Report No 46,.-PE

Peru: Issues and Optiolsin the Energy Sector

Januarv 1984

Report of the joint UNDPMbrld Bank Energy Sector Assessment ProgramThs document has a restricted distribution. Its contents may not be disclosedwithout authorization from the Government, the UNOP or the World Bank

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JOINT UNDP/WORLD BANK ENERGY SECTOR ASSESSMENT PROGRAM

REPORTS ALREADY ISSUED

Courntry Date No.

Indonesia November 1981 3543-IND

Mauritius December 1981 3510-MAS

Kenya May 1982 3800-KE

Sri Lanka May 1982 3792-CE

Zimbabwe June 1982 3765-ZIM

Haiti June 1982 3672-HA

Papua New Guinea June 1982 3882-PNG

Burundi June 1982 3778-BU

Rwanda June 1982 3779-RW

Mialawi August 1982 3903-MAL

Bangladesh October 1982 3873-BD

Zambia January 1983 4110-ZA

Turkey February 1983 3877-TU

Bolivia April 1983 4213-BO

FiUi June 1983 4462-FIJ

Solomon Islands June 1983 4404-SOL

Senegal July 1983 4182-SE

Sudan July 1983 4511-SU

Uganda July 1983 4453-UG

Nigeria August 1983 4440-UNI

Neoal August 1983 4474-NEP

Gambia November 1983 4743-GM

FOR OFFICIAL USE ONLY

Report No. 4677-PE

PERU

ISSUES AND OPTIONS IN THE ENERGY SECTOR

January 1984

This is one of a series of reports of the Joint UNDP/World Bank EnergySector Assessment Program. Finance for this work has been provided, inpart, by the UNDP Energy Account, and the work has been carried out bythe World Bank. This report has a restricted distribution. Its contentsmay not be disclosed without authorization from the Government, the UNDPor the World Bank.

ABSTRACT

The economic crisis that has overtaken Peru since early 1982 hasforced, or at least coincided with, a reevaluation of investment pro-grams, pricing policies, and institutional arrangements in the energysector with a view to increasing the efficiency with which investment,manpower, and energy resources are used. The shortage of financial re-sources is especially important in the electric power sector, where anunrealistic and to some extent unnecessarily ambitious investment programmust be, and is being, cut back and rationalized. Increased foreignparticipation in oil exploration has been needed, actively sought, andobtained. Hyper-inflationary conditions have made it difficult to in-crease real energy prices, but significant progress has been made,especially with respect to petroleum products. A new organizationalstructure for the electricity sector has been enacted into law and thenational oil company is undergoing a substantial internal reorganization.

Stronger efforts are still required to improve the energysituation in Peru. The traditional fuels (fuelwood and agriculturalresidues) on which most Peruvians rely for their daily cooking require-nents are becoming increasingly scarce; adequate exploration efforts inthe petroleum sector are still not assured, and the financial and or-ganizational problems still facing the power sector are formidable.Priority areas for action on these and other problems are identified anddiscussed in the report in the areas of demand management, fuelwood andforestry, oil and gas, electricity and coal.

Preface

An earlier draft of this report was discussed in November, 1983,with Mr. Fernando Montero, the Minister of Energy and Mines (MEM),Mr. Felipe Thorndike, the President of the National Energy Council(CONERG), and other officials of MEM and some of the principal operatingentities in the sector.

The main conclusions and recommendations of the report wereagreed in principle, although at the same time it was understood thatcontinuation of the progress made in the last several years on some ofthe most important issues, notably energy pricing and the policy frame-work for contract negotiations with foreign oil companies, is likely tobe highly conditioned by political consideration over the next severalyears.

Several important changes that have taken place since the energyassessment mission (November 1982) are reflected in the revisions agreedin the course of these discussions, but no systematic effort has beenmade to update figures or reflect minor changes that do not affect thereport's basic conclusions.

ACRONYMS AND ABBREVIATIONS

Acronyms

Cenfors Centros ForestalesCentromin Compania Minera del Centro del PeruCofide Corporacion Financiera de DesarrolloCoserelec Compania de Servicios Electricos S.A.DGE Direccion General de ElectricidadDGFF Direccion General Forestal y de FaunaEECH Sociedad de Energia de Chimbote S.A.EEPSA Empresa de Energia de Piura S.A.Electroperu Electricidad del PeruGOP Government of PeruIHidrandina Compania Hidroelectrica AndinaHierro Peru Empresa Minera del HierroIBRD International Bank for Reconstruction and

Development (World Bank)IDB Interamerican Development BankINFOR Instituto Nacional Forestal y de FaunaINGEMMET Instituto Geologico, Minero y MetalurgicoITINTEC Instituto de Investigacion Tecnologica Industrial

y de Normas TecnicasMEM Ministerio de Energia y MinasMinero Peru Empresa Minera del PeruOlade Latin American Energy OrganizationPetroperu Petroleos del PeruProcarbon Erapresa Promotora del Carbon S.A.Seal Sociedad Electrica de Arequipa S.A.SECH Sociedad de Energia de Chimbote S.A.Sedapal Servicio de Agua Potable y AcueductosSiderperu Empresa Siderurgica del PeruSIH Sociedad Industrial de Huancayo

Abbreviations

B Billion = 109bbl Barrelbd Barrel per dayBtu British Thermal Unitft3 Cubic Feetm3 Cubic MeterGW GigawattGWh GigawatthourK Thousandkm KilometerKTOE Thousand Tons of Oil EquivalentkV KilovoltskW KilowattKWh KilowatthourLPG Liquified Petroleum Gas

MMCFD Million Cubic Feet per dayMW MegawattMWh MegawatthourT TonnesTCF Trillion Cubic FeetTOE Tons of Oil 'Equivalent

This report is based on the findings of an energy assessment missionwhich visited Peru in November 1982. The members were David Hughart(Mission Leader - Energy Economist), Gabriel Sanchez-Sierra (Energy Plan-ner), Patrice Vabre (Financial Analyst), Fernando Manibog (RenewableEnergies Specialist), Arturo Montemayor (Gas Specialist, Consultant),Glenn W. Mortimer (Gas Specialist, Consultant), D.G. Fallen-Bailey(Petroleum and Coal Specialist, Consultant), Carlos Robertson (PowerEngineer, Consultant) and Oscar Garces (Energy Conservation Specialist,Consultant). The principal authors of the report were Messrs. Sanchez-Sierra and Hughart.

CURRENCY EQUIVALENTS

January 1982 US$1 = 518.63 solesMarch 1982 US$1 = 562.69 solesJune 1982 US$1 = 660.09 solesSeptember 1982 US$1 = 775.57 solesDecember 1982 US$1 = 949.18 solesApril 1983 US$1 = 1298.72 solesJuly 1983 US$1 = 1652.76 solesOctober 1983 US$1 = 2113.50 soles

ENERGY CONVERSION FACTORS

PETROLEUMCrude Oil 138 TOE/bblx103LPG 95 TOE/bblxlO3

Gasoline 122 TOE/bblx1O 3

Kerosene and Jet Fuel 133 TOE/bblxlO 3

Diesel 138 TOE/bblxlo 3

Fuel Oil 147 TOE/bblxlO 3

GASNatural Gas 23.4 TOE/CFxlO 6

Furnace Gas 60.0 TOE/CFx106

Coking Gas 14.5 TOE/CFx1o6

COALImported 730 TOE/TonxlO3

Domestic Anthracite 700 TOE/TonxlO 3

Domestic "Goyllar" 593.2 TOE/TonxlO3

BIOMASSFuelwood 360 TOE/TonxlO3

Charcoal 650 TOE/TonxlO3

Bagasse 150 TOE/Tonx103

ELECTRICITYMain Report 1/ 245 TOE/GWhAnnexes 2/ 86 TOE/GWh

1/ Electricity is converted to TOE in this report at a rate based onfuel oil consumption per KWh output - thermal efficiency adopted34.4%.

2/ Comparable to Energy Balances prepared by MEM4.

I

Table of Contents

Page No.

SUMMARY AND RECOMMENDATIONS ................................ i

Overview ....................................... iRecommended Energy Strategy .................... iii

Fuelwood and Forestry ....................... iiiOil and Gas ................................. ivElectricity ................................. viiCoal ........................................ ix

Energy Demand Management ....................... xPricing ......................................... xii

I. ENERGY IN THE PERUVIAN ECONOMY . . 1

Country Introduction ........................... 1Economic Situation ............................. IEconomic Prospects ............................. 3Energy Balance 1981 ............................ 3International Comparisons ...................... 6Projections .................................... 7Energy Sector Organization,

Finances and Planning ....................... 10

II. ENERGY DEMAND MANAGEMENT .......................... 16

The Structure of Energy Demand . . 16Energy Pricing .. 16Transport Sector ................ 20Household Sector . . 22Industrial Sector . . 25Manufacturing Sector . . 26Substitution of Coal for Fuel Oil . . 27Institutional Aspects . . 28

III. BIOMASS ........................................... 30

Resources ......... . .... 30Regional Disparities ........................ 30Fuelwood Scarcity in the Sierra Region ...... 31Deficits and Reforestation Requirements

in the Sierra ............................ 32Current and Planned Efforts .................... 33Improved Reforestation Efforts in the Sierra... 35Constraints to Reforestation and

Recommendations ............................. 37Project Possibilities in Biomass Energy

for the Sierra .............................. 42Forestry Priorities in Other Regions ........... 44

Page No.

IV. OIL AND GAS ....................................... 48

Petroleum ..................................... 48Reserves and Production ..................... 48Attracting Foreign Investment ............... 53Production Prospects ........................ 55Refineries .................................. 56

Natural Gas .................................... 58Reserves .................................... 58Existing Demand ............................. 59Potential New Demand ........................ 61Institutional Aspects ....................... 66

V. ELECTRICITY ....................................... 68

Resource Base .................................. 68Sector Structure ............................... 69Demand Growth .................................. 70Investment Choices ............................. 71Central North System ........................... 71Soutlhwest System ............................... 75Southeast System ............................... 76Isolated Systems ............................... 77

VI. COAL AND OTHER ENERGY SOURCES ..................... 80

Coal ........................................... 80Resources ................................... 80Development Strategy ........................ 83Coal Markets ................................ 84Institutional Aspects ....................... 85

Geothermal Energy .............................. 86Solar and W4ind ................................. 88

TABLES

Table 1 Commercial Energy Resources vs. Consumption, 1981 .... iiTable 2 Estimated Energy Savings and Investments Required

in the Mineral Industries and Manufacturing Sectors.. x

Table 1.1 Overall Energy Balance, 1981 ......................... 4Table 1.2 Evolution of Electricity Supply. 5Table 1.3 Economic and Commercial Energy Consumption Indicators

in Selected Developing Countries, 1970-1980. 6Table 1.4 Energy Demand Projections. 8Table 1.5 Petroleum Exports-Imports, 1985-1990. 9Table 1.6 Projected Energy Balance, 1990 .11Table 1.7 Consolidated Budget of Public Service

Power Sector, 1982 ................................... 14

Page No.

Table 2.1 Commercial Energy Prices ............................. 18Table 2.2 Road Vehicles, 1976-1981 ............................. 20Table 2.3 Transport Energy Consumption by Fuel ................. 21Table 2.4 Energy Consumption in the Transport Sector, 1985. 22Table 2.5 Residential Energy Consumption ....................... 22Table 2.6 Cooking Fuel Costs ................................... 24Table 2.7 Estimated Energy Savings and Investment

Mining Sector ........................................ 25Table 2.8 Total Estimated Energy Savings in the

Manufacturing Sector ................................. 26Table 2.9 Potential for Interfuel Substitution ................. 27

Table 3.1 Forest Resources ..................................... 30Table 3.2 Wood Balances for the Sierra, 1983 and 2000 .......... 32Table 3.3 Current Projects in Reforestation With

Bilateral and Informational Aid ...................... 35Table 3.4 Fuelwood and Charcoal Prices, Huancayo (1982) ........ 37Table 3.5 Wood Balances for the Costa, 1983 and 2000 ........... 46

Table 4.1 Oil Reserves, end-1982 ............................... 49Table 4.2 Oil Production and Net Exports, 1977-83 .............. 49Table 4.3 Evolution of Proven Oil Reserves, 1971-82 ............ 51Table 4.4 Crude Oil Production Projections, 1984-90 ............ 56Table 4.5 Petroleum Products: Capacity and Demand Balance ..... 57Table 4.6 Natural Gas Reserves, End 1981 ....................... 58Table 4.7 Natural Gas Production, MMCFD ........................ 60Table 4.8 Natural Gas Production in Northwest Peru ............. 60Table 4.9 Potential Natural Gas Demand ......................... 62Table 4.10 Alternative Natural Gas Pipeline Schemes ............. 63

Table 5.1 Access to Electricity in Urban and Rural Areas ....... 68Table 5.2 Installed Capacity (MW) and Energy (GWh) ............. 72Table 5.3 Additions to Capacity, Central-North System,

1982-86 .............................................. 73Table 5.4 Autoproducers ........................................ 77

Table 6.1 Mineable Coal Reserves ............................... 80Table 6.2 Analyses of Coals .................................... 81Table 6.3 Coal Production ...................................... 82Table 6.4 Estimated Geothermal Reserves and Resources

Sustained Over a Five Year Period .................... 87Table 6.5 Average Solar Radiation Over Selected Sites .......... 98

Page No.

ANNEXES

Annex S.1 Technical Assistaace Priorities in theEnergy Sector ........................................ 91

Annex 1.1 Economic Indicators .................................. 92Annex I.2 Energy Balance 1970 ............................... 93Annex 1.2 Energy Balance 1975 .. 94Annex I.2 Energy Balance 1931 .. 95Annex 1.3 MEM - Overall Orgcanigram . . . 96

Annex II.1 Electricity TarifEs .................................. 97

Annex III.1 Forestry Plantations EstablishedAs of 1980, By Department . . 98

Annex IV.1 Crude Oil Production - World Bank Forecast ........... 99Annex IV.1 Crude Oil Production - Petroperu Forecast ............ 100Annex IV.2 Gas Production Potential Forecast .................... 101

Annex V.1 Central-North Power System ........................... 102Annex V.1 Central-North Demand Projections ..................... 103Annex V.1 Central-North - Power Balance - MW . ........... 104Annex V.1 Central-North System - Energy and Power Balances..... 105Annex V.2 Power Sector - Description of Some

Important Projects .. 106

MAPS

IBRD 16094R Central-North Interconnected SystemIBRD 17126 Oil and Gas OperationIBRD 17291 Transport System, Regions and Relief

SUMMARY AND RECOMMENDATIONS

Overview

1. Peru is richly endowed with energy resources. Its largest knownresource is hydro power, of which less than four percent of the totalpotential has been devaeGped. 1/ Hydrocarbon resources are representedby about 1.4 billion barrels of oil (836 proven and 538 probable) and 1.9TCF of natural gas. Coal resources are estimated at about one billiontons (126 proven, but not necessarily economically recoverable, and 871inferred). Peru also has abundant forest resources which cover almost60% of the total land area. More than 95% of this resource is located inthe thinly populated Selva region; however, fuelwood is scarce in most ofthe more populous areas.

