An image of Peru's President Ollanta Humala is burnt by students during a demonstration against the government in Lima on July 4, 2013.

Peru has abundant natural gas reserves, but President Ollanta Humala’s $11.5 billion (R115.5bn) plan to use them to transform the country’s underdeveloped south is facing mounting hurdles.

The US shale gas revolution, left-wing guerrillas who operate near Peru’s gas fields in the jungle and difficult negotiations with energy firms have dragged the expected finish line for Humala’s flagship project far past his 2016 term limit.

The delays underscore the risks of making natural gas plans, especially in an emerging era dominated by cheap US shale reserves, causing some investors to re-evaluate projects in Peru.

Humala wants to diversify Peru’s fast-growing economy with what would be the first plastics plants along the Pacific coast of South America while generating power for new mines and providing Peruvians with cheap fuel.

The plan calls for a $4bn natural gas pipeline, a $3.5bn petrochemicals factory and $4bn in power plants that would rely on Peru’s main gas fields, known as Camisea, which have almost 13 trillion cubic feet of proven reserves.

But two years into his term, no parts of the plan have gone past the design phase. Concessions have yet to be auctioned for the 1 000 kilometre pipeline and power plants, while tough negotiations over ethane supplies for the petrochemicals complex have barely started.

Committed investors are impatient.

“It is not enough to talk about it. Action must be taken,” said Sergio Thiesen, the regional head of Brazilian petrochemicals giant Braskem, which would build the $3.5bn factory as part of the plastics hub.

“Peru has a unique opportunity because it has the resources and the demand.”

Critics say the project’s design is driven by a desire to appeal to voters in Peru’s poorer south and that it would be cheaper to build the petrochemicals hub at the terminus of the country’s sole existing gas pipeline on the coast near Lima.

Humala, who has said he would like to be remembered for the project, likely will not be able to reap political benefits from its completion before he leaves office.

“There is no way this project will be ready in 2016 – any one of the components takes five years to build,” said a high-ranking official deeply involved in Peru’s energy sector, he said.

“This is about politics. It doesn’t make technical sense: it’s not well-designed, it’s incoherent and will cost twice as much as necessary,” said the official, who declined to be identified.

Industry experts said the first petrochemical plant – which would produce 1.2 million tons of polyethylene a year for sale in Chile, Peru and Colombia – could not open until 2018.


Blood, sweat, tears

Humala has acknowledged the difficulties the project faces, especially surrounding the pipeline – a crucial initial step that will guarantee gas needed by other investments.

“We have put our blood, sweat and tears into developing the financial framework (for the pipeline),” he said recently.

The government says a handful of firms will likely compete for the right to build the pipeline in a pending auction.

“We are seeing a lot of enthusiasm among firms interested in bidding,” Mines and Energy Minister Jorge Merino said.

Brazilian construction giant Odebrecht intends to bid on the pipeline. The firm’s earlier plan to build a similar channel was scrapped because of financing issues.

Company head Marcelo Odebrecht said critics of the ambitious project should take a broader view.

“This project as a whole is the biggest and most complete in Latin America today. We are not just talking about a pipeline, we are talking about an integral development project,” he said.

Humala said the pipeline would help boost energy security in Peru by moving gas from Camisea in the southern Cusco region to the coastal area of Moquegua, where it will power a new node of plants with 2 000 megawatts (MW) of capacity.

Peru currently has effective capacity of some 6 500MW with a fairly thin surplus of 13 percent. The government said the node would provide back-up power if existing thermoelectric plants near Lima, which produce half of Peru’s electricity, fail during disasters such as earthquakes.

The pipeline would also bring ethane to the plastics plant due to be built by Braskem, a unit of Odebrecht that would partner with Peru’s state-owned oil firm Petroperu.

Braskem said work on the pipeline had to start before it could begin constructing its plant – and there were also doubts about the ethane supplies it needed.

Humala’s government has passed a law requiring Petroperu to negotiate an ethane supply contract for Braskem.

But there are no regulations requiring the consortium that operates the Camisea fields, led by Argentina’s Pluspetrol, to extract ethane from gas and sell it to Braskem, according to former mines and energy minister Carlos Herrera.

Experience suggests the talks could drag on. Negotiations that started three years ago between the government and the consortium over royalties continue today, and talks over how much gas should be set aside for domestic use lasted two years.

“Petroperu needs to be willing to handle this and do it quickly,” Braskem’s Thiesen said.


Fallout from shale gas

Remnants of the Shining Path insurgency also pose dangers. The armed group traffics cocaine and coca in swathes of jungle that surround Peru’s principal gas deposits – the Camisea fields where the new pipeline would originate.

Security problems have already snarled operations on the existing gas pipeline that runs from Camisea to near Lima, prompting Humala to reinforce army deployments in the area.

A rupture on the existing pipeline would temporarily knock out half of all Peruvian electrical generation until the current power plants were switched to diesel from gas. External forces could also hobble Humala’s plan.

Two petrochemical projects that were planned for Peru as far back as 2008, but which were not part of Humala’s package, have been thrown into limbo since the US shale gas revolution.

Prices for gas at Henry Hub, a US benchmark, have fallen by more than half over the last five years. They are around $3.80 per million British thermal units (mmBtu) now, but were below $2 in April 2012. Gas in Peru is around $3.20 per mmBtu.

A $2bn Peruvian nitrates plant planned by US-based CF Industries was put on hold partly because prices tumbled in the US, Herrera said. The company did not comment.

A nitrates project of Peru’s Grupo Brescia and Chile’s Sigdo Koppers for $1bn has also been held up.

Geir Skarstein, the head of the joint project, said the owners wanted to move forward though they did not yet have a supply contract that defined a long-term price.

“For a project this big, we have to make sure we can compete with the US,” he said.

“With shale gas now you have to find just the right formula.” – Reuters