García Takes Softer Line On Peruvian Resources

García takes softer line on Peruvian resources

by Mary Powers in Lima, Financial Times

10th August 2006

Alan García, Peru's new president, is treading more lightly in his relations with natural resources companies operating in the country than his colleagues in neighbouring Bolivia and Ecuador.

Despite campaign pledges to impose a windfall profits tax on mining firms and reduce prices of natural gas-based fuels, Mr Garcia's administration is instead asking them for a voluntary contribution towards social projects.

Meanwhile, the government and shareholders of the Camisea natural gas project are reviewing possible changes in a pricing formula that could hold natural gas prices at their current level.

"We are doing this in a friendly environment. It's not a confrontation. It's not a negotiation with pistols on the table," Prime Minister Jorge del Castillo said on August 1.

In Bolivia, by contrast, President Evo Morales is facing resistance from Brazil's Petrobras as he tries to move ahead with plans to nationalise the country's gas reserves. And in Ecuador, oil sector investment has slowed after Congress approved changes to the Hydrocarbons Law in March that will oblige foreign oil firms to hand over 60 per cent of excess earnings to the government.

Mr García, who became president for the second time on July 28, said that new taxes could lead to lawsuits against the Peruvian state. Around a dozen mining companies, including units of BHP Billiton, Falconbridge, Newmont Mining Corp and Phelps Dodge, have signed stability contracts with the government, thus exempting them from new taxes or royalties.

But perhaps more important are the billions of dollars in pending investment in the mining, hydrocarbons and electricity sectors. The private National Mining, Petroleum and Energy Society (SNMPE) calculates that figure at $10bn. Peru is one of the world's major producers of copper, gold, silver, zinc, lead and tin and its exports this year are expected to reach $22bn, about 60 per cent of which are minerals.

"The government clearly understands that changing the rules will affect investment and wants to avoid this," Carlos del Solar, president of the SNMPE, told the Financial Times.

He said, however, that it will not be easy for the mining companies in the SNMPE, about 30 in all, to come up with a formula with which they can all be happy for making their voluntary contribution. Each firm has its own reality - different operating costs, different prices depending on the metal and some are already paying royalties on sales.

"The companies still have to agree and this has not happened. What we have to try to avoid is the tax," he said.

On the Camisea project, Mr del Solar said he expects the negotiations to go more smoothly. The main issue is the formula by which natural gas prices are determined. Currently, it is linked to the price of residual fuel, whose price has almost tripled since the contracts were signed in late 2000. Norberto Benito, general manager of the local unit of Argentina's Pluspetrol which leads Camisea's upstream consortium, said the talks will not lead to lower natural gas prices; they will only help avoid rises in the future.

Still, some Peruvians have voiced dissent about Mr Garcia's back-pedalling.

"Part of the environmental conflicts [with mining companies], have to do with the fact that the people feel that natural resources are being extracted and that not everyone is benefiting from this wealth," said Marco Arana, a Jesuit priest who runs Grufides, an non-governmental organisation in Cajamarca, home to Latin America's largest gold producer Minera Yanacocha.