2. In 1981, per capita energy consumption was 690 kgoe. 2/ Biomassenergy sources 3/ met about 32% of the total demand (70% of the energyconsumption in the residential sector), with commercial energy 4/ provid-ing the other 68%. Most of the energy consumed in rural areas is bio-mass, 5/ and the annual per capita consumption of commercial energy thereis very low -- estimated to be less than 100 kgoe, compared to more than700 kgoe in the urban population. The modern Peruvian economy is basedon liquid fuels, which supply more than 70% of commercial energy require-ments. Petroleum accounts for 60% of energy consumption in the industri-al sector, 67% in the mining sector, and 100% in the transport sector.Table 1 reveals the large disparities between commercial energy resourcesand consumption patterns.

1/ Less than 2,000 MW of an estimated 58,000 has been developed.

2/ The Latin Amierican average is 1,000 kgoe.

3/ Includes fuelwood, charcoal, animal dung and agricultural residues.

4/ Hydrocarbon fuels, coal and electricity.

5/ 33% of Peru's population lives in rural areas.

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Table 1: Commercial Energy Resources vs. Consumption, 1981

Resources Final Consumption(Million toe) (%) (Million toe) (%)

Petroleum a/ 200 4 5.95 73.0Natural Gas a/ 45 1 0.12 1.7Coal b/ 84 2 0.06 0.7Hydro c/ 4777 93 2.0 24.6Total 5106 100.0 8.1 100.0

a/ Includes proven and probable reserves.b/ Proven reserves.c/ 390,000 GWh/year for 50 years (1 GWh = 245 toe).

Source: MEM and Mission estimates

3. Since 1981, the Peruvian economy has faced serious balance ofpayments difficulties, with a current account deficit averaging US$1.6billion, or about eight percent of GDP. The international environmenthas continued to deteriorate, and export prices have dropped even below1981 levels. The exchange rate was overvalued through most of thisperiod. Economic growth was decelerating and net international reservesdropped to less than two and a half months of imports (US$800 million).The public sector deficit was high, and annual inflation exceeded 70percent. At the same time, there has been mounting pressure to reestab-lish import prohibitions and price controls, increase subsidies and re-duce interest rates. Peru's economic difficulties in 1983 have beencompounded by natural disasters suffered during the first half of theyear. These include heavy rains and flooding in the northern part of thecountry, a severe drought in the south, massive landslides in the centralarea and a reduction in the fish catch. Since 1981, civil unrest hasincreased with an expansion of terrorist activities in the highlands and,occasionally, in Lima, making it even more difficult to manage thenational economy.

4. Peru's economic crisis h-as forced, or at least coincided with, areevaluation of investment programs, pricing policies, and institutionalarrangements in the energy sector with a view to increasing the efficien-cy with which investment, manpowrer, and energy resources are used. Theshortage of financial resources is especially important in the electricpower sector, where an unrealistic and to some extent unnecessarily ambi-tious investment program must be, and is being, cut back and rational-ized. Hyper-inflationary conditions have made it difficult to increasereal energy prices, but significant progress has been made, especiallywith respect to petroleum products. A new organizational structure forthe electricity sector has been enacted into law and the national oilcompany is undergoing a substantial internal reorganization.

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5. Stronger efforts are required to improve the energy situation inPeru. Priority areas for action are discussed below under six head-ings: (1) Fuelwood and Forestry; (2) Oil and Gas; (3) Electricity; (4)Coal; (5) Energy Efficiency and Fuel Substitution, and (6) Pricing.

Recommended Energy Strategy

Fuelwood and Forestry

6. The majority of the Peruvian population depends on fuelwood andresidues for cooking fuel. Fuelwood supplies are becoming more scarce,especially in the Sierra region, which has less than half a percent ofthe nation's forest resources. Reforestation efforts need to be vigor-ously accelerated in order to slow down the depletion of growing stock.The principal reforestation activity now underway in the Sierra is afive-year project being implemented with the help of the FAO 1/ that willeventually reach a rate of 30,000 ha/yr by 1990. A ten-year follow-upphase is planned but not yet financed.

7. In the Costa, forestry development priorities include erosioncontrol, protection of water catchments, and development of fuelwoodplantations in the northern costal area. In the Selva Alta, forestrypriorities cover the control of logging operations, improved protectionand management of logged-over forest, restoration of limited areas ofdegraded land, and controlled clearance and settlement of forest areassuitable for agriculture. In the Selva Baja, forest development priori-ties include the preparation and application of plans for forest manage-ment and exploitation, park and wildlife conservation and management, andcontrol of logging operations and clearance for settlement.

8. Building up local capacity to manage reforestation projects is aprerequisite to significantly increasing the scope of the program. Thereis an urgent need to train more technical staff for field work, and espe-cially non-degree technicians and extensionists. Training could beachieved through the establishment of special training centers and "mo-bile training units" to expand the capacity of central nurseries. Thereis also a need for short courses to train management-level field staff insocial forestry, as their approach to rural afforestation is often tootechnical to motivate communities to plant trees. Revising the incentivesystem within INFOR (e.g., through a higher per diem for going into thefield) may help to encourage forest engineers to do more "hands-on" work.

9. The division of labor between the two forestry agencies DGFF andINFOR merits reexamination in view of the apparent overlap between theirarea of responsibility. If reverting to a united forest service is toocumbersome, official consideration should be given to establishing theDGFF and the INFOR as planning and executing agencies for the Selva and

1/ With financial support from Dutch bilateral aid.

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the Sierra/Costa, respectively. Overlapping areas of responsibilityamong the CENFORS and the forest districts should also be clarified.

10. There is a need for more comprehensive planning in the forestrysector, particularly for the fuelwood subsector, focusing on the needs ofthe Sierra population. Immediate steps should be taken to formulate anational reforestation plan and work program, delineating the successivephases and components, and strengthening local capacity for rural/socialforestry. This activity would require improved coordination of externalaid for the fuelwood subsector.

11. Technical assistance projects 1/ that would expand successfulongoing projects or carry them to a more advanced stage could include:(i) evaluation of completed reforestation and coordination of work cur-rently being implemented; (ii) expanded training of sub-professional for-est technicians; (iii) species trials, including research on multipurposespecies; (iv) development of improved cooking stoves and more efficientwood burning devices; (v) strengthening of the CENFORs; (vi) protectionfrom livestock; (vii) feasibility study for producing charcoal in theSelva; (viii) identification of the potential for integrated agroforestryactivities, the potential for creating small wood products industies withfuelwood or charcoal as by-products, and for stimulating private tree-farming.

Oil and Gas

12. Petroleum is the dominant source of energy in Peru, meetingabout 70% of the country's commercial energy requirements in 1981.Peru's oil production increased almost threefold between 1976 and 1979,when a pipeline across the AndEs was completed and field discovered inthe mid 1970s in the Amazon basin were brought into production. Oilexports have been a substantial source of foreign exchange for Peru since1979. In 1981, petroleum exports accounted for 24% (US$777.8 million) ofthe country's exports and about a third of its petroleum production.

13. The present level of exploration is not adequate to maintainexisting production levels. The reserves-to-production ratio has beendeclining since 1976 and is clos e to the limit beyond which present pro-duction levels cannot be sustained. Of the 75 million hectares in Peruconsidered to be prospective for petroleum, only 15 million are undergo-ing any form of exploration.

14. Petroperu does not have the staff or financial strength neces-sary to mount the needed effort, and modifications to the system of ex-ploration and development contracts with foreign oil companies appearcalled for. The current system particularly discourages the search forthe small and medium scale finds that are the only size fields so fardiscovered in Peru. Additional incentives may also be needed to en-

1/ Technical Assistance priorities for the energy sector as a whole arepresented in Annex S.1

courage the more costly development of heavy oil fields. Finally, theaccounting and taxation system for oil companies should be revised tocorrect distorsions resulting from the high rates of inflation anddevaluation of the sol.

15. There have been small discoveries in areas under active produc-tion and secondary recovery, rehabilitation, and other projects in theseareas have contributed more to increases in reserves and production sincethe opening of the Transandean pipeline than exploration and developmentin new areas. There remains a substantial apparent potential for pro-jects of this type. Petroperu is in a position to undertake some ofthese projects but probably not all of them; consideration might be givento promoting service or joint venture contracts in secondary recovery orenhancement recovery projects.

16. At the same time as new foreign investment is sought, efforts toenhance Petroperu's capacity should be continued and extended. Routineuse should be made of consultants not only to do specialized jobs butalso to expedite projects when Petroperu's technical and administrativestaffing shortages would otherwise force delays. Although Petroperu isstill suffering from the loss of key staff abroad and to the privatesector, this phenomenon no longer appears to be a major problem for thecompany, since some have returned. Emphasis should now be placed onrecruiting and holding younger staff and giving them experience workingwith senior staff and consultants.

17. Consideration should also be given to steps that would reducethe range of Petroperu's responsibilities to a more manageable level andput it on a financial footing such that its accounts would reasonablyreflect the success or failure of its own operations as an oil companyand depend less on performance of its contractors and Government pricingand tax policy. Such steps could include:

(i) allowing Petroperu to operate under the same conditions asother oil companies for exploration and production activ-ities;

(ii) operating the refineries on a service basis and transferringsubsidies on domestic petroleum prices to the governmentbudget.

18. Natural Gas There are two areas with significant known naturalgas reserves. One is the Aguaytia structure (not currently in produc-tion) in the central Selva area about 500 km from Lima in a block assign-ed to Petroperu, where non-associated gas has been discovered. The otheris in the northwest (about 1,000 km from Lima) where associated gas isproduced in onshore areas operated by Petroperu and offshore by Belco, aforeign-owned private company. While the scale of production and utili-zation is very limited at present, the recent discovery of possiblysubstantial non-associated offshore gas reserves by Belco has raisedinterest in the possibility that natural gas could become an importantenergy source in Peru. However, important uncertainties must be resolvedbefore any project to develop this resource can be implemented.

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19. One issue concerns the size of the reserves. Data from thewells drilled to date, which were tested at about 5 MMCFD, cannot confirmthat sufficient reserves or production potential exist to make a develop-ment project economically viable. A study needs to be made of the size,classification and deliverability of reserves before negotiating any gaspurchase agreement with Belco. A, second issue is the market. A prelim-inary assessment of the potential use of natural gas indicates that themost important near to mediuim term prospect lies in replacing diesel inthe power sector in the northwest, where 20 MMCFD might be used by 1987.

20. The Government should pursue its plans to develop this resource,as use of natural gas would free petroleum products for export. Theshort-term plan should focus on a small project for developing the off-shore non-associated gas reserves and transporting this gas to Talara,Piura and, possibly, Chiclayo. The project would serve the power marketin the northwest region 1/ and permit some industrial fuel substitu-tion. The preliminary cost estimate of delivering gas to Piura is aboutUS$2.15/N4BTU. 2/ This gas would substitute for diesel oil currentlybeing used as power generating fuel and which has a cost of US$5/MMBTU.

21. The Government should undertake a detailed study of natural gasand electric power supply options in the northwest. The study shoulddetermine the optimum timing, location, and type of electric powerfacilities to be installed to satisfy the load growth in the Tumbes toChiclayo area. In view of the limited funds available to Electroperu, itwould appear preferable to create a regional enterprise with privatecapital participation to generates electricity. Electroperu and the majorindustrial consumers in the area, including Petroperu oil companies couldbe shareholders of such an enterprise.

22. Petroperu should also study the benefits of pursuing potentialgas savings which have been identified in the northwest area. In partic-ular, (i) Petroperu should make a field survey to identify the locationand extent of inefficient uses of gas in onshore field operations anddetermine the economics of conservation measures; (ii) steps should lsobe taken to reduce residential consumption in Talara to reasonable levels(it is estimated that 90%, the equivalent of about 800 barrels per day,is currently wasted); (iii) a decision should also be taken on whether tocontinue the operation of the fertilizer plant, given the low price ofimported fertilizer.

1/ The northwest region suffers serious power shortages which constrainits economic growth. Alternatives to the present costly isolatedgenerators include small, expensive hydroelectric schemes costing aminimum of US$3000/kW, or connection to the central system by a 500km transmission line.

2/ Assuming a 13% discount rate.

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23. For the longer term, the potential reserves in the Central Selvaarea should be further investigated as a potential alternative to supply-ing the potential natural gas market in and around Lima, and the non-associated gas potential in the onshore coastal area in the Northwestshould be further explored.

Electricity

24. The electric sector has recently completed an updated MasterPlan. However, the projects included in this plan have not yet beenfinanced. A series of projects, primarily hydro, is in various stages ofplanning, but Electroperu and the regional utilities do not have thefinancial and management capacity to undertake and complete them all on atimely basis. A strategy for effectively dealing with these problemswould need to include steps to:

(i) raise and restructure tariffs to give the utilities theresources they need and to bring incentives to consumersinto line with the structure of marginal costs;

(ii) implement provisions of the 1982 General Electricity Lawcalling for decentralization in favor of appropriatelysized and staffed regional utilities; and

(iii) pursue studies of thermal and medium-scale hydro alterna-tives to large hydro schemes in order to maintain choicesother than gas turbines in the event that these are foundunfeasible or subject to substantial cost escalation ordelay. M1EM has received continuing assistance from theWest German government in the past few years in the area ofhydroelectric project identification and prefeasibilitystudies. In addition, IBRD has made two loans, which in-cluded financing for studies of several hydroelectricprojects. Not all of these studies have been undertaken,however. ME11 or Electroperu should update the catalog ofhydroelectric projects, taking into account recent hydro-logical and cost information. This updating would permit awider selection of plants to be candidates for the powersector medium and long term development plan.

25. The 1982 General Electricity Law aims to decentralize the powersector; entities are to be organized on the basis of existing local andregional enterprises whose radius of action will be enlarged, or regionalunits of Electroperu, which will be given the appropriate legal form. Asof October 1983, four of the eight planned regional utilities have beenestablished. These units should be responsible for all activities in-volved in providing electric service in their respective regions.

