Assessing the Petroperú Crisis’ Implications & Opportunities for the West & China (October 2024)

Key Takeaways:

• Petroperú’s board of directors have resigned due to the Peruvian government's failure to address the company’s failing finances. The board called for privatisation, citing political interference and debt burdens. However, President Boluarte has rejected privatisation. In response, the government announced emergency financial measures, including debt relief and financial support, while mandating austerity measures and restructuring for the company. 

• Petroperú's market share has dropped from 50% in 2017 to 26% in 2023, due to financial struggles, increased competition, and low production at the New Talara Refinery. 

• Government restructuring efforts could improve transparency, reducing corruption, and enhancing governance. However, austerity measures may result in reduced operations, forcing the company to share its oil block licences with private firms.

• Despite Boluarte’s stance, Petroperú's privatisation is likely to become a major issue in the 2026 elections, driven by continued financial difficulties. North American, European, and Chinese firms are poised to bid for shares in the company’s assets, potentially escalating geopolitical tensions.

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Background

On 10th September 2024, the board of directors for Perú’s state-owned oil company, Petroperú, unanimously handed in their resignation following the Peruvian government’s inaction regarding the company’s financial situation. 

The statement continued messages outlined in previous statements released by the board of directors in May and August of this year, which stated that the company needs $2.2 billion USD in financial aid, and has projected millions of dollars of losses in 2024. Both statements called for the company to be placed under private management, asserting that ‘it was immoral’ to continue accepting money from the state without the company undergoing ‘profound changes’. Within these statements, Petroperú blamed three factors for its financial situation, attributing ‘historical political and union interference’, the construction of the New Talara Refinery, and the consequential need for the company to acquire more debt, as reasons for its continued failure. 

In response to the board of director’s resignation, Dina Boluarte, President of Peru, insisted that she would not privatise Petroperú. Boluarte instead emphasised that the government needed to appoint board members who ‘love the country’, highlighting that Peruvians in remote areas depend on Petroperú since its services reach regions which private companies do not.

Following this, on 14th September 2024, the government announced emergency financial measures to help bail out the company. As part of these, the Ministry for Economy and Finance (MEF) has agreed to take over Petroperú’s debt payments to Spanish export credit agency CESCE, pay up to $1 billion USD of loans to Peru’s state-owned bank, and provide up to $750 million USD of financial support. The government also ordered the company to comply with austerity measures and contract a private company to help restructure Petroperú and guarantee its long-term stability, a measure pushed for by the former board of directors. 

Brief Assessment of PetroPerú

Petróleos del Perú, otherwise known as Petroperú, is a Peruvian state-owned company dedicated to the production, transport, refining, distribution, and commercialisation of oil and petroleum products. Founded in 1969, it has been 100% state-owned for the past 55 years. 

As of 2023, Petroperú had a total national market share of 26%, and was a leading operator in petrol and gasohol (with a 40% share in the national market) as well as the diesel market (with a 32% share). However, this share has significantly decreased due to the company’s financial situation. In 2017, Petroperú had a 50% market share, which decreased to 32% in 2022. 

Source: 651-v2Yh5Wc3Ib9Rp2A.pdf (petroperu.com.pe)

The decrease in market share has been attributed to Petroperú’s current financial situation, specifically low production at the New Talara Refinery, and increasing competition in Peru’s oil and gas market. 

The company holds the sole licence to operate in several oil blocks in Peru, namely blocks in Talara, Loreto, and the continental shelf near the Piura region. Petroperú shares the right to operate in additional oil blocks in Talara (with Offshore International Group, Aguaytía Energy del Perú, and its subsidiary Termoselva) and Loreto (with Altamesa Energy). The company also holds the licence to operate in oil block Lote 64, which is undergoing an Environmental Impact Assessment, and once approved, it has announced that it will ‘launch a call for potential partners to jointly operate’ in the block. 

Petroperú operates the North Peruvian Pipeline (Oleoducto Norperuano) which transports crude oil from the jungle to the coast in the North of the country, and three refinery plants, Conchán, Iquitos, and Talara. The company is only one of two in Peru that refines oil, with Spanish company Repsol operating the only other refinery in the country, La Pampilla. 

