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Viewing cable 06LIMA742, CAMISEA II PROMISES JOB GROWTH AND EXPORT REVENUES

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Reference ID Created Released Classification Origin
06LIMA742 2006-02-24 17:02 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Lima
VZCZCXYZ0003
RR RUEHWEB

DE RUEHPE #0742/01 0551702
ZNR UUUUU ZZH
R 241702Z FEB 06
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC 8872
RUEHQT/AMEMBASSY QUITO 0059
INFO RUEHBO/AMEMBASSY BOGOTA 3028
RUEHBR/AMEMBASSY BRASILIA 6529
RUEHCV/AMEMBASSY CARACAS 9115
RUEHLP/AMEMBASSY LA PAZ FEB MEXICO 3290
RUEHMD/AMEMBASSY MADRID 2692
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
UNCLAS LIMA 000742 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR WHA/AND, OES 
DEPT OF ENERGY FOR 
D.PUMPHREY/G.WARD/S.LADISLAW/M.PRINIOTAKIS 
DEPT PASS TO INT/USGS/RESTON FOR DMENZIE/AGURMENDI 
 
E.O. 12958:  N/A 
TAGS: ENRG ECON ETRD EAID SENV PE
SUBJECT: CAMISEA II PROMISES JOB GROWTH AND EXPORT REVENUES 
 
REF:  A) LIMA 0316 
 
      B) 05 LIMA 3375 
 
1. (U) SUMMARY: Peru LNG, a consortium led by Hunt Oil, 
recently held a groundbreaking ceremony for construction of 
its $1.3 billion Liquefied Natural Gas (LNG) plant, Camisea 
Phase II.  Construction should add 5,000 direct jobs and up 
to 30,000 more indirect jobs to Peru's economy.  Peru LNG is 
investing $2.5 billion in both Camisea I and II; LNG exports 
to Mexico and the United States should begin in 2009.  Plans 
call for 4.2 million metric tons of LNG to be exported per 
year from 2009, adding $200 million annually in royalty and 
tax revenues to the central and local municipal governments. 
There are no significant environmental problems under Phase 
II, Peru LNG is working to avoid the breaks experienced by 
the Camisea I pipeline.  The groundbreaking reignited public 
debates whether Peru's natural gas reserves are sufficient 
to cover both internal needs and export commitments.  END 
SUMMARY. 
 
CAMISEA II LAUNCHED 
------------------- 
 
2.  (U) Peru LNG held a groundbreaking ceremony for its 
Liquefied Natural Gas (LNG) Plant at Pampa Melchorita on 
January 12, 169 km South of Lima.  Peru LNG (major investors 
include U.S. Hunt Oil, Korea's SK Corporation and Spanish 
Repsol) and the GOP signed an agreement guaranteeing tax and 
foreign exchange stability for the construction of the 
liquefaction plant planned for exports to Mexico and the 
U.S.  The project, commonly called Camisea II, will liquefy 
natural gas piped from the Camisea and nearby (projected) 
fields.  The project includes a nearly 400-kilometer 34-inch 
diameter gas pipeline from the eastern side of the Andes 
Mountains to the Peru LNG facility.  A sea wall around 800 
meters long, to be located 1400 meters offshore will protect 
the marine terminal and ships during loading. 
 
ECONOMIC IMPACT OF CAMISEA 
-------------------------- 
 
3.  (U) During the ceremony, President Toledo emphasized the 
legacy that Camisea and other projects would leave for the 
Peruvian people in export revenues and jobs.  According to 
Peru LNG, the export project will add approximately one 
percent to Peru's GDP during the construction period. 
Estimated royalties and taxes to the central government and 
to the local governments along the new pipeline and 
surrounding the plant will total approximately $200 million 
per year.  Construction of breakwater, plant, access roads 
and pipeline will create about 5,000 direct jobs.  Indirect 
jobs created are estimated to be around 30,000.  Operation 
of the pipeline spur, liquefaction plant and export terminal 
should maintain around 3,000 Peruvian jobs over the 18.5- 
year life of the project.  President Toledo stated that the 
combined impact of Camisea I (natural gas for internal 
consumption) and Camisea II would add 2 percent of growth to 
Peru's GDP. 
 
NO SHORTAGE OF CRITICS 
---------------------- 
 
4.  (SBU) Several critics, two of them former ministers of 
Mines and Energy (of the APRA and Paniagua Administrations) 
have accused the GOP of promoting exports at the expense of 
the domestic market.  The news that future LNG exports will 
occur in three years has made several critics question the 
sufficiency of Peru's natural gas reserves. 
 
5.  (SBU) Several candidates for the upcoming April 
presidential elections, including conservative Paniagua, 
APRA's Garcia and anti-establishment Humala have voiced 
their criticism against the Camisea contracts.  Paniagua 
alleges discretionary assignment of the LNG plant contract 
to the Peru LNG consortium; that the price of liquefied 
petroleum gas (LPG) (which Camisea does not produce) is too 
high in Peru and the amendment of the Block 88 concession 
(to allow export of gas in excess of domestic consumption) 
favored Peru LNG.  Garcia has called for a renegotiation of 
the Camisea contract as being "indispensable" and Humala 
promised to "review" all (major) contracts with large 
foreign companies. 
 