26. During the 1970s, the power sector suffered a considerableoutflow of professionals and technically skilled personnel, resulting indecision-making problems and inadequate maintenance of regional powersystems. While the problem is not severe for the Lima power system, it

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is likely to continue in regional utilities, given the relative attrac-tiveness of Lima for skilled staff and the sector's non-competitive payscales.

27. Revenues from the 20% special tax on electricity sales and theElectrical Development Fund (EDF) 1/ will be administered by Electroperu.Half of the special tax proceecs are to be used for rural electrifica-tion, while the EDF proceeds are to be used to finance electrificationworks of a social nature. Although Electroperu would be the appropriateagency to allocate funds among the regions for distribution and ruralelectrification projects, the regional companies are the executingagencies. Regional entities should be given responsibility for select-ing, designing, constructing ancl operating all distribution works withintheir areas, including those financed by the EDF and the special tax.

28. Priority in the Central North System should be given to har-nessing the water resources of the basins of the Rimac, Pativilca andSanta rivers, such as the 130 MW Mayush project, whose feasibility studywas completed in late 1983. The hydro potential of these rivers has beenstudied for many years and partially developed, making better use ofexisting installations and cons-ruction of new medium-size plants (100-200 MW installed capacity) feasible with reasonable construction periods.In the event that such projects are delayed, Electroperu should make adetailed analysis of the power supply options and decide w-hat type andsize of thermal plants to install.

29. The Southwest systems face a complex variety of choices. Thegeothermal potential of the southwest area could be invest_gated with aview to electricity generation. 2/ The use of existing hydroelectricplants could be improved by means of regulating works (basin of the ChiliRiver). The viability of the Lluta I (210 MW), according to the updatedfeasibility study, has been established. The Ministry has recently re-quested Bank finance for the engineering studies of this project. How-ever, the Molloco (300 MW) hydroelectric project is undefined; if proveneconomical, it could be built and equipped in stages. The Arequipa andTacna-Moquegua systems are being interconnected and their frequenciesstandardized.

30. Both of the Southeast systems serving the Cuzco and the Punoareas appear to have adequate hydrological resources. The existing powerstations should be able to supply these markets by the end of the

I/ Up to five percent of total power utility revenue, to be decided bythe Tariff Commission.

2/ Data about geothermal energy resources in Peru are insufficient toestimate the size of the potential. Geological studies financed byOLADE have identified six areas in southern Peru. which appear prom-ising. Further investigations are desirable, involving geophysicaland geochemical surveys to select the most promising areas and toidentify drilling sites.

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1980s. Ilowever, hydrological studies should be carried out to providethe basis for planning future projects.

31. In the Northwest, isolated electric systems which use dieselsets and gas turbines for thermal generation are being developed in thedepartments of Tumbes, Piura and Lambayeque. To take advantage of thenatural gas in Talara, consideration should be given to linking Talaraand Piura by means of transmission lines. Expanding the installedcapacity at Piura would be a possible second stage if a gas pipelinecarrying natural gas from Talara to the south has been built by thattime. Again assuming the availability of natural gas, installed thermalcapacity in the second half of the 1980s would be expanded by means ofgas turbines.

32. Other isolated systems Because of the difficulties imposed bythe country's topography, Peru's abundant, widely-distributed hydro po-tential should be harnessed, where economic, to supply isolated centersand rural areas. To reduce costs and facilitate the maintenance of theseprojects, technical designs, construction types and materials should bestandardized. This would also facilitate greater participation by domes-tic industry in equipment supply.

Coal

33. Peru lacks a systematic evaluation of its coal resources, al-though coal deposits ranging from lignite to anthracite are reported in18 of its 24 departments. Proven reserves are estimated to be 126 mil-lion tons, but economic viability has not been evaluated. Domestic pro-duction, after declining from 200,000 tons in 1950 to 14,000 tons in1975, is now back up to 106,000 tons.

34. To be successful, efforts to further expand coal production willhave to overcome substantial obstacles: (i) a lack of suitable coal-burning equipment for the population and industry to use and a lack ofexpertise to install and operate it; (ii) inappropriate geological condi-tions for large-scale mechanized mining; (iii) the inability of small andmedium-sized mines (100 to 500 tons/day output) to obtain credit in theabsence of an assured market; (iv) the difficulty of transporting coalfrom the mines in the mountains to potential consuming areas on thecoast; and (v) an absence of detailed geological surveys examining theoccurrences of coal-bearing strata in the mountains. Technical assist-ance should be provided to strengthen the entities responsible for coalexploration and development, INGEMET and Procarbon.

35. According to the available information, coal deposits in Peruare not generally geologically well-suited to the large, highly mechan-ized mines (e.g. Alto Chicama) typically envisaged by the large statecorporations and their foreign consultants. A number of small privatemines now operate in the Alto Chicama area, taking coal by truck toTrujillo, and consideration should be given to organizing an effort touse small private mines to deliver coal to a power station or other po-tential large-scale user. A pilot program to do this would have to focusfirst on identifying a suitable combination of mining potential, dual-firing (oil and/or coal) users, and coal transport links.

36. Coal Briquettes Much of the poorer urban population relies onkerosene for cooking, while poor rural areas rely principally on wood.The price of kerosene is heavily subsidized and demand is increasing;much of it is probably being diverted to illegal uses. The demand forkerosene and wood consumption could be reduced if smokeless coal bri-quettes could be provided as a substitute. The manufacture of such bri-quettes could be a local ccttage industry in the neighborhood of themines, where the dust and fines could be used, or a larger, industrial-scale enterprise as demand develops. It would be necessary to find asuitable binder for the coal, and to decide on the shape and size of astandard briquette, for whichi molds could be made and stoves designed.Potential pollution problems resulting from the sulphur content of coalalso should be considered. A prefeasibility study should be done, andbilateral technical assistance has been arranged with South Korea forstudying this option.

Energy Demand Management

37. The transportation, industrial, and household markets all appearto offer substantial, cost-effective opportunities for energy conser-vation and/or inter-fuel substitution. Most attention to date has beenfocussed on the principal industrial sectors, mining and mineral indus-tries and manufacturing, which altogether account for 37% of Peru'scommercial energy consumpticn. To ascertain with any precision theindustrial savings potential would require an energy audit of the in-dustries concerned, and only preliminary studies, principally in themining and mineral industries sector, have yet been made. However, ageneral idea of the energy Efficiency improvement possibilities for themanufacturing sector was obtained from visits to major consumers and bycomparing energy consumption rates with those in other countries andmaking hypotheses based on the results obtained by conservation effortselsewhere. Possible savings from various types of energy conservationmeasures in the mineral and manufacturing sectors are summarized inTable 2.

Table 2: Estimated Energy Savings and Investments Requiredin the Mineral Industries and Manufacturing Sectors

Mineral Industries Manufacturing Sector ImplementationPeriod

Improvements (KTOE) (US$Million) (KTOE) US$Million Years

Maintenance andOperation 40 10 116 23 2

Application ofAvailable Technologies 72 33 127 63 5

Application ofNew Technologies 96 66 n.a. n.a. 10

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38. Possible savings of the same order of magnitude have been iden-tified in a recent study of energy use in the transport sector, 1/ whichconsumes about 44% of the petroleum products used in Peru. According tothis study, between 17% and 25% of the energy used by road transport, thedominant subsector in terms of energy use, could be saved, principallythrough improved car maintenance. Slightly lower percentage ranges areestimated for air and rail transport.

39. An estimated 60% of the energy used in the household sector isbiomass, largely fuelwood, and it may be possible to save a significantfraction of this by improving the efficiency with which it is usedthrough development and distribution of a simple stove to replace theopen fires now used for most cooking. Experience in other countriessuggests, however, that it is easier to design an improved stove than toget it into widespread use and that any program of this type should bedesigned with at least as much strength on the extension side as on thetechnical design and R&D side.

40. The newly created National Energy Council has been given energyconservation as one of the top items on its agenda, and it may be able tosort out the lack of coordination among the institutions involved withenergy efficiency in industry (Ministry of Industry, Ministry of Energyand Mines and the Institute for Industrial Technology Research and Tech-nical Standards (ITINTEC)). These three institutions have made parallelefforts to develop an institutional capability to deal with energy effi-ciency in industry. Clearly it is important to coordinate the devel-opment of policies and legislation on energy conservation as well as theuse of available resources inside and outside of government. Thespecialized nature of the work to be performed and the absence of quali-fied staff in the field require a centralized public service or autono-mous national energy conservation center with a separate legal frameworkand functional and financial autonomy.

41. Substitution of Domestic Coal for Fuel Oil Replacement of fueloil by coal is becoming more common worldwide in the cement and brick-making industries, thermal power plants, and industries with a high con-sumption of steam such as the paper and sugar industries. In Peru,conversions to burn coal in boilers and furnaces appear feasible from thetechnical point of view. However, the absence of a reliable supply,price instability, the distance between production and consumption cen-ters, and the lack of a clear government policy to develop the country'scoal resources are very important constraints to a major fuel oil switchto coal. Feasibility studies should be done to analyze the economic andfinancial aspects in specific cases.

l/ Trans-Energ, "Conservation de la Energia en los sectores Industria yTransporte," 1982.

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Pricing

42. In a mixed economy such as Peru's energy pricing is probably themost important policy instrument available to encourage energy conserva-tion and appropriate fuel cho:'ces. Between 1970 and 1976, petroleumprices were held at artificially low levels. Since then, the Governmenthas tried to pursue a more realistic pricing policy, and the weightedaverage price of petroleum products was raised by 60% in 1981, and by 26%in 1982 in dollar terms. In 1983, the Government approved several priceincreases, bringing the average per gallon price close to internationallevels, but the aggregate "subsidy" 1/ is still on the order of $380million annually. The Government's plans to continue dollar price in-creases in 1983 as required for national budget purposes (about half ofthe retail price is a tax) and its long term policy is to make prices(except for domestic kerosene) reflect the opportunity cost of thefuels. Since July 1983, howe!ver, political pressures have led to aslower rate of increase in energy prices.

43. Average electricity tariffs declined five percent in real termsthroug'hout the 1970s. The Government authorized accelerated nominaltariff increases for late 1981 and 1982 which were just sufficient toke ep pace with inflation. Tariff increases have been applied unequallyin the past. A recent marginal cost tariff study 2/ for the principal(central north) system showed substantial daily and seasonal variationsin the cost of electricity supply, with costs during the dry season (Mayto November) exceeding costs during the rest of the year. Analysis ofthe incidence of hidden subsidies and taxes in the current tariff struc-ture shows that residential consumers are the most heavily subsidized,while small industrial and irrigation pumping customers receive a moder-ate subsidy and commercial cust:omers are overcharged. In order to im-prove the overall financial investment situation in the power sector, themission recommends that the Government review the present tariff struc-ture with a view to implementing the recommendations of the recent mar-ginal cost tariff study. 3/

l/ Defined as the difference between retail prices and comparator pricesestimated as border price plus distribution margins and adjusted forthe 16% general sales tax and a 10% foreign exchange shadow value.

2/ Electricite de France/SOFRELEC. Estudio Tarifario para el sistemainterconectado Centro-Norte Lima, March 1983.

3/ In August 1983, the new and autonomous Tariff Commission was in-stalled according to the 1982 Electricity Law.

I. ENERGY IN THE PERUVIAN ECONOMY

Country Introduction

1.1 Peru has an area of about 1.3 million km2, supporting a popula-tion of 17 million; 29% live in the Lima area, 38% in other urban areas,and 33% in rural areas. The Andes Mountains divide the country intothree distinct regions: first a narrow strip of coastal deserts calledthe Costa, about 2,000 km long and from 17 to 170 km wide, lying alongthe Pacific Coast, which holds about 46% of the population and most ofthe modern economic activity; the second mountain region called theSierra, with 24% of the total population and most of the traditionalagricultural activity; and third the sparsely-populated tropical rainforest located in the Anazonas Basin and called the Selva. The ruggedtopography limits trade between these three regions. Peru's naturalresources include large mineral deposits, petroleum, and a significantfishing potential in coastal waters. Only about five percent of thecountry's land area is suitable for crops, and almost 90% of thisagricultural land is already in use. Peruvian agriculture depends heavi-ly on irrigation, especially in the Costa (IBRD Map 18291).

Economic Situation

1.2 In 1981, GDP and per capita income totalled US$22 billion andUS$1,294 (in 1980 dollars), respectively. GDP growth averaged 3.3 per-cent in real terms during 1970-81. It was higher during 1970-75, averag-ing 4.8 percent, but dropped to 1.1 percent during 1975-78 because of thesevere economic and financial crisis in Peru. Real GDP growth resumed in1979 and continued during 1980-81 at a rate of about 3.9 percent peryear. However, international recessionary forces caused a slowdown dur-ing the second half of 1981 which continued through 1982. During 1970-80, the most dynamic sectors were mining, energy, transport, banking andgovernment, with a combined contribution to GDP growth of about 52 per-cent, compared to 34 percent of GDP in 1970. Agriculture nearly stag-nated, and manufacturing and construction grew only during the first halfof the 1970s.

1.3 Functional income distribution in general was characterized by adrop in the share of wages and salaries and other capital income (rent,interest). The larger drop during 1978 and 1979 was partly due to re-strictions imposed on the salaries of government employees. The averageremuneration of employed workers declined by 14 percent in real termsduring 1970-80, 10 percent for blue collar workers, and 36 percent forwhite collar workers for the same period. By comparison, the real aver-age salary of the government employee dropped by about 29 percent.

1.4 High inflation is a phenomenom of the 1970s in Peru. Before1973, annual price changes fluctuated around six to seven percent; after

2-

1973, there was an almost continuous acceleration of inflation measuredin terms of the consumer price index (Annex I.1). In 1982, inflationamounted to 72%, and expected inflation for 1983 is estimated to beabout 0%. Inflation has caused major distortions in the Peruvian eco-nomy. For example, the marked changes in the relative prices of goodsand services and the erosion of real wages and salaries have had a dele-terious effect on income distribution, and have caused a diversion ofhuman and capital resources; negative interest rates for deposits pre-vented the adequate mobilization of financial savings; and negativeinterest rates for credit did not promote the best use of scarce re-sources.

