Economist closes in on presidency in gas-rich Peru

OREANDA-NEWS. June 09, 2016. Resource-rich Peru has been on political tenterhooks since an exceptionally tight presidential run-off election on 5 June, but market-oriented economist Pedro Pablo Kuczynski is now close to declaring victory.

Kuczynski, a former energy and mines minister widely known as PPK, leads his opponent, Keiko Fujimori, by just around 42,300 votes, with 99.5pc of 18.1m ballots counted as of this morning.

The razor-thin margin and post-election polarization could make for an especially difficult five-year term, especially amid softer prices for LNG, copper and other commodities that provide the bulk of Peru's income.

PPK and Fujimori have been subdued since the vote, calling on supporters to be prudent. Both vowed to respect the results prior to the election. A contested vote would cut into the already tight seven-week transition with outgoing President Ollanta Humala.

If the numbers remain constant, PPK would have to move quickly to build bridges to other parties, especially Fujimori's right-of-center Fuerza Popular party. Her party will dominate Congress, holding 73 of the 130 seats in the unicameral legislature. That majority could easily block PPK's plans.

In the unlikely event that the final tally goes her way, Fujimori would enjoy a congressional majority, but little else. She continues to come under the cloud of her father, former President Alberto Fujimori (1990-2000), who is in prison for crimes committed during his 10-year term. He is serving several sentences, including a 25-year conviction for human-rights abuses.

The elder Fujimori was accused of electoral fraud in his bid for a third term in 2000. He only served a few months, fleeing Peru for Japan in November of that year to escape a corruption probe. Memories of the crimes committed by her father played heavily in the race, as they did when she lost in 2011 to Humala, and the specter of fraud could hang over her government were she to win.

Hanging in the balance are huge projects, including the \\$4bn southern gas pipeline (GSP) underway by a consortium including Brazilian construction firm Odebrecht, Spanish utility Enagas and Peruvian builder Grana y Montero. The consortium needs to sign an addendum to its 2014 contract to facilitate financing, but Peru's government has resisted because of Odebrecht's legal problems with a major corruption investigation at home. Odebrecht is trying to sell its 55pc share, but so far there are no takers.

A turbulent political climate may create even more delays. The 1,000km (600mi) pipeline, which will deliver gas from the Camisea gas blocks in the jungle to the southern coast, is the cornerstone of a "energy complex" that already includes two thermal generating plants under construction and, eventually, petrochemical facilities. The aim is to build up the domestic gas market, leveraging Camisea gas outside of block 56 which supplies the 4.4m t/yr Peru LNG export project.

The pipeline would initially pump 500m ft3/d (14m m3/d) from block 88 from mid-2018. Any setbacks could keep China's state-owned CNPC, which operates exploration block 58, and Spain's Repsol, which operates 5mn m3/d block 57, from moving ahead with investments. Additional gas from block 57 or new production on block 58 would need the southern gas pipeline to move the gas to the domestic market.

The pipeline is also critical to one of PPK's flagship promises to build regional pipelines off the GSP for southern cities.

PPK and Fujimori both pledged to address bureaucratic knots and community opposition that have contributed to reduced oil and gas investment. Investment last year totaled \\$817mn, compared with \\$1.2bn in 2014 and \\$1.4bn in 2013.

Oil and gas promotion agency PeruPetro reported that, as of March, 29 of 38 existing exploration blocks were subject to force majeure, nine because of permitting lags, 14 because of community issues and six for other reasons. PeruPetro expects only two exploration wells, both by CNPC, to be drilled this year.

PeruPetro was forced to cancel two international bidding rounds last year for offshore and jungle blocks. It has no immediate plans for tenders, but it has ready six offshore blocks and 12 jungle blocks. There have been no bidding rounds in Peru since 2010.