Does It Make Sense to Export Camisea Gas?

With the IDB on the verge this week to make a decision to finance Camisea II, the export phase of the Camisea project, aka Peru LNG, an article in today's El Comercio reports that it could be a grave economic error for Peru to export its gas. According to an analysis by Glen Jenkins of Environmental Defense, at current oil prices, it would be more cost effective for Peru to secure its internal hydrocarbon demand for the next 33 years than to export the gas and have to import fuel in the future. In other words, Peru is paying a high opportunity cost by exporting fuel that it will eventually need.

The Camisea blocks 88 and 56 together contain an estimate 10.9 trillion cubic feet of gas. Of this, 4.2 trillion TCF is destined for export by Peru LNG. The Peruvian Ministry of Energy and Mines calculates Peru's future demand for gas to be 6.6 TCF and a large portion of the energy, industrial, and transportation sectors are making costly conversions to function on gas. The initial contracts for the exploitation of the Camisea gas required that export would be permitted only if domestic demand was permanently assured for a 20-year outlook, however this provision was conveniently changed to a fixed 20-year period (2005-2025) during a renegotiation between the Toledo administration and Pluspetrol. Now the Peruvian government's answer to meeting the future domestic demand for gas is simple if uncertain: discover more.

With over a billion in public financing for Camisea II pending from the IDB, IFC, and ExIm Bank, it is clear that the real beneficiary will be Hunt Oil which controls 50% of Peru LNG. What is less clear is how the project will ultimately benefit the Peruvian economy.

New Report Finds Camisea Fails IDB and IFC Standards

The September 2007 report, Holding the IDB and IFC to account on Camisea II, is available for download from Amazon Watch. The report, by anthropologist, Tom Griffiths, highlights some of the major environmental and social problems of Camisea I and II and concludes that the Camisea consortium's community engagement in Block 56 has violated international standards on protecting the rights of indigenous peoples and fails to the meet the performance standards of the InterAmerican Development Bank (IDB) and the World Bank’s International Finance Corporation (IFC), both of which currently considering financing Camisea II.

Among the problems with Camisea II outlined in the report are:
1) A flawed and deficient Environmental Impact Assessment (EIA) for operations in Block 56.
2) A community consultation process on the Block 56 EIA that threatened confused and dissatisfied communities into signing their approval.
3) Evidence that prior consent and prior consultation rights were not fully respected by the Ministry of Energy and Mines and Perupetro when it sold exploitation rights to Block 56, questioning the legality of the sale.
4) Failure to address potential impacts of Block 56 exploration and development on isolated indigenous peoples.

The report states that the IDB must delay its decision on financing Camisea II until it first addressed project non-compliance issues with respect to its financing of Camisea I and ensure that ascertain that the project fully complies with IDB policies, including protections for indigenous peoples’ established under ILO Convention 169 and the Inter-American human rights system.

It urges the IFC to include the “associated facilities” of Blocks 56 and 88 in its due diligence; conduct its own social and environmental audit as required under its Performance Standards; and ensure public consultation in Peru and internationally before proceeding with the project.

This is a very good document, in particular for understanding how indigenous communities were railroaded into signing off on the Block 56 EIA in early 2005. Good work, Tom.

Congressional Hearing Highlights Environmental Impacts of Camisea

On June 4th, 2007 a hearing was held in the Peruvian Congress on "Camisea Gas and the Development of the Affected Communities. Presenters included the mayors of Pisco and Anco-La Mar as well as Congressional representatives from the regions of Huancavelica and Ayacucho. Wílder Manyavilca, Mayor of the province of Anco-La Mar (Ayacucho) described the damage to forests, contamination of water and medicinal plants, and the loss of agricultural activity caused by the project. He asked for a fund to compensate agriculturalists for the loss of flora and fauna. A recent study estimated that socio-environmental impacts of the project in Anco-La Mar alone were 39,062,885 Nuevo Soles (US$ 12.3 m).

Representatives from Pisco stated that the project had caused environmental damage in Paracas Bay and feared an increase in problems as the fractionation plant is expanded. The demanded a halt to all Camisea II activities. Pluspetrol responded in La Republica that Paracas Bay is not contaminated, citing a monitoring report of ProParacas which found water quality and biodiversity to be within "normal parameters."

Vice Minister of Energy, Pedro Gamio announced that the government had met 70% of its 21 commitments under the IDB Program for Institutional Strengthening and Support for Environmental and Social Management which will end in August.

Article on the hearing in La Republica.

USAID Report to Congress Links PeruLNG to Camisea I

A report obtained by Oxfam America through the Freedom of Information Act submitted by USAID to Congress reveals that agency's concerns with the Camisea Natural Gas Project and links it directly to the development of PeruLNG aka Camisea II.

USAID must report on the project because US tax dollars contributed to the $75 million IDB loan granted to the downstream (pipeline) portion of the project.