1.5 FollowiLnE a period of increasing overvaluation of the sol duringthe first half of the 1970s, there was a strong real devaluation duringthe 1977-78 financial crisis. Since 1979, the exchange rate policy hasbeen based on periodic mini-devaluations with respect to the US dollar,with the objective of maintaining an approximately constant real exchangerate. However, a slower crawl and the appreciation of the US dollarrelative to other currencies resulted in an appreciation of the sol withrespect to the weighted average of Peru's trading partners of about fourpercent in 1980, and an additional 15 percent in 1981. The appreciationfueled imports and made Peru's exports less competitive.

1.6 Peru carried out a stabilization-cum-economic recovery programin 1978-79, supported by an IBRD program loan and an IMF standby arrange-ment. While the economic program was successful in improving the coun-try's external sector and financial situation, several serious structuralproblems remain, including high inflation, substantial distortions in theincentive system, widespread un- and under-employment, and an ineffectivepublic investment program. Peru entered 1982 with large internal andexternal disequilibria that required serious stabilization efforts by theGovernment. Economic activity was slowing down as world commodity pricescontinued to fall from their a:Lready low 1981 levels, causing a 23 per-cent reduction in Peru's terms of trade. The public sector deficit,partly caused by low export prices, was also increasing because of grow-ing expenditures and delays in some price adjustments. Despite austerityefforts, the 1982 public sector deficit was equivalent to 8.8 percent ofGDP. The balance of payments deficit was US$1.6 billion and GDP growthslowed to 0.3 percent, industrial output fell by more than two percent,and inflation continued at 73 percent. Peru's economic difficulties in1983 have been compounded by natural disasters suffered during the firsthalf of the year. These include heavy rains and flooding in the northernpart of the country, a severe drought in the south, massive landslides inthe central area, and a reduction in the fish catch. A preliminary esti-mate of the cost of replacing the infrastructure damaged by naturaldisasters amounts to US$400 million (equivalent to about 2% of GDP or 26%of the 1982 public investment budget.

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Economic Prospects

1.7 Experience over the past 20 years suggests that the economicsituation of Peru is closely related to the economic performance of in-dustrialized countries -- through the price paid for traditional exports,volume growth of non-traditional exports, and the magnitude of capitalinflows. The international environment over the medium term is notexpected to offer much in foreign exchange availabilities, either interms of export earnings or foreign capital flows. Peru will have tomake adjustments in accepting slower economic growth and less ambitiousdevelopment efforts. Given the poor medium-term international outlook,and assuming a continuation of present economic policies in Peru (gradualadjustments in the exchange rate and domestic petroleum prices, for ex-ample), the total export volume is expected to grow by about three per-cent per year during 1983-1987, and the purchasing power of exports(import capacity) by about six percent. GDP is expected to fluctuatearound 3 to 3.5% during 1983-87.

Energy Balance, 1981

1.8 Peru's energy balance for 1981 is shown in Table 1.1. The do-mestic production of primary energy was 17 million tons of oil equivalent(MTOE), of which more than 58/a was oil, 21% fuelwood, 15% hydropower, and6% gas. Energy exports consisting entirely of oil and petroleum productswere 3 MTOE; imports were negligible. The remaining 14 MTOE were used inthe domestic economy. A detailed breakdown of the energy balances for1970, 1975 and 1981 is presented in Annex I.2. Domestic consumptionaccounts for 81% of gross energy production, leaving 19% for exports ofprimary energy supplies and petroleum products. The final demand forenergy shows that the household residential sector (35%) is the largestconsuming sector, with transport and industry following at 23% and 16%,respectively. Table 1.2 shows the evolution of energy trade in theoverall commercial balance; the situation changed drastically between1975 -- when net energy imports cost almost 20% of total exports -- and1981, when net energy exports paid for almost 20% of total imports.

Table 1.1: Overall Energy Balance - 1981(thousand toe)

CommercialNon Commercial Energy Commercial and Non-

Commercial Crude Oil Gas Petroleum Electricity Energy Commercial

Energy Hydro Thermal Total Total Total

Primary SupplyProduction 3538 9901 1032 2643 2643 13576 1714

Exports (2117)Flared Gas 278Total 3538 7784 754 2643 11181 14719

TransformationRefineries (7784) (95) 7673Thermal Power (82) (458) 540 540

Energy Sector (512) a/ (199) (11)

Balancing Item b/ (383) (65) (339) (898)

Total Product Supply 3155 6677 2274 8951 12106

Product TradeImports 10 -

Exports (875)Domestic Supply 3155 5812 2274 8086 11241

Final ConsumptionIndustry 377 1085 700 1785 2162

Transportation 2501 2501 2501

Households 2710 882 752 1634 4344

Mining 571 660 1231 1231

Others 68 773 162 935 1003

a/ It includes gas used in the industry.b/ It includes losses and adjustments.

Source: MEM Energy Balance, 1981

Table 1.2: Evolution of Electricity Supply(GWh)

Hydro Thermal Total

1970 3820 (69%o) 1708 (31%) 55281975 5470 (73%) 2016 (27%) 74861980 7628 (78%) 2164 (22%) 97921981 8631 (88%) 1917 (12%) 10548

Evolution of Installed Capacity(MW)

Hlydro Thermal Total

1970 923 (55%) 754 (45%) 16771975 1397 (59%) 962 (41%) 23591980 1864 (59%) 1320 (41%) 31841981 1917 (58%) 1364 (42%) 3281

Source: Electroperu

1.9 Peru's energy sector underwent some fundamental changes duringthe last decade. (i) The most important event was its shift from being anet importer to a net exporter of petroleum in 1977. (ii) Fuelwood uti-lization stagnated, and this promoted a widespread substitution away fromfuelwood by commercial energy, and the substitution of kerosene for fuel-wood in the household sector. (iii) Gas production stagnated as a con-sequence of the low priority given to this source. (iv) Coal productionstagnated during the first half of the decade, slowly recovering after1975. (v) There was a major shift from gasoline to diesel oil in thetransport sector because of the high increases in gasoline prices in com-parison with increases in diesel prices, and the participation of gaso-line in the transport sector fell dramatically betwen 1970 to 1981, from68% to 49%. (vi) Little change occurred in the participation of thehousehold, transport and industrial sectors in total demand. (vii) Hy-droelectric generation more than doubled between 1970 and 1981, due to aharnessing of the hydroelectric potential of the Rimac and Mantaro riverswhich supply the central system, including Lima. Table 1.2 shows theevolution of electricity supply and installed capacity in Peru between1970 and 1981.

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International Comparisons

1.10 Table 1.3 compares energy intensities and growth rates of percapita GNP and commercial energy consumption in Peru and other developingcountries at similar per capita income levels. 1/ It shows that Peruuses relatively large amounts of energy per unit of output. While thisis to some extent due to the large, energy-intensive mining sector inPeru, it may also be related to the historically low prices of energy; ona per-capita basis Peru uses more commercial energy in transportation andhousehold uses than either Guatemala or Ivory Coast uses for all purposescombined. 2/ The past decade, beginning with the energy crisis in 1973,was an atypical period for the latin American economy in general, and notleast for Peru. Table 1.3 shows that GDP growth was very low in Peru forthe 1970-1980 period in compaiison with most other countries in thegroup. The growth in energy consumption in Peru also was one of thelowest, but at the same time one of the highest in relation to GDPgrowth.

Table 1.3: Econaoic and Conmercial Energy Consumption Indicatorsin Selected DeveLoping Countries, 1970-1980

(% p.a.)

1980 Energy Intensity 1970-1980 Growth RatesGNP/capita (To0]/US$ Energy

Country (1980 $US) million GDP) Consumption GDP Difference Ratio

Peru 1080 479 4.0 3.0 1.0 1.3Colombia 1260 516 4.9 5.8 0.9 0.8Dominican Republic 1190 275 6.7 6.6 0.1 1.0Ecuador 1100 350 11.7 9.1 2.6 1.3Guatemala 1080 196 5.9 5.8 0.1 1.0Ivory Coast 1110 134 6.3 6.4 0.1 1.0Jamaica 1090 n.a. 1.7 -1.1 2.8 -1.6Tunisia 1260 328 8.4 7.5 0.9 1.1

Source: World Bank, Energy Indicators for Developing Countries

1/ The sample comprises all developing countries over 1.0 million inpopulation with per capita incomes within 15% of Peru's for which areasonably complete set of energy data is available.

2/ The share of industry in Peru's 1980 GDP was 45%, compared to 23% inIvory Coast and a roughly similar figure in Guatemala.

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Projections

1.11 The long range projection of future energy supply and demand inany country is subject to a wide margin of error, especially when theeconomy is as unstable as it is in Peru. However, to provide an analy-tical basis, the mission has considered the following scenarios 1/ for1982 to 2000:

(i) Historic Scenario: this projection is based on historicenergy and GDP growth for the past 11 years (3.3% p.a.).Under this assumption, the final energy demand in 1990 and2000 would be 23% and 54% higher than in 1981, respective-ly. In this case the contribution of biomass energy willdecrease from 28% in 1981 to 23% by 1990, and to 19% by theyear 2000. During the same period, the coal and coke sharewill remain very low (1%), the share of electric demand willincrease from 20% in 1981 to 27% by the year 2000, andfinally, the share of petroleum products will be stable ataround 50% of total demand.

(ii) Base Case Scenario: this projection is based on a GDPgrowth of 1.5% from 1982 to 1985, and 3% from 1986 to2000. Under this assumption, the final energy demand in1990 and 2000 would be 17% and 47% higher than in 1981,respectively. Even though total demand under this scenarioshould be 4% lower (year 2000) in comparison with thehistoric case, the contribution of energy fuels to totaldemand is similar to the historic case.

(iii) Substitution Case: This projection is based on the same GDPassumptions of the base case and it also includes: (1) sub-stitution of coal for fuel oil in the industrial sector: 2/15% by 1990, 20% by 1995, and 25% by the year 2000; (2) sub-stitution of coal briquettes for kerosene in the residentialsector: 15% by 1990, 20% by 1995, and 25% by the year 2000;(3) substitution of electricity for diesel oil in thetransport sector: 10% by 1990, 15% by 1995, and 20% by theyear 2000; (4) coal utilization in power generation; in-cludes the installation of 200 MW by 1990, 400 MW by 1995,and 600 MW by the year 2000. Under this scenario, finalenergy demand in 1990 and 2000 would be 18% and 51% higherrespectively, than in 1981. The most important structuralchanges from the substitution should be: the share of coalwill increase from 1% in 1981 to 6% by the year 2000 and thecontribution of petroleum products in comparison with thebase case will decrease (year 2000) from 53% to 49% and willremain as the most important fuel in energy consumption.

1/ Summarized in Table 1.4.

2/ Assumes the introduction of a total of about 200 trolley buses by1990, about 400 trolley buses by 1995, and about 600 trolley busesby 2000.

Table 1.4: Energy Demand Projections(thousand toe and % p.a.)

1981 1985 1990 1995 2000Hist. Base Case Subst. Hist. Base Case Subst. Hist. Base Case Subst. Hist. Base Case Subst.

Noncommercial 3155 3157 3022 3022 3234 3096 3096 3317 3175 3175 3401 3256 3256Coal & Coke 81 98 94 94 105 102 442 113 108 659 120 116 927Electricity 2274 2652 2538 2538 3237 3098 3113 3889 3718 3746 4636 4434 4480Petroleum Products 5812 6447 6169 6169 7316 6998 6764 8271 7919 7452 9324 8919 8398Total 11322 12354 11823 11823 13892 13294 13415 15590 14920 15032 17481 16725 17061

Total DemandGrowth Rate p.a.

Historic Case 2.2 2.4 2.3 2.3Base Case 1.1 2.4 2.3 2.3Substitution 1.1 2.6 2.3 2.6

Source: MEM and Mission estimates co

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1.12 Supply Prospects Oil production has been analyzed under twoscenarios, the low case with the assumption that 41 million barrels ofnew reserves will be added each year for the next five years (about the1979-82 average), and the high level case which is based on finding 82million bbls/year (the 1975-78 rate). Under these assumptions, produc-tion would peak in 1985 and 1989 respectively. Without any new majordevelopment project, natural gas production (mostly associated) willincrease by 4.6% p.a. during the 1980s; however, if new gas reserves wereto be discovered in the north and gas development take place there and inthe Aguaytia field, gas could play a more important role during the1990s. Hydro power, presently providing 80% of generation, will continueto be the main source of electricity in the country. However, the powersector should improve considerably its present organizational and finan-cial situation in order to develop the hydro power resources. The futureof coal development is very uncertain. Coal production, which has had aslow revival since 1975, would require special incentives to increase itscontribution to the energy balance. Non-commercial energy, defined toinclude fuelwood plantations, natural forest and other biomass wasteswill probably decrease during this decade as a result of a substitutionprocess (kerosene for fuelwood in urban areas), depletion of the growingstock of trees, slow reforestation rates and a shift in the industrialuse of bagasse from energy source to feedstock.

Table 1.5: Petroleum Exports-Imports, 1985-1990

1985 1990High Low High Low

Crude Oil Production 200,000 195,000 192,000 140,000

DemandHistoric 150,000 170,000Base 143,000 165,000Substitution 143,000 157,000

Exports/ (Imports)Historic 50,000 45,000 22,000 (30,000)Base 57,000 52,000 27,000 (25,000)Substitution 57,000 52,000 35,000 (17,000)

1.13 Petroleum Exports-Imports - 1985-1990 An analysis of Table 1.6leads to the following conclusions: By 1985, under the high level pro-duction case, oil exports will be increased from 40,000 bd in 1983 to50,000 bd (historic demand case) and 57,000 bd (base and substitution de-mand cases). Oil revenues 1/ will increase correspondingly, from US$438million/year to US$547.5 million/year (historic case) and US$624 million/year (base and substitution cases). Under the low level, oil revenues

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will be US$492 million/year (historic case) and US$569 million/year (baseand substitution cases). However, by 1990 the situation may be signi-ficantly different; under the high level production case, oil exportswill be reduced to 22,000 bd, 27,000 Bd and 35,000 bd for the historic,base and substitution cases, respectively. Oil revenues will decrease toUS$240.9 million/year, US$295.6 million/year and US$383 million/year.The low level production case shows a dramatic situation for Peru: Forthe three cases analysed, the country will need to import oil, 30,000 bd(historic case), 25,000 bd (base case) and 17,000 bd (substitution case)and will expend US$328.5 million/year, US$273.8 million/year and US$186.0million/year, respectively. Taking into account that the demand scena-rios considered already correspord to low GDP growth rates, the main con-clusion is the crucial importance of a successful oil exploration inPeru.