Petroperú is the only state-owned enterprise in Peru that does not fall under the jurisdiction of FONAFE (Fondo Nacional de Financiamiento de la Actividad Empresarial del Estado). FONAFE is a public entity responsible for overseeing and managing the efficiency and transparency of state-owned enterprises in Peru, and is generally aligned with OECD best practices. Petroperú, on the other hand, has a history of high turnover rates for management and accusations of corruption, which has hindered the effective governance and management. 

New Talara Refinery

One of the major reasons for Petroperú’s financial difficulties has been attributed to the construction of the New Talara Refinery (NRT). Talara is Peru’s second biggest oil refinery, and the largest refinery under Petroperú’s control. Since 2014, the refinery has undergone a modernisation project which aimed to increase oil production from 65,000 to 95,000 barrels a day. The project was initially projected to cost $3.5 billion USD in total, of which $2.73 billion would be financed by the Peruvian state. However, as of 2023, the refinery has cost the state $6.53 billion USD. 

Despite being inaugurated in December 2023, issues with the Flexicoking Unit in February 2024 caused the refinery to only operate at 76% of its production capacity. The Unit’s operations were further suspended on 1st March for 90 days, which in turn, has impacted the company’s 2024 EBITDA projections. 

Revival of Oil Blocks in the Amazon

The Peruvian state’s measures to retain control of Petroperú comes during current attempts to reactivate extractive activity in the Amazonian region of Loreto. This follows long-term plans announced in 2023 to boost investments in oil and gas exploration and production in the country. The reactivation of Amazonian oil blocks is expected to increase the hydrocarbon sector by 2.9% in 2024 and 3.8% in 2025. 

On 9th July 2024, the Ministry of Energy and Mines (MINEM) signed an agreement with local indigenous groups to reactivate Amazonian oil block Lote 8, operated by US-Peruvian firm Upland Oil. This follows announcements in Congress by the Minister for Energy and Mines, Rómulo Mucho Mamani, that oil block Lote 192, also in Loreto, will recommence operations in October. Lote 192 is in joint operation with PetroPerú and Canadian firm Altamesa Energy. 

However, despite reviving these oil blocks in the Amazon, indigenous opposition to the projects is high. The indigenous Achuar Nation have petitioned at the Inter-American Commission on Human Rights (IACHR) for Petroperú to cease all activity in oil block Lote 64 due to the lack of Free, Prior, and Informed Consent. This would be a violation of Indigenous rights, and therefore disrupt ongoing operations, posing a risk for Petroperú and potential future partners. 

Peruvian Oil and Gas Industry

Peru is the seventh-largest crude oil reserve holder in Central and South America, with an estimated 741 million barrels of reserves. US and Canadian enterprises and their subsidiaries have a strong presence in the Peruvian oil and gas industry. Petrotal Corp and Offshore International Group (OIG) are the two major operators in the country, with OIG gaining an even greater stake after winning a joint bid with PetroPerú, and Peruvian company Aguaytía, to run oil block Lote X from May 2024. This takeover saw the Chinese operator CNPC lose its biggest stake in the Peruvian oil and gas industry, as Lote X is Peru’s third most productive oil block. 

Although crude oil production has been declining in Peru, the country’s total liquid fuels production has been reinforced by increased production of Liquified Natural Gas (LNG). LNG production has, on average, increased 20.5% annually between 2004 and 2019 (although only 0.6% within the last five years). In 2010, the country opened South America’s first LNG plant in Pampa Melchorita, which is owned by the PERU LNG Consortium. Initially PERU LNG was composed of US firm Hunt Energy (50%), South Korean company SK Earthon (20%), Spanish firm Repsol (20%) and the Japanese Marubeni Corporation (10%). However, as of 2024, Repsol and SK Earthon no longer form part of the consortium, having had their stakes acquired by Shell and MidOcean Energy (owned by US investment firm EIG) respectively. In terms of LNG production, Dutch-Argentinian firm Pluspetrol is by far the biggest operator, with Repsol extracting the second largest amount. 

