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  • Published on: 14th September 2019
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Research on Peru 1970s-1990s

Extraction, refining, and marketing of oil in Peru were under the control of PetroPeru from 1968 to 1991. Foreign firms were allowed to participate in exploration efforts, although negotiations over their rights were often points of contention. From 1973 to the early 1980's, the Peruvian government's economy was in severe decline as they ran deeper into debt, were forced to devalue the sol, and instituted inflationary policies. Still, PetroPeru sought the active participation of private companies in upstream activities throughout the 1970's. The two private energy companies that remained in Peru in the 1970's were Belco Petroleum Corporation and Occidental Petroleum Corporation. These companies frequently experienced disputes with the Peruvian government over exploration rights and contract terms. During this time, less oil was discovered than was initially estimated, but the reserves discovered in the Amazon region gave Peru the ability to become a net oil exporter from 1978-1988.  

The Velasco government (1968-1975) ensured Belco Petroleum Corp. and Occidental Petroleum Corp. that their increased investments and exploration efforts in Peru represented significant value for the country. Even as the economic policies of the Velasco administration proved largely unsuccessful and led the nation further into an economic downtrend, output of petroleum products were on the rise. Increased government intervention in the energy sector had an observed effect on Peru's foreign relations and policy, especially with the United States.

The dispute between the United States and Peru began over the controversial nationalization of companies in Peru without proper compensation. This was an investment dispute between the U.S. and Peru. The disagreement was eventually settled through the “Greene Agreement” in 1974 and from the U.S. point of view, was heralded as a diplomatic success. Peru agreed to pay compensation of $76 million and this agreement sent out a signal that the U.S. accepted Peru's right to expropriate.

Another military coup, launched by the same army officers who put Velasco in power in 1968, occurred in 1975 and was headed by Peruvian Prime Minister, General Francisco Morales Bermudez. The power transition was followed by plans for an economic re-vamp with the promotion of non-traditional exports and increased flow of foreign capital into the country. While prominent economists and politicians began to question Peru's failing interventionist and protectionist policies, President Morales Bermudez (1975-1980) began the transition towards a more democratic government.

Foreign companies had a larger role in Peru under Morales Bermudez, as he attempted an economic stabilization program that was characterized by the invaluable role of foreign capital in the economy. The Peruvian government had negotiations with private banks and the IMF from 1976-1978. This was a period of time where the government was moving away from a state-run economy and moving towards an increased reliance on market mechanisms. The Morales Bermudez government hoped that opening the domestic oil market would spur foreign investment and increased capital ventures between multinational petroleum corporations and Peruvian companies.  In June of 1977, the North Peruvian pipeline was inaugurated. The pipeline construction was almost exclusively financed by Japan but failed to initiate additional FDI in Peru's hydrocarbon sector.

After 12 years of military rule, characterized by high levels of accumulated debt and ineffective structural economic reforms, Peru held democratic elections in 1980. The election was won by Fernando Belaunde (1980-1985), whose first government was overthrown in the first military coup in 1968. Peru's democratic transition, coupled with a price hike in international oil prices, fostered hopes of Peru once again becoming an oil power. However, the results of vigorous oil exploration efforts in the early 1980's were dismal.

Under the second Fernando Belaunde government, the rate of inflation rose exponentially, the amount of goods and services imported nearly doubled, and manufacturing exports and outputs plunged. The hydrocarbons sector quickly joined the economic downturn given the volatile economic conditions and oil production decreased sharply between 1980-85. Price controls on oil held the price below the costs of production drove PetroPeru into a budget deficit which constrained its ability to finance additional E&P efforts. In 1981 Shell signed an exploration contract with the Belaunde government to explore an area of 2,000,000 hectares in the Ucayali basin and in Cuzco.

In the following election, Peruvians voted for the populist-reformist Alan Garcia who promised to decrease unemployment, raise wages, and increase production and output. The Garcia administration (1985-1990) rejected free-market principles and rescinded Belco and Occidental's operating contracts in order to nationalize their operations. Belco refused to renegotiate its contract with the Peruvian government and left Peru in late 1985.  By 1986, Royal Dutch Shell was the only other major private company involved in Peruvian upstream activities. It was then that the Camisea Gas Fields were discovered by Shell in the Ucayali basin- where they had already been exploring since 1981. Shell sought development rights and wanted to invest an additional $1.3 billion towards the development of Peru's natural gas for commercial use, residential use, and exports.

In March 1988, the preliminary agreement on exploration was signed between PetroPeru and Shell. Shell's negotiations with PetroPeru eventually broke down over PetroPeru's attempt to call a tender for development rights to the Camisea fields project. As a result of this disagreement, Shell halted operations and left Peru in late 1988. Following Shell's departure, PetroPeru was unable to raise the necessary capital to continue with the Camisea project. In 1990, the incoming Fujimori administration was left with PetroPeru's $2.5 billion debt and an energy supply capacity that met below half of the country's domestic energy demand. Reserves and production in Peru were quickly declining due to a lack of investment in the energy sector.