Energy Sector Organization, Finances and Planning

1.14 The Ministry of Energy and Mines (MEM) is responsible for formu-lating energy policies and regulating the exploration, exploitation, andindustrialization of all energy resources except forestry, which is underthe responsibility of the Ministry of Agriculture. In practice, many ofthese responsibilities are delegated to the large state-owned oil andpower companies. In addition, MEM has overall responsibility for allmining activities and geological surveys. (Annex I.3)

1.15 In July 1981, the economic (and political) importance of devel-oping a national energy policy was recognized with the establishment of aNational Energy Council, the S1:atutes of which were approved by theGovernment in June 1983. l/ The Council is comprised of the DirectingCommittee and the Technical Secretariat. The Directing Committee in-cludes 15 respresentatives fro[m the public energy corporations andspecialists in the various fields of energy planning. The TechnicalSectretariat is the Council's permanent working body and is divided intothree offices, covering energy policy, conservation and new and renewableenergy sources. The Council's main purpose is to propose the medium andlong-term energy policy to the Fiinister. The main permanent activitiesare (1) preparing energy balances as a means for energy policy formula-tion, (2) promoting the creation of a National Energy Conservation Centerand appropriate conservation legislation, (3) recommending financialpolicies for hydrocarbon and electricity development, (4) coordinatingtraining programs for all energy subsectors, and (5) defining energyplanning for rural development, with emphasis on new and renewable energysources.

1/ This council was officially installed on November 8, 1983 by theMinister of Energy and Mines.

Table 1.6: Projected Energy Balance - 1990(thousand toe)

CommercialNon Commercial Energy Commercial and Non-

Commercial Crude Oil Gas Petroleum Electricity Energy CommercialEnergy Ilydro Thermal Total Total Total

Primary SupplyProduction 3406 9671 1549 3432 3432 14652 18058Exports (1379)Flared Gas (300)Total 3406 8292 1249 3432 12973 16379

Trans formationRefineries (8292) (150) 8215Thermal Power (324) (458) 782 782

Energy Sector (700) a/ (240) (15)Balancing Item b/ (310) (75) (519) (1101)

Total Product Supply 3096 6998 3098 10096 13192Product Trade

ImportsExports

Domestic Supply 3096 6998 3098 10096 13192Final Consumption

Industry 333 1154 1012 2166 2499Transportation 3159 3159 3159Households 2737 1120 1145 2265 5002Mining 580 701 1281 1281Others 26 985 240 1225 1251

a/ It includes gas used in the industry.i/ It includes losses and adjustments.

Source: MEM Demand Projections

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1.16 MEM regulates the hydrocarbon sector through the GeneralDirectorate of Hydrocarbons (Direccion General de Hidrocarburos) whichhas under its jurisdiction the national oil company Petroleos del Peru(Petroperu), and through Petroperu, the foreign oil companies operatingin the country. Petroperu was established in 1969, following thenationalization of the production and refining operations of Exxon'sPeruvian subsidiary, the International Petroleum Company (IPC).

1.17 Regulatory functions in the power sector are carried out byMEM's General Directorate of Ele!ctricity (Direccion General de Electrici-dad), which has under its jurisdiction eight public service utilities,numerous local systems operatec. by municipalities, and about 600 auto-producers. The government-owned Empresa Electricidad del Peru (Electro-peru) is both an electric utilfty and a holding company for the publicownership of the other seven.

1.18 Both central operating entities in the sector, Petroperu andElectroperu, have encountered financial problems. Petroperu's overallfinancial performance has been unsatisfactory since the mid-1970s,primarily because of: (i) the high debt service burden resulting prin-cipally from the US$900 million Transandean pipeline project; (ii) lowdomestic petroleum product prices; and (iii) the high tax burden assumedby Petroperu particularly in its contracts with foreign companies. Priorto 1980, Petroperu had to pay the income taxes of its contractors, and itstill pays all of their other taxes, duties and royalties.

1.19 In recent years the Government has taken measures which havehelped improve profitability and allow increased investments. (i) theGovernment has made significant equity contributions and assumed part ofPetroperu's medium term debt, wlhich had been originated and increased asa result of subsidized domestic prices. The Government is continuing aprogram of automatic equity injecCtions which correspond to the oil equiv-alent of the contractors income tax. However, as these contributions area function of the financial performance of the companies, they recentlyhave been reduced by the implemnentation of the reinvestment tax creditlaw and the decrease in profitability of their operations. (ii) the Gov-ernment has reduced the tax bur-den of Petroperu by reducing the exportduties for crude and petroleum products. (iii) the Government hasauthorized real price increases which have significantly augmented Petro-peru's revenues from domestic sales.

1.20 Petroperu's current financial performance is not yet fullysatisfactory. Although the company generated a small profit in 1981 and1982, it was not sufficient to cover the increased investment duringthese years. Investments increased from about US$60 million a year inthe late 1970s, to $160 million in 1981, and $200 million in 1982.Petroperu has not contracted any long term debt from commercial banks tocover the insufficient internal cash generation. Instead it has borrowedon the short term market, so the liquidity position of the company issomewhat precarious.

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1.21 The increased investments have resulted in higher production.Petroperu's 1982 production was about 27% above the 1981 level. However,in 1982, two external factors prevented Petroperu from improving itsliquidity position: Occidental's production, of which Petroperu receiveshalf, decreased by about 10,000 BD, and the export prices of crude oilproducts decreased by about $3 per barrel from the 1981 level. The pro-spects for 1983 are not very encouraging, as Petroperu's and the overallcountry's production will decrease as a result of the floods whichoccurred in the northwest in the first half of 1983. Country productionis now forecast at 175,000 BD, compared to 195,000 BD in 1982 and a tar-get of 215,000 BD for the 1983 budget. The export prices of productsalso have declined. To maintain a viable financial position, the Govern-ment will have to accept lower fiscal receipts from the sector or approvefurther real price increases to compensate for the decline in the volumeand price of exports.

1.22 The financial condition of the power sector is even more critic-al, as illustrated in Table 1.6. The consolidated sales revenues on thepublic sector electric utilities in 1982 were about $332 million. Wages,fuel, and other operating costs (exclusive of depreciation) were $218million, leaving a surplus of $114 million, or about $50 per kw of in-stalled capacity. The system's assets, including transmission and dis-tribution, probably have a replacement value of roughly $1500-2000/kw, soa 10-13% rate of return plus 3% depreciation would come to $200-300/kwp.a. in capital charges. On this basis, the sector is subsidizing itsconsumers in economic terms at a rate of $330-550 million annually (i.e.,by at least as much as they are paying in tariffs). Financially, withdepreciation charges amounting to only $27/kw-yr, the sector showed anoperating profit of $55 million and, after deducting financial costs andadding $30 million in revenues obtained from the DL-163 tax imposed onconsumption in excess of 150 kwh/month, the sector had about $102 millionavailable for investment, less than 25% of the cost of its investmentprogram.

l123 Tariffs were adjusted three times in 1980, eight times in 1981,and once each month from April 1982 to October 1982. However, the aver-age price for the public service provided by Electrolima in November1982, 42.4 soles/kWh, did not cover the 12% return on net fixed invest-ment prescribed by the General Electricity Law. 1/ The increase neededat that time to bring tariffs up to the legal requirement for Electrolimais estimated between 30% and 60% of the current average selling price,using the criterion adopted for revaluation of assets used in theservice.

1.24 For 1982, the list of investments gives a total of US$415 mil-lion. Of this figure, Electroperu accounts for 94.4%, implying a low

1/ The tariff situation has deteriorated during the last year. Accumu-lated tariff increases between August 1982 and July 1983 amounted to89 percent while internal inflation during the same period reached116 percent.

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utilization of the human and technical resources embodied in entitiessuch as Electrolima, Hidrandina and SEAL. The new General Law onElectricity prescribes a more important role for these companies in thefuture.

1.25 An investment of US$2.0 billion, or an average of US$400 milliona year, will be required in the period 1983-87 to complete the works inprogress. The yearly average, about three percent of GDP, is compatiblewith the size of the public-service electricity sector. However, thisinvestment level only can be met if the companies involved increase theirinternal generation of resources. Otherwise, there is a danger that,even given external financing, the works will be halted for lack of localcounterpart resources.

Table 1.7: Consolidated Budget of Public ServicePower Sector, 1982

Soles billion US$ million

Sales Revenues 233 332Operating cost 153 218Wages, etc. 100 140Fuel 33 47Other 20 29Depreciation 41 59

Total Cost 194 277Net Profit/Loss 37 55Financial Expenses 30 42Internal Cash Generation 50 72DL 163 revenue a! 21 30Available for investment 71 102

a/ 25% tax on consumption in excess of 150 KWh/month

1US$ = 700 soles.

Source: DGE estimates

1.26 For the medium and long term, projects have been identified thatwould enter into service from 1988 onward, including Huallaga, EnePlatanal and Huaura. A number of these require additional engineeringstudies and economic appraisals which should focus on improving resourceallocation and investment efficiency. These should be carried out with-out delay.

1.27 The financial constraints on the central operating entities inthe sector give a special importance to careful investment planning to

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assure that whatever funds are available are used as effectively aspossible. Unfortunately, planning is one of the areas of weakness inboth the power and petroleum sectors. Electroperu utilizes a sophis-ticated least-cost system expansion model, but without realistic inputdata with respect to crucial variables such as project costs and demandgrowth rates and without taking financial limitations sufficiently intoaccount. The result is a "plan" which cannot be implemented but whichcould lead the company and the sector to spend time, money and engineer-ing skills on beginning more large projects than it can afford to com-plete in a timely manner. However, some progress in this direction hasbeen made in the Master Plan developed in 1983.

1.28 In September, 1983 Petroperu recieved an overall review of itsinvestment options and priorities from a consultant study (IBRD -financed). This study should help substantially to improve planning inthe petroleum sector, but it will need to be periodically reviewed andupdated. A general tendency in Petroperu's planning at both the cor-porate and project level that has led to problems in the past is to acton the basis of optimistic assumptions without sufficient contingencyplans for dealing with the unexpected.

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11. ENERGY DEMAND MANAGEMENT

The Structure of Energy Demand

2.1 In 1981, Peru consumed 11.3 million toe of energy (see Table1.1). Per capita energy consumption was about 690 kgoe, compared with aworld average of 1,500 kgoe, and an average for Latin America of 1,000kgoe. Noncommercial, traditional energy sources met about 32% of thetotal demand, and commercial energy the other 68%. There is a gap ofalmost 2:1 in per capita energy consumption between urban and ruralareas. The rural population is estimated to be 5.6 million (33% oftotal) and consumes approximateLy 2.2 million toe (20%), while the urbanpopulation at 11.4 million (67%) consumes 8.8 million toe (80%). Thereis also a qualitative difference; about three-fourths of the per capitaenergy consumption in rural areas (estimated at 400 koe) is noncommer-cial, while commercial energy accounts for about 90% of the energy con-sumed in the urban sector each year (about 770 koe).

2.2 Total commercial energy consumption in Peru was 8.3 million toein 1981. The sectoral structure shows the transport sector as the mostimportant consumer of commercial energy (30%), followed by the industrial(22%), household (20%) and mining and metallurgical sectors (15%). Theindustrial, mining, and transport sectors have continued to depend heavi-ly on petroleum; petroleum accounts for 49% of energy consumption in theindustrial sector, 46% in the mining sector, and 100% in the transportsector.

2.3 Non-commercial energy consumption in Peru was 3.3 million toe in1981. The most important user of noncommercial energy was the residen-tial sector. Traditional energy accounted for almost 70% of energy con-sumption in the residential sector and 21% of energy consumption in theindustrial sector.

Energy Pricing

2.4 Pricing is the principal policy instrument used to influenceenergy demand in Peru. Policies in other areas, especially investmentdecisions in publicly-owned industries and in transportation infrastruc-ture, also have an effect on energy consumption, but energy is generallya minor element in these decisions. Conversely, the effect on demand isonly one element involved in energy pricing decisions; revenue require-ments of the Government and the energy suppliers, the real and psycholog-ical effect of energy price inc:^eases on inflation, and income redistri-bution considerations appear to be at least as important.

2.5 The MEM controls the prices of petroleum products and the TariffCommission sets electricity rates. The prices of coal, fuelwood andcharcoal are not controlled. Table 2.1 shows the commercial energy price

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structure (February 1983) and the relationship between internal prices inPeru and approximations of the economic cost of each product. These com-parators are estimated in the case of petroleum products as the sum ofthe border price and an allowance for internal handling and distributioncosts and in the case of electricity taken from a study of long runaverage increamental supply costs in the Centro-Norte System. The dollarvalues of domestic prices and the domestic/comparator price ratios areshown as computed on two different basis. The first, labelled "unad-justed", is based on official exchange rates. The second or "adjusted"basis includes allowances for a 10% overvaluation of the sol and a 16%general sales tax. These comparators are not necessarily ideal or targetprices: they do not include any allowances for highway user charges orpublic revenue generation or adjustments for income distribution objec-tives. Highways are heavily subsidized in Peru and a tax on gasoline anddiesel fuel may well be an efficient way to charge road users. Publicsector revenue requirements may also justify pricing energy at higherthan comparator prices, while income distributin considerations mightmotivate further increasing prices for some products (e.g., gasoline andresidential electricity use beyond some level) while holding other's(e.g., kerosene) at or below their comparators.

Petroleum Products

2.6 Petroleum prices were held at artificially low levels from theearly 1970s until 1976. Since then, the Government has tried to pursue atnore realistic pricing policy and, especially during the past threeyears, real prices have been increasing. The average unadjusted price ofpetroleum products 1/ was raised from US$0.38/gallon in January 1981, toUS$0.61 in January 1982, and US$0.77 in January 1983. In dollar terms,prices increased by 60% in 1981, and 26% in 1982. In February, 1983, theGovernment approved a 10% dollar increase, bringing the average gallonprice close to US$.84. The Government plans to continue dollar priceincreases in 1983 for national budget purposes (about 50% of the retailprice is a tax) and its long term policy is to make prices reflect theopportunity cost of the fuels.

2.7 Kerosene, which is sold for domestic use at about 33% (adjusted)or 42% (unadjusted) of its comparator value is the most heavily subsi-dized fuel. The economic subsidy (price differential relative to thecomparator) on kerosene is intended to hold down the cost of living forlow-incmae groups, particularly in urban areas, and is worth about $10per capita per year to people who cook with kerosene. Assuming thisincludes about 60% of the total population (equivalent to 90% of theurban population), the "efficiency" of the income transfer can be esti-mated at about two-thirds, with the other third (about $50-65 millionp.a.) going to individuals and businesses who use "domestic" kerosene forother purposes. 2/

1/ Weighted petroleum product prices (gasoline, diesel, kerosene, fueloil and LPG).