Under the Pelosi Amendment (Section 1307 (a)(1) of the International Development and Finance Act of 1989), the EIA (Environmental Impact Assessment) for the fractionation plant and marine terminal were not completed and publicly available 120 days before the IDB's vote, thus USAID recommended to the Secretary of Treasury and US Executive Director on the IDB Board "not to vote in favor of the proposed Camisea Natural Gas Project."

USAID's analysis, "revealed substantial adverse environmental and social impacts involving biodiversity and indigenous peoples that needed to be remedied." It also found that not all of the IDB's loan conditions regarding environmental and social commitments of the project were fulfilled prior to financial closure on the loan.

The report describes the LNG export component of the project as including the construction and operation of an LNG liquefaction facility and marine export terminal in Pampa Melchorita on the coast, a 408 km, 34" diameter, pipeline extending from Chinquintirca, Ayacucho to the coastal plant (we now know that this new pipeline will most likely extend all the way to the Lower Urubamba in the Amazon), and the development of new gas wells in Block 56, adjacent to the Block 88. Six (or more?) wells are planned to tap the Pagoreni Reserves of 3.5 trillion cubic feet of gas in Block 56.

The proposed financing of the LNG export component is the following: $700 million from Export Credit Agencies, $400 million "A" loan and $400 million "B" loan from the IDB (the IDB signed a mandate letter in July 2006 formally beginning the project appraisal process), and $300 million from local capital markets. Project sponsors will contribute $1.6 billion.

According to its report to Congress, "USAID considers the LNG project as an expansion of the Camisea Natural Gas Project." This means that in considering loans to PeruLNG, the US government will revisit the environmental and social concerns raised in the first IDB Camisea loan and evaluate fulfillment of the conditions of that loan (something that the IDB has not done since June 2004).

Under the Pelosi Amendment, the US government's environmental assessment of the project must include associated and cumulative impacts, in this case the existing Camisea project including the pipeline and activities in Block 88.

Brief: IFC to Consider Financing Camisea II

Sources recently reported that the Policy Committee of the International Finance Corporation, the private sector arm of the World Bank, has given the lender a green-light to consider financing Hunt Oil for Peru LNG or Camisea II. The IFC has a performance standard on indigenous peoples. The upcoming project approval process should be interesting to watch.

Camisea II: Hunt Oil May Build Second Pipeline in Amazon

Since October, we have been hearing diverse accounts that Peru LNG - the consortium led by Hunt Oil (US) and including SK Corporation (South Korea) and Repsol YPF (Spain) is considering building a second pipeline originating from the Las Malvinas facility in the Lower Urubamba region to feed its LNG plant in Pampa Melchorita with gas from Block 56. According to the Peru LNG's website, and the InterAmerican Development Bank (IDB), which is considering financing the project, the second pipeline was supposed to be built only from the coast to the edge of the jungle in Ayacucho. The reasoning has always been that constructing a new pipeline in the Amazon jungle would cause additional environmental damage to an extremely sensitive region. The original Camisea gas pipeline was supposedly sized large enough in anticipation of the additional gas from Block 56.

Now, however, Hunt is looking seriously at the possibility of constructing a second pipeline in the Amazon. Peru's Ministry of Energy and Mines (MEM) and its natural resource agency (INRENA) held consultations with local organizations in Quillabamba in November about the proposed second pipeline. In late November, a senior official with MEM told me that a second pipeline in the Amazon was in the planning and that it was needed because Peru's internal demand for gas has far exceeded expectations. This argument does not make much sense because the new pipeline would be build by Peru LNG to feed their LNG export facility. Besides, according to El Comercio, Camisea operator, Pluspetrol has not managed to offer gas at a price that has been attractive to industry. In a recent interview with Reuters, PeruPetro President, Cesar Gutierrez said, "The conversion to gas in industry has been limited and the conversion for domestic use is almost nil."

A more likely reason why Hunt is looking into the second pipeline is that Peru LNG could not come to agreement with TGP over the cost of transporting gas through the existing pipeline. Quality concerns with the pipeline may be another factor.

In December, I spoke with Lelis Rivera, Director of CEDIA, who has worked in the Upper and Lower Urubamba for three decades. He predicts that a second pipeline in the Amazon could not be routed alongside the existing liquid and gas pipelines. The existing pipelines were built along steep ridgelines and subsequent erosion has left little room to add another pipe. In some places, erosion of the ridgeline has been so bad that it has exposed the pipeline.

If Hunt does decide to build a second pipeline in the Amazon, the impacts on indigenous communities and the ecosystem will be as extreme. In a 2003 report on the construction of the first pipeline, Global Village Engineers Global Village Engineers estimated that the clearing and exposure of the right-of-way in the Amazon caused as much as 100 tons of soil and vegetation per meter of pipeline eroding into sensitive aquatic habitat. This left local indigenous communities without clean water or fish to eat.