The challenges facing the massification of natural gas

Rubio Leguía Normand | View firm profile

As of 2004, Peru began the exploitation of its most important natural gas reserves, located in the region of Cusco (Camisea), specifically in the fields located in the towns of San Martín, Cashiriari and Mipaya. These reserves, coming from Lots 88 and 56, are transported from the rainforest to the coast of the country to meet the energy demand of the population.

By Daniela García Belaúnde

Partner, Energy Practice Area

Rubio Leguía Normand

As of 2004, Peru began the exploitation of its most important natural gas reserves, located in the region of Cusco (Camisea), specifically in the fields located in the towns of San Martín, Cashiriari and Mipaya. These reserves, coming from Lots 88 and 56, are transported from the rainforest to the coast of the country to meet the energy demand of the population.

Since that date, there has been a cheap, clean and safe energy component, which allowed the country, among other benefits, to build a diversified energy matrix of high reliability to the electrical system and respectful with the environment. The next step was to build an infrastructure that would transport the Camisea gas to the south of the country, in order to connect the distribution concessions in the regions and the energy node plants awarded. This was interrupted in 2017 when the concession of the Gasoducto Sur Peruano project was terminated because the concessionaire did not reach the financial closure due to the Lava Jato scandal.

As part of the process of promotion and mass consumption of natural gas in the country, since 2010, six concessions for natural gas distribution by pipeline network have been awarded, which five are in commercial operation.

However, the recent termination of the concession contract by the company Naturgy Peru, among other events, has made it a priority for the sector to rethink the structure of these concessions and take actions that address the challenges brought about by the massification of natural gas. This, with the purpose of avoiding similar situations, specifically, with regard to the inexistence of a transportation infrastructure, the lack of consistency of the regulatory framework with a real policy of natural gas massification and the uncoordinated action that exists between State entities, which provide clear rules that provide regulatory predictability and stability to investment.

Particularly in the case of Naturgy Peru, this concessionary company decided to terminate the contract with the State due to the significant economic losses caused by the higher costs of liquefaction and virtual transport of natural gas, this in turn, due to the non-existence of transport infrastructure to bring the gas from the center to the south of the country.  The absence of this transportation infrastructure makes the final tariffs less competitive with respect to substitute fuels and other distribution concessions. Added to these circumstances, Naturgy’s disadvantage is compounded by the lack of regulation of the marketing of both CNG and LNG which has allowed the marketing of gas to large consumers within the concession area at competitive prices, as well as the lack of incentives granted by the State to promote consumption in the regions, unlike the concessions of Lima and Callao and Ica.

Along the same lines, during the quarantine, OSINERGMIN, the agency in charge of setting natural gas transportation and distribution rates, has published its intention to establish a new methodology for the transfer of natural gas supply and transportation costs by natural gas distribution concessionaires to end users.

According to this new proposal, the transfer will no longer be based on payments made to the producer and carrier under agreed take or pay and ship or pay clauses, but rather on the volumes actually delivered by the producer and carrier assessed in a historical period. Under this scheme, distribution companies will maintain the obligation to pay for gas and transportation capacity according to their contracts, without the possibility of transferring this cost assumption to the end user. According to the regulator, those inefficient costs incurred by contracts attributable to planning errors or business strategies will be the sole responsibility of the distributors, since in their view, the transfer of such costs in excess would constitute an abuse of dominant position.

A proposal such as this undoubtedly only looks at the last link in the chain, without taking into consideration that take or pay and ship or pay clauses are essential for the long-term financing of large-scale infrastructure works, and that contracting is done within a plan to expand the other links in the chain. In this sense, in contracts being executed, a proposal such as that of the regulator is to put the sector’s payment chain and the financial health of companies at risk and to eliminate incentives for new investment. In addition, since we are talking about a chain, this proposal obviously has repercussions for the end user, who it is intended to protect.

In this regard, the State must establish clear rules regarding what must be considered as efficient contracting and how those situations would be resolved when such efficiency may be lost along the way for reasons not attributable to the concessionaire or when the contracting is derived from the fulfillment of its contractual obligations. In this sense, and with the aim of providing a solution, a few days ago the Ministry of Energy and Mines, the governing body of energy policy, published a project that attempts to establish the criteria of what should be understood as efficient contracting, for which it proposes that it be that which is necessary to meet a current and projected demand in the regulatory process or promotion process, which would be far from the criteria that the regulator intends to establish.

Finally, and not less important, the State has announced that it plans to award the project of the Integrated System of Gas Transportation South Zone – SIT GAS for the month of July 2021, so that it can take the gas from Camisea to the distribution concessions of the center and south of the country, which will increase the competitiveness of the final tariffs with respect to substitute fuels. A project of this magnitude should not only have the predictability mentioned previously, but also a guaranteed demand for natural gas that justifies the Project, since it seems that the demand for the energy node would not be sufficient and would make transportation costs high, and that the problems of electricity demand could be solved with renewable projects in a much more economic manner.

The above-mentioned is of vital importance to guarantee the continuity of the process of massification in the regions and to consolidate the use of gas, as well as the execution of new projects. For this reason, situations that generate uncertainty, affect investor confidence and reduce interest in infrastructure investments are not required, even more so when it is essential to attract them in order to face the economic consequences of the COVID-19 pandemic. Long-term investor decision-making is based on legal stability, legal certainty and respect for contracts by a country’s authorities.

Therefore, in order to avoid situations like those of Naturgy, and in the interest of contributing to the implementation of the energy policy of massification, it is important that the State provides concrete signs of predictability, adequate cost assumption and guarantees of supply for the end user. Natural gas is part of the transformation process towards a sustainable economy model based on clean energies. Therefore, a balance between the costs assumed by the user and the obligations to which the distribution concessionaires are subject, can set the guidelines to attract and maintain safe and reliable investments for the benefit of the population.

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