2/ Prominent advertisements for kerosene-fueled portable electricgenerators in Lima newspapers promise an 80% savings in fuel costs.

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Table 2.1: Commercial Energy Prices

Domestic Price b/ Comparator c/ Domestic/ComparatorUnadjusted Adjusted Price Unadjusted Adjusted b/

(US$/unit)(US$/toe) (US$/unit) (US$/unit) % %

Petroleum products a/super 1.28 440 1.00 1.05 122 95regular 1.09 375 0.85 .96 114 89diesel 0.93 283 0.73 1.09 86 68kerosenedomestic 0.46 145 0.36 1.09 42 33industry 0.92 291 0.72 1.09 84 66

fuel oil 0.77 22C 0.60 0.58 133 103LPG 0.30 285 0.24 0.45 66 53Composite barrel El 0.84 267 0.66 .91 92 72

Electricity d/Residential 0.036 146 0.028 0.084 42 33Commercial 0.133 541 0.104 0.084 158 124Industrial 0.048 195 0.038 0.084 57 45

Coal 38 76 29.78 n.a. n.a. n.a.

a/ February 1983 prices at 1063 soles/US$.b/ Including a 10% premium on foreign exchange content and further 16%

adjustment corresponding to the general sales tax.c/ Comparators for petroleum prices are Caribbean posted prices minus a

shipping differential for those products of which Peru is a signif-icant exporter (gasolines, 5k/gallon; fuel oil, 4.2k/gallon; tradein other products is miarginal in volume) plus estimated cost ofinternal handling and distribution (gasoline and diesel, 20k/gallon;kerosene and LPG, 30k/gallon; fuel oil, 5k/gallon). Comparator forelectricity is the long-run average incremental supply cost for theCentro-NIorte system as estimated by Electricite de France/SOFRELECfor their base case.

d/ Composite barrel (1.1% super, 23.4% regular, 25.7% diesel oil, 14%domestic kerosene, 0.9% industrial kerosene, 31.8 fuel oil, 3.1%LPG).

e/ November 1982 tariffs at 825 soles/US$.

2.8 LPG, priced at about 53% (adjusted) or 66% (unadjusted) of itscomparator value, is nonetheless so expensive to use (it requires heavyand relatively expensive containers and appliances) that only relativelysmall quantities are used by upper-income Peruvians. The implicit LPGsubsidy costs about US$20 million p.a. and appears unjustified.

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2.9 Diesel and "industrial" kerosene are sold for 67% (adjusted) or85% (unadjusted) of their respective comparator values. Because thevolume involved is about twice that of "domestic" kerosene sales, thetotal implicit subsidy is roughly the same, nearly $170-200 million annu-ally. As these are intermediate goods used by transport and industrialenterprises, the distributional effects of this subsidy are probablywidely diffused through the modern sector of the economy. Partial sub-stitution by "domestic" kerosene (which has practically taken over theformer "industrial" kerosene market) could, however, become a problem fordiesel fuel if its price is raised substantially without a parallel in-crease in the kerosene price.

2.10 Regular gasoline is priced about 10% below or 15% above itscomparator value depending on whether the adjusted or unadjusted price isused. High-octane gasoline (little used in Peru) and fuel oil prices areboth substantially above their respective comparator values on the basisof the unadjusted comparators and about equal on the corrected basis.

Electricity

2.11 The level and the structure of Peru's electricity tariff do notreflect the real cost of this public service. In spite of the progressmade by authorities to remedy this situation during 1980-82, there isstill much left to be done. The average selling prices for energyapplied during the first half of 1982 are detailed in Annex II-1. Theprices have been classified according to electricity enterprise and con-sumption category and are expressed in current soles per kWh, beforetaxes. The low spread of the enterprises' average price levels in rela-tion to widely differing cost levels reflects the resource transfersimplemented through the Fondo de Compensacion Tarifaria (Tariff Compensa-tion Fund) established in 1976.

2.12 The average tariffs for industrial consumers show the greatestdiversity, with a maximum for the Chimbote utility and a minimum forHidrandina, which sells 95% of its billed energy in the Pativilca Conces-sion to a single industrial complex. The national average of this indus-trial tariff is 65% higher than the average for residential sales. Com-mercial consumers pay the highest prices in most systems, averaging 2.4times the residential tariff. These differences, which are neither tech-nically nor economically justified, indicate a substantial subsidy toresidential consumers on the part of industrial and commercial users; itsredistributional intent is thwarted because the implicit subsidies bene-fit large consumers more than small ones, particularly those in the resi-dential category.

2.13 Average tariffs declined five percent in real terms throughoutthe 1970s. The Government authorized accelerated nominal tariff in-creases for late 1981 and 1982 which were just sufficient to keep pacewith inflation. Tariff increases have been applied unequally in thepast. For example, residential and public lighting customers benefittedfrom sharp declines in the real price paid between 1970-80, while indus-tries experienced a 47% real increase. The industrial tariff remains,

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however, below the price of the fuel oil needed to produce electricity ina thermal power plant. A recent marginal cost tariff study for theprincipal system (central north) showed substantial seasonal and dailyvariations in the cost of electricity supply, with costs during the dryseason (May to November) exceeding costs during the rest of the year.When analyzing the incidence of hidden subsidies and taxes in the currenttariff structure, residential consumers are the most heavily subsidized,while small industrial and irrigation pumping customers receive a mod-erate subsidy, and commercial customers are overcharged. Electricitytariffs appear to average only 40-50% of the corresponding economic costfor residential and industrial consumers while the commercial tariffexceeds its (long-run average incremental costs, LRAIC) comparator.

Transport Sector

2.14 Road, rail, sea and air transport are all used extensively inPeru. The road system spans approximately 60,000 kilometers, 6,600 ofwhich is paved. The Panamerican highway which stretches 3,000 km alongthe coastal plain is the most important road in the system. In 1981, thetotal road fleet was estimated at about 522,000 units (0.03 per capita),70% of which are registered in Lima. As Table 2.2 shows, the number ofroad vehicles has been growing at about 3.2% a year.

2.15 Peru has 3,074 km of railways, almost one-half the length of thepaved roadways. The two main railroads in the country link mining cen-ters in the Sierra to ports on the coast; the Central Railway connectsCallao-Lima to the central mining areas, and the Southern Railway runsbetween the port of Matarani, Cuzco and Puno. Five airports, at Lima,Pisco, Arequipa, Cuzco and Talara, are rated as first class, capable ofhandling Boeing 707 aircraft, and another eight are capable of handlingBoeing 727s. The most important seaports in the country are Callao,M4atarani (general cargo), Talara (petroleum products), Chimbote and SanNicolas (iron ore), Ilo (copper ore) and the river port of Iquitos (gen-eral cargo) on the Amazon River.

Table 2.2: Road Vehicles 1976-1981

Cars Omnibus Pick Up Trucks Others Total

1976 265,486 17,001 55,370 61,407 46,343 445,6071979 273,363 27,754 61,499 64,108 45,511 472,2351981 296,706 18,278 71,162 69,074 66,750 521,970

Source: Direccion General de Transporte Terrestre

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2.16 Energy Consumption The transport sector depends entirely onpetroleum products; as a whole it contributes 44% (1981 figure) to thenational demand for petroleum products. Table 2.3 shows the structuralchanges in the transport sector over the past ten years.

Table 2.3: Transport Energy Consumption by Fuel(percent)

1970 1975 1981

Gasoline 67.9 66.0 49.6Kerosene 10.1 10.9 12.2Diesel 16.0 17.5 27.3Fuel Oil 6.0 5.6 10.8Total 100.0 100.0 100.0Percent of Totaloil consumnption 40.9 44.7 44.9

Source: fEM - Energy Balances

2.17 The most important change in the structure over the last tenyears has been the substitution of diesel fuel for gasoline. Due to theincrease in gasoline prices (gasoline prices increased faster than dieseloil prices) and the increase in the diesel oil fleet (especially trucksand buses), gasoline participation fell fran 67.9% in 1970 to 48.7% in1980, at the same time raising diesel consuraption from 16.0% in 1970 to27.6% in 1980. In 1981, there was a modest reversal of this trend be-cause of the import car liberalization which increased the automobile(gasoline) fleet.

2.18 Energy Conservation A recent study 1/ has estimated that asavings of 15-22% in fuel could be achieved in the transport sector.This includes a 12-18% savings in road transport, mainly through carmaintenance, improved traffic management in Lima and road maintenance; 2-3% in air transport through fleet maintenance, availability of new equip-ment, and improved traffic management; and a potential savings in mari-time and rail transport of 2% and 1%, respectively. Table 2.4 gives theestimated possible energy savings.

1/ Trans-Energ, "Conservacion de la energia en los sectores Industria yTransporte, 1982."

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Table 2.4: Energy Consumption in the Transport Sector -1985

Consumption without Possible Energy SavingsEnergy Conservation (KTOE) (% within mode) (% within sector)

Road Transport 1800 307-448 17-25 12-18%Car Maintenance 127-188Traffic Management 30-60Driver Education 50

Engine Maintenance 50-90Road Maintenance 50-70

Air Transport 335 45-75 13-22 1.7-2.9Engine Maintenance 15-30New Equipment 15-30Management 15-30

Rail Transport 57 8-12 14-21 0.3-0.5Maintenance 6-9Management 2-3

Maritime Management 365 20-35 5-10 0.8-1.3

Total 2557 380-570 15-22%

Source: Trans Energ, Conservacion de la Energia en los Sectores Industriay Transporte,July 1982.

Household Sector

2.19 The residential sector depends mainly on noncommercial energy.In 1981, energy consumption in the household sector totalled 4.4 milliontoe, of which 2.7 million (61a) was from noncommercial sources (mainlyfuelwood), and 1.7 million (39%) was from commercial sources. Keroseneaccounted for 0.82 million toe and electricity for 0.75 million toe ofcommercial energy used in households. Table 2.5 shows the pattern ofenergy consumption in the residential sector over the past ten years.

Table 2.5: Residential Energy Consumption(Percent)

1970 1975 1981

Noncommercial 73 67 61Kerosene 14 15 19Electricity 10 14 17Others 3 4 3

Source: NEM - Energy Balances

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2.20 In 1981, traditional energy sources accounted for 61% of totalenergy use in the household sector. Of the 4.4 mtoe consumed, 53% camefrom wood, 6% from other biomass sources, and 2% from charcoal. Theparticipation of traditional energy sources in the residential sectorfell between 1970-1981 from 73% to 61%, while the share of commercialenergy sources increased from 27% to 39% during the same period. Thistrend can be partly explained by the high migration rates to urban areas,a relatively stable overall consumption of traditional fuels, and somesubstitution of kerosene for firewood in rural areas, as a result ofregional scarcities.

2.21 A study of firewood availability in three villages in thesouthern highland of Peru 1/ strongly suggests that scarcity of tra-ditional fuel is not generalized all over the Sierra but is most serious-ly felt among the poorest households living in the higher altitudes.Land tenure systems contribute to the problems of access to fuels of theinhabitants of high altitude, steep mountain slopes; areas less capableof providing sufficient fuel for their populations are increasingly de-nied traditional access to trees in the more fuel abundant areas near thevalleys.

2.22 Developing and promoting more energy-efficient cooking stovescould be of great benefit to rural households by increasing the amount ofcooking that can be done with a given amount of wood. There are somereports that "improved" stoves (such as a three-hole stove, a clay stove,and the "biscarra") are in use in isolated parts of the Sierra and inOxapampa. The efficiency of these stoves needs to be tested and dissem-ination programs explored. As no local research and development work hasyet been done, cost figures are not available to determine whether userscan afford them. Experience elsewhere (Central America, West Africa)suggests that efficiency improvements in cooking stoves can provide im-mediate, significant reductions in fuelwood consumption (an importantbenefit to communities most seriously affected by fuelwood penury), re-ducing the areas required for reforestation. However, the design of aprogram to develop and encourage the use of energy-efficient cookingstoves should be based on the premise that the dissemination process islikely to be more difficult than the technical R&D involved.

2.23 Important options in urban areas include the substitution ofcoal briquettes and/or electricity for kerosene. Electricity, of course,requires the availability of a network and a minimal demand. Forty per-cent of all households now have access to electricity, a proportion whichshould increase as a result of the national rural electrification programand the expansion program in other areas.

1/ Sara Lund Skar, Fuel Availability, Nutrition and Women's Work inHighland Peru. Geneva: International Labor Office, January 1982.

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Table 2.6: Cooking Fuel Costs(US$ per capita per year)

Huancayo Lima

Woodused in open fire 10.8-15.0 27.5-31.7with improved stove 5.4-11.2 13.8-23.7

Charcoal 33.9 58.5

Coal Briquettes 9.3-13.3 9.3-13.3

Kerosenewith current subsidy 7.7 7.7unsubsidized 21.0 t8.5

LPGwith current subsidy n.a. 10.1unsubsidized n.a. 21.4

Electricitywith current tariffs n.a. 12.1at long-run average incremllental cost n.a. 28.2

Notes: Cost of stoves not incladed

Fuel requirements estiniated on basis of 200,000 kcal per capitaper year useful energy and energy content and utilization effi-ciency estimates as follows: wood, 2.4 million kcal/cu m, 10% inopen fires, 15-20% in improved stoves; charcoal, 6500 kcal/kg,20%; coal briquettes, 4-5000 kcal/kg, 30%; kerosene, 34,000kcal/gallon, 35%; LPG, 21,300 kcal/cylinder (24 lb.), 45%; elec-tricity, 860 kcal/kWh, 70%.

Unit costs in Huancayo: wood, $13-13/cu m; charcoal, $0.22/kg;coal briquettes, $0.08/kg; kerosene, $0.46/gallon subsidized,$1.25/gallon unsubsidized; LPG and electricity not idely avail-able in Sierra.

Unit costs in Lima: wood $33-38/cu m; charcoal, $0.38/kg; coalbriquettes, $0.08/kg; kerosenes, $0.46/gallon subsidized,$1.10/gallon unsubsidized; LPG, $2.95/cylinder subsidized,$4.95/cylinder unsubsiclized; electricity, 3.6k/kUh at currenttariffs, 8.44/kIWh at long-run average incremental cost.

2.24 Table 2.6 compares the costs of alternative cooking fuels inHuancayo (an urban center in the Sierra -- one would expect wood to be

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less expensive and kerosene more expensive in smaller, more isolatedSierra communities) and in Lima. At current price levels, kerosene, LPG,and electricity are the least expensive where they are available, andeven without a subsidy kerosene would probably remain the least expensiveoption for Lima consumers unless a coal briquetting program can be de-veloped.