Chinese Influence in Peru

The core intelligence question posed by several KSG clients centres around the prospect of Chilean oil becoming increasingly available for purchase and investment, as well as which state’s companies are best positioned to exploit any opening. It is therefore important to assess Chinese, European and North American influence across Peru’s economy, and thus their ability to influence the political system of Peru which will inevitably be crucial in any procurement decision.

Following CNPC’s loss of the Lote X oil block, Chinese corporations do not have a strong presence in Peru’s oil and gas sector. Despite North American and European companies' heavy involvement in this sector, Chinese corporations play a key role in other extractive industries in the country. A considerable share of the country’s copper production is controlled by Chinese firms, notably MMG Limited and Chinaclo who operate the Las Bambas and Toromocho mines respectively. Shougang Hierro Perú, a subsidiary of Chinese state-owned Shougang Corporation, is the sole producer of iron-ore in Peru. 

Chinese companies have also invested heavily outside of the mining sector, most notably in critical infrastructure, such as the Peruvian National Grid, where China Southern Power Grid International is a major stakeholder following their buyout of Italian firm Enel. Infrastructure projects such as the Chancay Megaport also form a major part of China’s foreign investment in Peru. The port is due to be inaugurated during the 2024 APEC Summit in Peru, which will take place on 10th-16th November, with China also pledging to provide equipment and organisational support for the event. 

This follows Peru’s closer alignment with China, whereby in a recent visit to the People’s Republic of China, Dina Boluarte and Xi Jinping signed 13 bilateral agreements to strengthen the partnership between Lima and Beijing. Amongst these, the Plan de Acción Conjunta (Joint Action Plan) 2024-2029 was established to guide cooperation in key areas such as scientific innovation, technology, and infrastructure. Moreover, two key MOUs were signed. The first, signed with the Director of China’s National Development and Reform Commission, Zheng Shanje, establishes a strategic dialogue on economic cooperation between both governments. Furthermore, a second MOU was signed between the President of the Association of Exporters (ADEX), Juilo Pérez Alván, and the President of the Chinese Council for the Promotion of International Trade, Ren Hongbin, to establish the Peruvian-Chinese business council.

North American and European Influence in Peru

Despite Lima’s closer relationship with China, several North American and European multinationals play a major role in Peru’s extractive sector. Swiss company Glencore,  US-owned enterprises Freeport-McMoRan and Newmont, British firm Anglo-American, and Canadian firm Hudbay Minerals all operate key mines in Peru. 

Peru is Canada’s second largest bilateral trading partner in Latin America, and the third-largest recipient of Canadian FDI, receiving over $14 billion CAD of investments in 2023, with the majority in the mining sector. In 2021, Canadian mining assets in Peru amounted to nearly $10 billion. 

The US also invests the majority of its FDI in Peru in mining. In 2023, US FDI was $6.6 billion, an increase of 0.6% from 2022. To strengthen US-Peruvian cooperation regarding critical mineral trade, on 29th August 2024, the US Secretary of State for Economic Growth, Energy, and the Environment, and the Peruvian Minister for Foreign Affairs, signed a Memorium of Understanding (MOU). 

However, unlike Chinese enterprises, North American and European firms do not have a strong investment presence in Peru outside of extractive industries. 

Forward Look:

• KSG assesses that given the recent decision made by the Peruvian government, Petroperú will continue to be state-owned until the end of Boluarte’s term in office, which ends in 2026. However, continuing financial and technical difficulties associated with the New Talara Refinery will have severe impacts for the Peruvian government, and are likely to create a fiscal black hole during the remainder of Boluarte’s term. 

• Given Boluarte’s extremely low approval rate of just 5% and Peru’s tendency to favour neoliberal candidates post-1990, it is highly likely that Petroperú’s privatisation will be a key policy debate in the 2026 general elections.

• China is highly likely to use the upcoming APEC Summit to increase its presence in Peru as an influential foreign investor. This will be solidified through the planned opening of the Chancay Megaport, where Xi Jinping and Dina Boluarte are highly likely to be in attendance. Consequently, in the event of Petroperú’s privatisation, it is likely that Chinese corporations will attempt to regain their stake in the Peruvian oil and gas industry, following CNPC’s loss of Lote X. KSG assesses that the successful acquisition of Enel by China Southern Power Grid International, the strong presence of Chinese firms in other extractive industries, as well as recent MOU’s, will bolster Chinese bids for takeover. 

