Peru revokes Tullow exploration contracts

Peru's energy ministry revoked five shallow-water exploration contracts awarded in March to Ireland's Tullow Oil.

The ministry published a seven-point communique outlining its decision, stating that the decision to rescind the contracts was based on the need for greater public participation in the process used to award exploration blocks. The new decree cancelling the contracts gives hydrocarbons agency PeruPetro 120 days to approve new regulations for public participation.

The Irish independent called the move "deeply disappointing given that Tullow has complied with the process and procedures required under Peruvian law…Tullow has operated throughout under the strict guidance of PeruPetro," Tullow told Argus. "We will now consider our next steps."

The Peruvian Hydrocarbons Society (SHP) and National Mining, Petroleum and Energy Society (SNMPE), warned of negative consequences from the move, but maintained a sliver of hope that the decision could have long-term positive effects.

"We disagree with how this has been handled, but the government has told us that it wants to improve the citizen participation process and ensure transparency. This could be positive in the long run, but everything will depend on what the government does next," SHP president Felipe Cantuarias told Argus.

He said despite the decision, there was no reason why the state and Tullow could not work together to secure a social license for the blocks and sign new agreements.

Contracts for the blocks, located off the northern coast, have been controversial from the start. They were signed by former president Pedro Pablo Kuczynski on 21 March, the same day he resigned to avoid impeachment in a corruption case. The decrees were published three days later.

Legislators from most parties in the 130-member unicameral congress objected to the contracts, submitting different bills to have them annulled. Lawmakers complained about economic and environmental issues, claiming the contracts would have allowed Tullow to pay royalties as low as 5pc and would have harmed fishing grounds.

The regional government in Ancash state passed a resolution on 4 May rejecting contracts for two of the blocks in its coastal waters, citing the need to protect the fishing industry.

Fishermen's cooperatives along the northern coast had protested the agreements, claiming they were not properly consulted.

President Martin Vizcarra told Argus prior to the formal cancellation of the contracts that his administration decided to review the agreements to dispel any suspicions.

"The message is clear that we want private investment, but it has to be completely transparent. In this case, there have been doubts about these blocks because they were awarded while I was taking office. This created suspicion that the process was not done correctly," he said.

The SHP warned that if the government mishandled the issue, it could undermine the industry just as oil prices are increasing and companies are again expressing interest in exploration.

Cantuarias said Peru could forfeit $250mn in investment from Tullow and planned investment by other companies could dry up. Investment in the sector in 2017 was $487mn, the first increase after four years of steady decline. Investment the previous year was $335mn.

The number of exploration blocks in effect has plummeted since peaking at nearly 70 at the start of the decade. The energy minister listed 17 exploration blocks as of April, down from 24 a year ago and 38 in April 2016. The country has not held a licensing round since 2010 and has awarded just nine blocks, including Tullow's five, since then. Three offshore blocks were awarded to US independent Anadarko in October. Russia's Ricoil received onshore block 29 in 2015.

Peru produced 49,965 b/d of crude in April, up from 43,224 b/d the same month last year. Natural gas production was 1.22bn cf/d in April, up from 1.14bn cf/d last year.