Industrial Sector

Mineral Industries

2.25 The minerals sector is a very important part of the country'seconomy, contributing about 10% to GDP. Peru has a large number ofminerals; those of major energy importance are the ores of copper, lead,zinc and iron. In 1980, the mineral industries accounted for 15% ofcommercial energy consumption, including almost 10% of petroleum productsand 30% of electricity. The energy conservation potential for thelargest consumers in the sector has been analyzed and the conclusionsextrapolated to the whole sector. 1/

2.26 Taking as a basis the 0.8 MTOE consumption of petroleum deri-vates in 1981, and considering possible energy conservation measures,such as ,maintenance and operation, modernization and/or replacement ofequipment and application of new technologies, it appears possible thatfor the total Mining Sector: (i) a savings of 5%, equivalent to some 40KTOE, could be reached within two years with low levels of investment;(ii) within five years, a savings of 9% (72 KTOE) could be achieved, butwith measures requiring significant investments, and; (iii) by applyingnew technologies, a savings of 96 KTOE, or 12% of energy consumption,could be obtained. Table 2.7 shows the results of energy savings and theestimated investments and time required to achieve them.

Table 2.7: Estimated Energy Savings and InvestmentMining bector

Reduction in ImplementationEnergy Consumption Investment Period

Improvements KTOE % US$ million (years)

Maintenance and operation 40 5 10 2Application of availabletechnologies 72 9 33 5

Application of new technologies 96 12 66 10

US$1 = 870 soles (November 1982).

Source: Based on Sereland, Conservation of Energy in Peru, April 1983.

1/ Sereland, Conservation of Energy in Peru, April 1983.

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Manufacturing Sector

2.27 The manufacturing sector 1/ in Peru was the largest contributorto GDP in 1981 (24%). In the last five years, its importance to thecountry has grown, largely because of its participation in labor employ-ment and the commercial balance. The manufacturing sector mainly dependson petroleum products. Total consumption of petroleum products in 1979was 1,240 Ktoe, comprising 998 Ktoe fuel oil, 205 Ktoe diesel, and 37Ktoe others. The consumption of electricity accounted for 2500 GWh (613Ktoe).

2.28 A good estimate of industrial savings potential would requirethat energy audits be conducted on the industries by using techniques andpersonnel specialized in energy conservation; however, a general idea ofthe potential savings in the manufacturing sector can be obtained by com-paring energy consumption per unit in each branch of industry with ana-logous figures for other countries and considering the reductions in perunit energy consumption that have been obtained through various types ofmeasures. Based on such an analysis, the mission estimates that mainte-nance and operation measures could reduce industrial energy consumptionby 116 Ktoe (7%) with an estimated investment of only US$23 million.Modernization and/or replacement of equipment require significant invest-ments (but still with payback periods of two to five years) could save127 Ktoe. The feasibility of making this improvement appears to be theo-retical for the time being and will also depend on the capacity to applylong term investments. Table 2.8 shows the total savings forthcomingfrom these conservation measures.

Table 2.8: Total Estimated Energy Savings in theM4anufacturing Sector

Reduction Investment Implementation PeriodImprovements ICEOE % US$ million (years)

Maintenance andoperation 116 6 23 2

Application of availableTechnologies 127 7 63 5

Source: Based on Sereland, Conservation of Energy in Peru, April 1983

1/ The principal subsectors are: Food, Paper, Non-metalic, Metalurgic,Chemical and Textiles Industries.

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2.29 The mission's preliminary analysis of the mineral industries andthe manufacturing sector for the short run confirms that the efficiencyof fuel use, basically for petroleum products and electricity, could besignificantly improved. Immediate measures to increase energy efficiencyinclude: (i) good combustion practices and the value of instrumentationleading to improved operation and maintenance practices; (ii) improvedperformance of heat exchangers, through increasing the heating surface,better controls to prevent overfiring, the installation of baffles andthe additional insulation on air ducts; (iii) heat recovery from exhaustgases by the installation of recuperators; and (iv) power factor correc-tion, in most cases the addition of capacitors would be appropriate, butthe larger industries could install synchronous motors.

2.30 In the longer run, additional savings could be achieved throughmore extensive investments. These should be identified in greater detailas part of the energy audit work, but they are likely to include the fol-lowing: (i) modernization and replacement of equipment; (ii) optionaluse of steam products; (iii) improving the efficiency of storage and con-ditioning of raw materials; (iv) utilization of sensible heat by means ofan integrated system applied to the steam network for mechanical drivingpurposes and to obtain process steam.

Substitution of Coal for Fuel Oil

2.31 Substituting coal for fuel oil is becoming more common through-out the world in the cement and brickmaking industries, thermal powerplants, and industries with a high consumption of steam such as the paperand sugar industries. In Peru, substantial conversions to burn coal inboilers and furnaces appear feasible from a technical point of view, asshown in Table 2.9, and the economics appear attractive. However, theabsence of an established supply, the distance between production andconsumption centers and the lack of a clear government policy to developthe country's coal resources are very important constraints to a large-scale switch from fuel oil to coal. A pilot program designed to addressthese limitations is outlined in Chapter VI (para 6.19).

Table 2.9: Potential for Interfuel Substitution

Fuel Coal SubstitutionOil Potential

Industry Equipment (toe) (tonnes)

Cement kilns 250,000 385,000Bricks furnaces 50,000 77,000Sugar boilers 140,000 215,000Paper boilers 160,000 246,000Mining boilers &

& Metallurgical furnaces 200,000 303,000Total 8()°3°°() Tl,ZTE(Ut

Source: Mission estimates

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2.32 The short term substitution possibilities in the industrialsector are somewhat limited. International experience suggests thatpriority should be given to the brickmaking 1/ and cement industries,where the technical and commercial feasibility of substitution has beenproven. The cement industry, with a consumption of some 250,000toe/year, presents the greatest economic attraction. The brickmakingindustry is made up of large pLants producing 35,000 toe/year, and smallplants producing 13,000 toe/year. The large plants require concentratedinvestments in 12 plants; the small plants require small investments in agreat number of handicraft-type furnaces. Substitution possibilities forthe remaining sugar mills, paper plants, and mining and mnetallurgicalplants require more detailed studies, because substitution implies aproblematical reconversion of boilers and adaptation of old boilers.

Institutional Aspects

2.33 Coordination is generally weak among the central institutionsconcerned with industrial energy: Ministry of Industry, Ministry of Ener-gy and Mines, and the Institut:e for Industrial Technology Research andTechnical Standards (ITINTEC). 2/ These three institutions have madeparallel efforts to develop an institutional capability to deal withenergy efficiency in industry. Clearly it is important that the NationalEnergy Council coordinate the development of policies and legislation onenergy conservation and fuel substitution, as well as the use of avail-able resources inside and outside of government.

2.34 Based on the above, two main conclusions can be drawn. First,there are energy conservation opportunities already identified in sectorssuch as transport, mining, household and industry. To achieve the aforementioned energy savings different levels of investment would be requiredin the different sectors. Such an investment program requires an insti-tutional system able to coordinate activities to avoid waste of re-sources. Secondly, the current institutional framework does not allowfor a clear and coherent strategy regarding global energy conservationactivities. Given the inadequacies of the current institutional frame-work and the existing opportunities for energy conservation, the creation

1/ A survey carried out in September 1983 shows that one major brick-maker and many smaller brickmakers now use coal.

2/ In October 1983, an agreement was signed between the technicalsecretariat of the National Energy Council and ITINTEC for jointefforts in energy conservation.

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of a centralized public service or autonomous national energy conserva-tion center 1/ appears to be necessary. The center would have a separatelegal framework and functional and financial autonomy. The center's rolewould be to: (i) carry out energy audits of industrial installations 2/and sample commercial and residential structures; (ii) propose measuresto moderate consumption and improve efficiency especially in the industryand transport sectors; (iii) develop conferences, direct contacts withcompanies and communication campaigns to inform energy consumers aboutthe potential for conservation and the means of achieving it; (iv) moni-tor the evolution of energy consumption; (v) coordinate and conduct re-searclh and demonstrations on "new energy sources and energy conservationtechnologies.

Financing of the Center

2.35 The Inter-American Development Bank (IDB) is expected to providefinancing through MLM for the organization and operation of the Centerover a period of two years. Complementary assistance may be required tofinance: (i) training and instruction of the Center's personnel;(ii) purchase of measuring equipment and instruments needed to performenergy audits; (iii) feasibility studies pertaining to energy conserva-tion at the large industrial/mining complexes; (iv) a line-of-credit toan appropriate financial intermediary to support energy conservationefforts at the small- and medium-sized companies.

Conservation Incentives and Legislation

2.36 Special incentives may need to be given to promote energy con-servation demonstration or research and development projects. Incentivescould take the form of subsidies, preferential loans and credits, and/orreduction of taxes, but, if used, should be implemented in parallel withmechanisms to evaluate the results of the demonstrations on R&D they havehelped to finance and make them known to potential users.

1/ There is a Government proposed conservation center project beingconsidered by the Inter-American Development Bank and the Bank hasalso recently been requested to consider helping in setting up thecenter.

2/ Energy audits which should be the base for possible investments inenergy conservation.

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III. BIOMASS

Resources

3.1 Biomass energy is of special importance in the formulation ofnational energy policy in Peru, as traditional biomass fuels are mainlyused to meet subsistence needs of the poorest sectors of the population,particularly in the Sierra region. Peru has abundant forest resources,with natural or cultivated forests covering almost 60% of the total landarea, as shown in Table 3.1.

Table 3.1: Forest Resources(thousand ha)

Land Total Regional DistributionNatural Suitable for Forest of Existing

Region Forest Plantations Reforestation Potential Forest Resources a/

Costa 2,573 10 490 3,073 3.6Sierra 6 160 7,377 7,506 0.2Selva 70,214 4 2,496 72,714 96.2

Total 72,793 174 10,363 83,330 100.0

a/ Existing forest resource includes natural forest and plantations or72,967 ha.

Source: Peru Forestal. Lima: Ministerio de Agricultura, 1982. Figuresfrom: Memoria Explicativa del Mapa Forestal del Peru, 1975, andEstadisticas de Reforestation, 1979-1980.

Regional Disparities

3.2 The same table shows, however, that most of the existing nation-al forest resource (96%) is located in the thinly populated Selva region.Only 0.2% of the national wood supply is located in the Sierra region,although Sierra households comprise 24% of the population and account for85% of the estimated 5.3 million cu.m. annual fuelwood consumption.Regional scarcities are evident from statistics on wood and charcoalproduction. Out of 24 departments, 6 (Ancash, Cajamarca, Cuzco, Junin,Piura and Puno) produce over 50% of the wood consumed in the country; 3(Cajamarca, Cuzco and Puno) account for 31%. The situation for charcoalis more constrained, with two departments (Lambayeque and Loreto)

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producing 95% of reported charcoal production. 1/ Because of the seriousdeforestation in the Sierra, the Government of Peru has made the produc-tion and export of charcoal to Lima illegal. Judging from the regularityand large volume of charcoal supplies to Lima in spite of its greatdistance from Lambayeque and Loreto, unreported charcoal production isprobably very large. Added to the fact that charcoal is produced throughthe use of traditional earth kiln techniques that have a low (15-20%)energy conversion efficiency, the official forest conservation objectiveis probably not being achieved.

Fuelwood Scarcity in the Sierra Region

3.3 Table 3.2 presents estimates of the current and projected woodsupply/demand balance in the Sierra. Annual fuelwood consumption isestimated at about 4.5 million cu.m., or 0.64 cu.m./capita/year over aregional population of 7 million. Little is known about the currentbalance, in particular the source of the 75% of the wood consumed (pri-marily estimated from household survey data) that exceeds the yield ofnatural forests and existing plantations. The great bulk of this woodpresumably comes from trees and shrubs growing outside of areas consider-ed as forested; the aggregate growing stock of forests and plantations inthe Sierra is too small for depletion to contribute much and "imports"from the Selva or the North Costa would be too expensive.

3.4 Although MEM, DGFF and INFOR all agree that severe deforestationis occuring especially in the Sierra region, the precise rate has notbeen determined because of inadequate distinction in available statisticsbetween systematic clearcutting, rapid forest degradation by partialcutting, and prevention of forest regeneration by agricultural clearingand livestock grazing. In addition to the immediate, negative effects ofthis shortage on well-being, animal dung is being diverted from use asfertilizer to use as a cooking fuel, resulting in a loss of food produc-tion potential.

3.5 While Table 3.2 provides a useful framework for analyzing fuel-wood imbalance and identifying possible remedies, its numbers are basedon various major assumptions and estimates (see notes to the table) forlack of enough firm data. Therefore, it is urgent that Peruvian forestryauthorities undertake serious data gathering efforts particularly in thefollowing areas: (i) the magnitude and location of fuelwood sourcesother than existing plantations and natural forests; (ii) the rate ofouttake beyond sustainable yield; (iii) the amount of non-energy wood usein the Sierra; and (iv) more accurate information on fuelwood sources,and levels and patterns of use. In the absence of these data, it is verydifficult to determine if further investments in reforestation are re-quired beyond the level already covered under the FAO Reforestation Pro-ject.

1/ Anuario de Estadistica Forestal y Fauna Silvestre.

IL

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Table 3.2: Wood Balances for the Sierra, 1983 and 2000(raillion cu.m.)

1983 2000

DemandFuelwood 4.5 5.0Other a/ 2.4 3.4

Total 6.9 8.4

SupplyPlantations b/Existing 1.7 1.7Ongoing projects c/ - 1.0Planned (pending projects) d/ --- 3.4

Other sources e/ 5.2 2.6 ± 2.6

Total 6.9 8.6 2.6

Balance 0.0 0.2 + 2.6

a/ Includes 30% of estimated national totals for local construction andlocal industry and 80% of mining, paper and other industry.

b/ Assuming yields of 10 cu.m./ha-yr.c/ Includes INFOR, the initial five years of the FAO project, and a

USAID financed project.d/ Includes 3.0 from a planned but not yet financed FAO project and 0.4

from a financed but inactive IDB project.e/ Estimated as residual itern for 1983. Assumed to decline by unknown

amount by 2000.

