ENERGY INFORMATION ADMINISTRATION FOR CHARLES ESSER
DEPT PASS TO INT/USGS/RESTON FOR D. MENZIE/A. GURMENDI
USAID FOR LAC, EGAT
USTR FOR HARMAN, CARILLO

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: EPET ENRG EINV SENV PE
SUBJECT: PERU OIL BOOM CONTINUES; EXPLORATION SPREADS TO HEAVY OIL

REF: Lima 4321

1. (SBU) SUMMARY. The GOP signed oil exploration deals with three
foreign firms on December 12, resulting in a record 16 oil
exploration deals signed this year. One of the firms, Texas-based
Barrett Resources, also announced its intention to produce oil in
another block, with plans to produce 100,000 barrels per day by
2010. New technology and high oil prices have made profitable the
heavy Amazon oil that companies such as Occidental had declined to
exploit in the past. The GOP plans to offer 17 concession lots for
exploration bids in February. Despite the good news, foreign firms
have raised concerns that some in the GOP may have anti-competitive
plans. END SUMMARY.

2. (U) In a December 12 signing ceremony over which Minister of
Energy (MEM) Juan Valdivia presided, the GOP formalized oil
exploration contracts with three foreign firms: Barrett Resources
(U.S., Lot 125), Hocol Peru (Colombian, Lot 116) and Gran Tierra
Energy (U.S./Canadian, Lot 128). The three lots total almost 3
million hectares, in the Amazon basin areas of San Martin, Amazonas
and Loreto Departments; each firm committed to investments of from
$32 to 45 million.

3. (U) These three contracts bring to 16 the number of exploration
and production contracts signed for 2006, exceeding 2005's record of
15. U.S. firm Burlington Resources, acquired this year by
ConocoPhillips, signed in September the first oil
exploration/production agreement to be finalized under President
Garcia's administration. Burlington will spend about $108.5 million
in the seven-year exploration phase in blocks 123 and 124, and is in
the exploration phase for block 104 under a 2005 agreement. With 61
contracts in force for oil or natural gas, the GOP plans to invite
bids for 17 additional concessions in February at the annual
hydrocarbon fair in Texas. (Note: some media reports have trumpeted
Peru's covering its Amazon basin with oil development. Most of
these wells will cover one or two hectares out of the hundreds of
thousands in each concession. Some concessions include protected
areas for which Peruvian law permits hydrocarbon exploration. End
Note.)

4. (U) At the December 12 ceremony in Lima, Barrett took the
opportunity to announce "commerciality" (intention to produce) for
Block 67, an Amazon heavy oil area that Barrett concessioned in 1995
and confirmed oil in 1998. At that time the expensive extraction
process, coupled with lower oil prices did not make production
feasible. Barrett has invested over $100 million after drilling new
wells in 2006, with current production techniques and high oil
prices making production attractive. During peak production,
beginning in 2010, Barrett expects to produce 100,000 barrels per
day.

5. (U) Note: Block 67 is part of the same general seam of heavy oil
that includes Blocks 8 and 1AB where Pluspetrol has had
environmental issues with contamination of the high volume of water
that is extracted with the oil in this area (Reftel). Barrett
executives took pains to explain to us (and in their press release)
that all water extracted with the oil will be reinjected into the
fields (something Pluspetrol had neglected to do earlier in its
exploitation).

6. (U) Another project dimension of Lot 67 is the construction of a
400km pipeline to connect Barrett's production to the existing
Northern Peru pipeline system, which currently transports
higher-grade crude. To avoid problems resulting from mixing the two
grades, Barrett will construct a heavy oil upgrade facility. This
model should encourage other firms to conceptualize exploitation of
nearby heavy oil fields. Aside from extraction challenges, the
inability of the Northern Pipeline to carry heavy oil has been a
deterrent to exploitation of this area. Pluspetrol, for example,
ships its Block 8 oil out on river barges.

NOT ALL IS ROSY
---------------
7. (SBU) Despite the heady news of oil and gas to be exploited and
the GOP's public efforts to show it welcomes foreign investment,
some foreign firms remained cautious about the future business
climate. State-controlled Perupetro, responsible for overall
regulation and licensing of the oil and gas industries in Peru,
recently disqualified one U.S. independent from a pre-Garcia
exploration contract for alleged lack of financial resources. Strong
advocacy from several sources, including the U.S. Embassy and inside
the GOP, appears to have helped to convince Perupetro to rescind the
disqualification yesterday. State-owned oil company Petroperu's
recent cooperation agreement with Brazilian parastatal Petrobras has
helped fuel the rumor that some in the GOP want to turn state-owned
Petroperu into a major exploration firm allied with other regional
parastatals that would compete against foreigners. Perupetro's
President told us that after recently being "burned" by a small U.S.
firm that failed to carry out a concession contract, Perupetro is
leery of undercapitalized independents

COMMENT
-------
8. (SBU) The three-contract signing and commerciality announcement
was front page news in the major Lima newspapers. While we will
continue to watch for difficulties, so far we believe the GOP's
interest in attracting investment is genuine, and have seen no firm
evidence that it intends to interfere unfairly in the concessioning
process.

9. (U) Information on oil concession blocks can be found on
Perupetro's English language web site at
http://mirror.perupetro.com.pe.

STRUBLE

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