• Given the strong presence of North American and European corporations in Peru’s oil and gas industry, KSG assesses that it is also highly likely that these firms will attempt to acquire Petroperú if it were to be privatised. The fact that companies such as Offshore International Group and Altamesa already share licences with Petroperú to operate key oil blocks will aid bids to increase their share in the Peruvian gas and oil sector. The strong presence of North American and European FDI in Peruvian extractive industries is likely to provoke a bidding war which may exacerbate geopolitical tensions in the region, particularly between the USA and China. 

• KSG assessed and wargamed who would be in a stronger position to capitalise on PetroPerú’s privatisation. Although the US may hold a slight advantage due to its established dominance in the global energy market, recent Memorandums of Understanding (MOUs) and trade agreements between Peru and China present a strong possibility of shifting the balance in favour of Chinese interests. This is particularly likely as the China-Peru business consortium continues to expand and strengthen its influence. Given that the competition between Western and Chinese interests is currently evenly balanced, KSG cannot make a reliable assessment at the time. KSG will consequently continue to monitor and review the situation to make a reliable assessment as it develops. 

• The likely fiscal black hole created by Petroperú is likely to contribute to increased economic hardship in Peru, with reduced public spending and austerity measures. Given that economic instability has historically led to widespread protests in Peru, the Petroperú crisis will likely have this same effect. Given the Boluarte administration's actions following civil unrest in 2022 and 2023, which have been brought to the International Criminal Court (ICC), KSG assesses that a fragmented political landscape, combined with protests and strikes, could lead to the government resorting to authoritarian measures to maintain control, further complicating the domestic political landscape and security in the Andean region. 

• Given the pending petition of the Achuar nation at the IACHR, it is likely that Petroperú will have to halt production in Lote 64. Precedents established within the Interamerican System strongly indicate that the Court will rule in favour of the Achuar Nation’s right to Free, Prior, and Informed Consent, potentially forcing Petroperú to halt any operations in the oil block. Considering the Peruvian government’s goals of expanding oil and gas production through Amazonian oil blocks, KSG assesses that indigenous opposition will continue to affect oil and gas operations in the country through petitions to the IACHR, which will severely affect Peruvian gas and oil supply. 

• Peru is therefore unlikely to substantially impact global supply chains or meet global energy needs, especially compared to larger global suppliers like Brazil, the USA and the Middle East. This severely limits any likelihood of Peru growing into a reliable supplier to the global energy market, especially if privatisation and refinery issues are not resolved in time. 

• Following government announcements regarding Petroperú’s restructuring and austerity measures, it is extremely likely that Petroperú’s corporate governance structures will be changed. This could include Petroperú’s inclusion in FONAFE, which will consequently improve transparency and reduce claims of corruption within the organisation. However, a reduction in overhead costs could also restrict Petroperú’s business operations, causing them to reduce their 100% stake in licences for key oil blocks in the country. Petroperú therefore would instead continue to operate as a minority stakeholder in oil blocks, sharing the licence with other firms, as seen in Lote X, Lote 192, and Lote 64. It is likely that in this scenario, as previously mentioned, a bidding war between North American, European and Chinese companies would take place to secure a share in these blocks. Given the established partnerships that US and Canadian companies already hold with Petroperú in the oil and gas sector, particularly through existing operational licences, KSG assesses that American firms would likely have an advantage in this isolated bidding process. This would further exacerbate regional tensions, particularly as the US and China are both highly invested in securing strategic resources. 

  
  

• In the event that Petroperú overcomes challenges regarding social opposition, as well as technical and financial difficulties, it could expand its export capacity. KSG assesses that privatisation and significant foreign investments from North American and European firms could help to make Peru a source of non-Russian oil and gas, thus helping to develop non-Russian energy supply chains. However, KSG notes that this is highly unlikely to have a significant effect, since Peru is currently only ranked 51st in terms of global primary energy production, and does not have sufficient reserves to disrupt global energy supplies.