6.  (SBU) As the government tries to induce consumers, 
transporters and industries to convert to natural gas, 
critics highlight that Peru's natural gas and LPG prices as 
higher than those of Argentina.  (Note: the GOP does not 
subsidize nor controls the price of natural gas and other 
fuels as do some of its neighbors, but Camisea operator 
PlusPetrol is allowed to charge prices for natural gas based 
on a formula of petroleum product market prices.  Yet, 
prices of natural gas in Peru are well below world market 
prices.  End Note.)  As a result, the Energy Minister 
Glodomiro Sanchez stated to the press in mid-February that 
natural gas prices may decrease, that continuing rumors of 
an energy ring deal with Chile are unfounded and that Peru's 
natural gas reserves still stand at an estimated 11 trillion 
cubic feet -- enough to meet Peru's projected consumption 
for the next twenty years. 
 
STILL NEEDED: MORE PROVEN GAS 
BEFORE EXPORTS ARE POSSIBLE 
----------------------------- 
 
7.  (SBU) Domestic Camisea natural gas consumption in 2005 
(77.9 million cubic feet per day) was merely 60 percent of 
the MEM's 2003 forecast (130 million cuftp/d) and just 87 
percent of its early-2005 estimate (89.5 million cuftp/d). 
Consumption thus has not yet reached the capacity of the 
Camisea field.  However, under a 1999 Peruvian law, a 
natural gas concessionaire must guarantee the long-term 
supply for domestic demand before it can export.  In Camisea 
neighboring blocks, the Camisea consortium (Pluspetrol, 
Hunt, SK, Tecpetrol and Sonatrach) also has an exploration- 
production concession for Block 56 (Pagoreni), while 
Petrobras has one for Block 58, and Repsol and Burlington 
for Blocks 57 and 90.  In May 2006, Peru LNG plans to start 
drilling up to six wells in Block 56 during a two-year 
period.  The companies with concessions around Camisea are 
optimistic about finding more natural gas reserves and are 
more confident now that construction of the LNG plant has 
begun, with preparatory exploration work in train. 
 
CAMISEA II AND THE ENVIRONMENT 
------------------------------ 
 
8.  (SBU) The natural gas and liquids pipelines from the 
Camisea I field (Block 88) in Cuzco's jungle experienced 
four cracks during the first 15 months of operation, likely 
due to seismic and weather-related conditions (i.e., earth 
slides after rains).  Because of a safety system of valves, 
and the relatively minor effects of natural gas liquids 
spilling over the ground/rivers, the breaks in the pipelines 
have not caused significant environmental damage, but they 
have interrupted revenues.  Peru LNG has learned these 
experiences and is taking measures to reinforce the new 
pipelines. 
 
9.  (SBU) Ministry of Energy and Mines (MEM) Hydrocarbons 
Director Gustavo Navarro told Econoff that Camisea II did 
not have environmental impact assessments problems.  During 
meetings with several NGOs that have criticized the 
environmental protection of Camisea I, they noted that they 
had no significant issues with the plant, seawall or export 
terminal.  They all reported that Peru LNG's site (chosen 
after extensive environmental vetting) was not in an 
ecologically fragile zone and they expected few 
environmental problems from the plant's operation. 
 
10.  (SBU) Local fishermen complain that the sea wall and 
shipping terminal will interfere with their livelihood. 
(Note: In view of the rich fishery that exists all along the 
Peruvian coast, and the relatively small impact that the sea 
wall is expected to have, the fishermen's complaints appear 
to be based more on a desire to obtain money than a 
legitimate concern.  The MEM's energy environment bureau has 
urged the fishermen to support their claim with hard data. 
End Note.) 
 
SQUATTERS FLOCKING ALREADY 
-------------------------- 
 
11.  (SBU) Although the site of the Peru LNG plant is a 
desert wasteland with no water or vegetation, hectares of 
shacks have already sprung up around the area.  Peru LNG 
officials told Econoff that while some shacks are inhabited 
as people move to the area in hopes of finding work, many 
are erected as a sort of squatter's speculation; many 
squatters hope that by possession, they may be able to 
establish title to the land by the time there is enough 
development to make the land valuable. 
 
COMMENT 
------- 
 
12.  (SBU) The signing of the Peru LNG/GOP agreement will 
contribute to U.S. energy security and be a boon for Peru's 
future development, particularly as the country becomes a 
net exporter of energy.  This positive trend will be 
amplified if companies with oil and gas concessions around 
Camisea strike gas, as they expect, which could triple the 
initial capacity of Peru LNG's plant.  A February 24 visit 
by Econoff to the site showed construction was well 
underway. 
 
ARELLANO