In 1990, Alberto Fujimori won the presidency and used economic “shock” measures, known as Fujishock, to stabilize the failing economy. The Fujimori government (1990-2000) instituted major neoliberal reforms and stepped up efforts to attract new investment by foreign oil companies to privatize the oil sector, which would ultimately end the monopolistic position of PetroPeru on downstream operations. The three main corporations engaging in E&P in Peru in the early 1990's were Occidental, Shell, and Mobil.  Several other foreign oil companies also entered into negotiations with the Fujimori government to begin exploration activities in 1991. Fujimori wanted to reduce the role of the state in the economy and implemented fiscal and monetary reforms with the aim of creating a unified exchange rate (there had previously been multiple exchange rates under the Garcia administration) and eliminating price controls in the private sector.

In addition to oil and gas sector reforms towards privatization, Peru worked to strengthen its environmental standards and regulations. In 1990, the Environmental and Natural Resources Code created new standards for environmental protection where oil and gas companies are required to submit an Environmental Impact Assessment (EIA) before a project can begin. The EIA must detail the expected environmental and social consequences of the proposed project and include a plan for managing the impact.

PetroPeru embraced the Fujimori administration's policies towards privatization. Although PetroPeru never fully privatized, they were able to efficiently streamline its operations by shutting down underperforming projects and diverting their resources to projects with higher productivity. Legislation approved in 1993 ended PetroPeru's monopoly over oil and gas and allowed for the participation of private companies in upstream and downstream operations. Improvements to E&P contract terms and the involvement of international arbitration methods in the event of a dispute made Peru more competitive on the market. As a result of the 1993 reforms, from 1990 to 1997 investment in the sector increased from $20 million to $4.3 billion and operating areas increased from 1 million hectares to 23 million hectares. Prices were no longer set by the state and reflected the market which gave rise to PeruPetro. PeruPetro is a state-owned company whose only purpose is to administer oil and gas resources and to contract with private companies seeking E&P rights.

After these hydrocarbon and environmental reforms, Peru focused on development of the Camisea Gas Fields in 1994 and was eager to have the Camisea project under development.  The government wanted to open up the project for bids, but potential bidders urged Peru to resolve its past dispute with Shell. Two years later, Peru granted a 40-year concession to a Shell-Mobil consortium. In 1998 the Shell-Mobil consortium terminated the project's contract, citing “irreconcilable differences” between the two companies and the Government of Peru. In 1999, the government passed legislation that attempted to address complex challenges in the gas market that had arisen with the Shell-Mobil agreement. In 2000, President Fujimori was removed from office for corruption, but the Camisea deal was officially completed. At the end of 2000, under President Paniagua, Peru signed contracts with Pluspetrol and TecGas for the development, transportation, and distribution of the Camisea natural gas.

References Additional Information

1. Peru: Reform and Privatization in the Hydrocarbon Sector (Washington: The International Bank for Reconstruction and Development/The World Bank, 1999);

2. Energy in Peru: Opportunities and Challenges, (A Working Paper of the Americas Society/Council of the Americas Energy Action Group) http://www.as-coa.org/sites/default/files/ASCOA_Energy_in_Peru.pdf

3. Peru Energy Policy, Laws and Regulations Handbook Volume 1 Strategic information and basic laws By IBP, Inc. Intl Business Pubns Usa, 2015.

4. Ideas and Economic Policy Change: The Influence of Policy Ideas and Non-State Actors in the Peruvian case of market -oriented reform by Alba Hesselroth, USC dissertation, http://digitallibrary.usc.edu/cdm/ref/collection/p15799coll16/id/444899

5. The Peruvian Experiment Reconsidered, edited by Cynthia McClintock, Abraham F. Lowenthal

6. Sustaining Development in Mineral Economies: The Resource Curse Thesis By Richard Auty

7. Peru and the United States, 1960-1975: How Their Ambassadors Managed Foreign ...By Richard J. Walter

8. https://history.state.gov/historicaldocuments/frus1969-76ve11p2/d296

9. The Japan-Peru FTA: Antecedents, Significance and Main Features*, Fernando Gonzalez-Vigil and Tatsuya Shimizu http://www.ide.go.jp/English/Publish/Download/Dp/pdf/335.pdf

10. Energy Cooperation in the Western Hemisphere: Benefits and Impediments By Sidney Weintraub, Annette Hester, Veronica R. Prado

11. THE UNITED STATES AND PERU IN THE 1990s: COOPERATION WITH A CRITICAL CAVEAT ON DEMOCRATIC STANDARDS, Cynthia McClintock June 2000, Dept .of Political Science, GWU

12. http://www.ogj.com/articles/print/volume-89/issue-2/in-this-issue/general-interest/peru-struggles-to-maintain-crude-production.html

13. Up, Down, and Sideways: Anthropologists Trace the Pathways of Power edited by Rachael Stryker, Roberto J. Gon

14. https://nacla.org/article/i-privatization-and-public-debt-us-banks-peru

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