Sources: INFOR, FAO, Table 3.3, Mission estimates

Deficits and Reforestation Requirements in the Sierra

3.6 Total wood requirement:s are expected to increase by 1.5 millioncu.m. by the year 2000, to reaich approximately 8.4 million cu.m. Fuel-wood supply and demand at the year 2000 will be on balance regionally(local shortages would be widespread) if about half of the unidentifiedsources are still available, and if all planned projects are indeed fi-nanced and implemented. Under these assumptions, existing plantationswould be able to meet 19% of total wood requirements; ongoing projectswould account for 11%; and less firm supplies such as "unidentifiedsources" and potential projects would provide the balance of 30% and 40%respectively. The fact that unconfirmed sources of supply are expectedto meet 70% of demand underlines the need to obtain more accurate data on

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these "unidentified sources" and to obtain financing and develop localcapacity to implement planned projects by 1990 at the latest.

3.7 If, however, only 10-20% of this unidentified resource remains,there will be a deficit of almost two million cu.m., which can be metonly by accelerating reforestation efforts to cover an additional 19,000ha/year beyond the 30,000 ha/year covered under planned projects, if nomore than sustainable yields are to be extracted. An incremental plant-ing level greater than 19,000 ha/yr will be required if growth rates innon-energy wood uses are projected to be faster than the rates assumed inTable 3.2. It is also important to investigate better reforestationtechniques inasmuch as an increase in yield to 15 cu.m./ha-yr would re-sult in only 3,000 ha/yr additional planting being required instead of19,000 ha/yr. Under this scenario the unidentified wood resources wouldcover only 6% of total wood requirements, while supplies from acceleratedreforestation for which there are no tangible plans would cover 23% oftotal needs. If, in addition, the planned projects are delayed or arenot undertaken, the difficult fuelwood situation could reach crisis pro-portions. The outlook would be accelerated depletion of remaining re-sources, further desertification, severe erosion and loss of topsoil. Itis therefore urgent that the Government focus attention on the overallwood supply situation, particularly in the Sierra, and on building up theinstitutional capacity for a significant expansion in the country's re-forestation program.

Current and Planned Efforts

3.8 Until 1982, only about 160,000 hectares 1/ had been reforested,representing a mere 1.3% of the total potential of over 7 million hec-tares (Table 3.1). Around 140,000 hectares had been planted up to 1980,and INFOR has been planting at the rate of 10,000 ha/yr since then.About 98% of the species planted consist of Eucalyptus, especially Euca-lyptus globulus. Annex II1.1 presents areas reforested by department.As the table shows, the bulk of reforestation efforts has been concen-trated in 5 out of 24 departments (Cuzco, Junin, Apurimac, Ancash andCajamarca); these account for 73% of the total reforested area (25% inCuzco alone). While it is not certain that these "preferred" areas ofreforestation match areas of population concentration, it is clear fromthe annex that areas of reported severe penuries (Puno, Tacna and thegeneral area around Lake Titicaca) or areas of rapid wood outtake (Piura,Lambayeque) have not received enough attention in national reforestationefforts.

1/ Source: Mario Veneros Borda. Potencial del Recurso ForestalMaderable, Lima, February 1982.

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External Assistance

3.9 External aid is focussed on reforestation in the most favorableparts of the Sierra and on supporting forest industries in the Selva.Little is being done on the important problems of erosion control andwatershed management. As showa in Table 3.3, there are presently nineprojects in Peru related to reforestation, some of which are under theresponsibility of INFOR. The largest one is being executed by the FAOand INFOR, with funding of about US$5 million from the NetherlandsGovernment. This reforestation project for energy purposes initiallywill cover 13,000 ha/yr, eventually building up to 30,000 ha/yr by 1990;implementation will start in Huancayo, Huaraz and Puno. A follow-up tothis five-year project is planned but is not yet financed.

Improved Reforest:ation Efforts in the Sierra

Land Availability

3.10 According to Table 3.1, a total of more than 10 million hectaresin the country are suitable for reforestation, 7.4 million of which arelocated in the Sierra. The planned FAO project follow-up (30,000 ha/yr),even if expanded by an additional 19,000 ha/yr would require a cumulativetotal of around 500,000 ha by the year 2000, less than seven percent ofthe amount of land suitable for reforestation available in the Sierra.

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Table 3.3: Current Projects in Reforestation with Bilateral or International Aid

REFORESTATION PROJECTS

EXECUTIWG IMPLEMENTATION STARTINS/ COMPLETION AMOUNT OF FOREIGNAGENCY PROJECT SUMAIY MAJOR ODMPONENT/ S AGENCY PERIOD DATES EXCHANGE (US$/m)

FAO/Nether- Assistance in proroting and Institutional sup- INFOR 5 September 1982/1987 5.0 (grant)lands Trust supporting afforestation through- port and extensionFund out the Sierra, starting in works to increase

Nuancayo, Cuzco and Huaraz in the present plantinginitial phase. Small component rate of 10,000 halyrfor credit line to farmers for to 30,000 ha/yr.afforestation.

USAID "Food for Work" project for 30,000 ha planted so INFOR 5 1979/1985 0.9 (grant)afforestation on community land far, with 80% (first phase com- 8.5 (food in kind)in 8 Departments throughout the success rate. pleted in 1982; 9-.4Sierra, including development of second phase willnurseries. continue until 1985)

CANADA Trials and selection of appro- Establihment of ex- - 7 1977/1983 0.6 (grant)priate species for nurseries and perimental plots inplantations in the Sierra. Cuzco, Huaraz and

Huancayo.

GERMANY Small project to support refores- 2 experts, plus con- - 3 1980/83 0.5 (grant)tation work in the Selva Central sultants. Equipment (4-year extensioninvolving mostly species trials and materials. arranged in 1982)and improvement of nursery tech- Overseas trainingniques, combined with extension courses.work to encourage planting byindividual farmers.

BELGIUM On-going project of smail-scale (Project negotia- - 6 - new project:trials and afforestation tech- tions not yet con- 2.5 (EEC)niques in the Sierra, which has cluded as of end- 1.75 (Belgium)continued over a period of 15 1982) 4.25 (grants)years. Now proposed for expan-sion into a larger project withEEC and Belgian Government fund-ing and Belgian management, forthe afforestation of 6,000 ha inCajamarca.

COMPNENTS FOR REFORESTATION IN OTHER PROJECgS

IDB Reforestation project of 40,000 Target reforestation INFOR 4 January 1982 22.3 (loan)ha as part of the "Sectoral Agri- areas: (until inactive)culture and Livestock Program". Sierra - 35,000 ha

Costa - 3,000 haSelva - 2,000 ha

WORLD BANK Forestry component in an Inte- 1,500 ha of planta- - - - 0.8 (loan forestrygrated Rural Development project tions to be estab- component only)in the Puno Department (Sierra). lished over a periodConsists mainly of reforestation, of 3 years.nursery establishment and speciestrials.

NETHERLANDS Support for the Corpuno RegionalDevelopment project in the Sierra(Puno-Cuzco area), utich has aforestry component consisting ofafforestation of 600-1,000ha/year. Details unavailable.

BELGIUM Multipurpose project in the Selva (Signing of project Pichis 5 - 2.5 (grant)Central with livestock, agricul- agreement expected Palcazuture and forestry components and slbortly). Forestry Specialcovering 74,000 ha. inventory. Control Project

of logging conces-sions. Trial plan-tations of fast-growing species.

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Economic Viability

3.11 The cost of growing fuelwood on plantations can be estimated onthe basis of a number of assumptions (initial reforestation and allowancefor maintenance, $400/ha 1/; mean annual increment, 10 cu.m./ha-yr, aconservative estimate; 5-year cutting cycle and 15-year rotation period,corresponding to Eucalyptus; 10% p.a. real cost of capital) at about$6.50/cu.m. With the existing wide margins for cutting, transportation,and distribution (see Table 3.4), the retail price would be about$18/cu.m. About 30% of the production would be useable as buildingpoles, however, which at current prices (about $0.50 each) are worthabout $35/cu.m. On this basis, the remaining 70% could be sold as fuel-wood for about $11/cu.m., a bit below the current market price, but bymuch less than the margin of error inherent in these estimates. Withfurther deforestation increasing the distances that non-plantation woodhas to be carried, the competitiveness of plantations can be expected toimprove over time, but whether or not a fuelwood plantation can be finan-cially viable in this situation will obviously depend on a host of localfactors that would influence the cost and market price of fuelwood in anyparticular case. The economic case for plantations is clearer, giventhat most of the cost is unskilled labor whose wages are in part de factotransfer payments and that cutl:ing "natural" wood has a social cost interms of soil erosion and, consequently, future agricultural yields, thatis not reflected in the market price.

3.12 Government promotion of private tree-planting should be a prior-ity, especially where this can become an income-generating, self-sustain-ing activity in economically depressed rural areas where wood can be soldfor local construction and ot:her small industrial requirements whileproviding fuelwood for household needs in the process and where the eco-logical cost of inaction is particularly high. Experience elsewhere hasdemonstrated the effectiveness of using the profit motive to stimulatesmall scale, homestead-level tree-farming, particularly if an integratedagro-sylvo-pastoral technical package can be provided. In contrast,large, formal, state-owned plantations have proven to be hard to manageand more costly due to highei: maintenance and protection (e.g., fromlivestock and theft) requirements and have not really been effective ineliciting local participation. Major benefits of private tree-farminginclude the slowing down of the over-cutting and depletion of naturalforests, erosion control and soil conservation, employment and incomegeneration, greater availabilit:y of fodder and building materials to thefarmer, human energy and time savings through increased fuelwood avail-ability at the homestead, possible additional income sources from anexpanding wood market covering charcoal making, furniture and other woodproducts. In the long run, there may be downward pressures on fuelwoodprices due to overall increases in supply and lower labor and transportcosts incurred by wood dealers who could procure cut wood directly at thefarm gate.

1/ Based on INFOR estimates. Composed of labor, 67%; technicalsupport, administrative and extension costs, 23%; inputs andsupplies, 8%; tools, 2%. No allowance for land value is included.

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Table 3.4: Fuelwood and Charcoal Prices for Huancayo, (1982)

Soles/kg US$/ cu.m.

Fuelwood"Tree for sale" a/ 2- 3 1.30- 2.0Producer's price, fresh-cut b/ 3- 5 2.00- 3.30Price at sawmills or roadside

wholesalers, stacked c/ 7- 11 4.60- 7.20Retail stores, bundled dT 18- 21 11.80- 13.80

Charcoal 11S$/metric tonWholesaler, at charcoaling site 30- 70 28.00- 65.80Retail stores 150-200 140.60-187.40(Note: Lima retail prices) over 250 over 235

a/ A whole tree is bought for 2,000-3,000 soles (US$1.90-2.80) forcutting; yield is 1 to 1.5 cu.m. of wood.

b/ Two woodcutters interviewed.c/ Four sawmills visited.d/ At a distance of 8-10 km from sawmills.

Source: Mission estimates following visit to Huancayo.

Constraints to Reforestation and Recommendations

3.13 The consensus among local implementing agencies and externalfunding sources is that, given the level of local capacity, external aidprograms in support of reforestation activities in the Sierra have prob-ably reached saturation point for the moment. Constraints to localcapacity for immediately undertaking new and large reforestation projectsare discussed below, followed by recommendations to address the respec-tive issues.

Wealc Institutional Framework

3.14 There are areas of duplication between the two main institutionsin charge of the forestry sector, i.e., the Direccion General Forestal yde Fauna (DGFF) and the Instituto Nacional Forestal y de Fauna (INFOR).The DGFF is supposed to be primarily involved in drawing up nationalforestry policy, while INFOR is responsible for implementation. In prac-tice, however, INFOR is also undertaking some reforestation planning, andDGFF also implements projects. Examples of the latter are the Canadian-financed project to develop industrial forestry and to establish a post-graduate degree program in forestry sciences at Universidad NacionalAgraria (La M4olina), and the IDB-funded project to study the feasibilityfor tree plantation in the arid zones of the southern coast. 1/ Respon-

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sibilities are increasingly being divided regionally, with DGFF becomingmainly involved in the Selva and the INFOR in the Sierra and both insti-tutions exercising planning and project execution in these regions. Inaddition, the implementation of seven special projects in the Selva hasbeen placed directly under the Prime Minister's office. While this movemay increase the chances of successful implementation, it adds moreconfusion about the division of responsibilities and may further weakenthe DGFF and INFOR by diverting financial and professional resources fromthem.

3.15 Other projects indirectly related to rural forestry are theresponsibility of other agencies. The Ministry of Energy and Mines, withUNDP funding, is undertaking technical and economic studies of "renewableenergy." Some of the objectives include: (i) classification of energysources by ecological zones and economic sectors; (ii) analysis of ruraland urban supply and demand balances; (iii) demand projections; and(iv) identification of training needs for planning on the utilization ofrenewable energy. Another project being planned is a study of biomassenergy use possiblities for the areas along the road linking Pucallpa (inthe Selva) to Tingo Maria, Huanuco, Cerro de Pasco and Junin (in theSierra).

3.16 Field organizations also appear to duplicate each other. TwelveCentros Forestales (CENFORS) 2/ have been created to decentralize theadministrative operations of the two-pronged forest service. However,the original Forest Districts under DGFF still exist, and their jurisdic-tions have overlapped with those of the CENFORS. Furthermore, there doesnot seem to be any uniform basis for establishing CENFORS; some of themare autonomous, some are attached to externally funded projects, whileothers have been created as parts of existing Forest Districts.

3.17 Recommendations The effectiveness of having separated the for-est service into DGFF and IliFORI in the first place needs to be carefullyreexamined since this division has led to the duplications discussedabove and to a lower level of efficiency. If it proves to be too cumber-some to revert to one forest service given the amount of work alreadyinitiated under the current institutional arrangements, then the optionof officially establishing the DGFF and the INFOR as planning and imple-menting agencies for the Selva and the Sierra/Costa respectively warrantsconsideration. Overlapping areas of responsibilities among the CENFORSand the forest districts should also be rationalized.

1/ Source: Peru Forestal Lima, 1982.

2/ Piura, Cajamarca, Huaraz, Lima, Arequipa, Tarapoto, Huancayo, SanRamon, Puno, Iquitos and Pucallpa. Seven are operational and havetheir own budget, although funds have not yet been disbursed.

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Inadequate Implementation Network and Field Support

3.18 In addition to the serious lack of transportation, equipment andeducational materials, there has not been enough training of non-degreelevel forest technicians and extension workers. There are four schoolsfor training professional forest engineers, but none focus on trainingfield-oriented staff who could give on-site advice to communities in theSierra on the preparation of sites nursery establishment and the requiredsupport system, plantation management, matching of soils and species,soil stabilization on hillsides, and the like. The only training insti-tute for sub-professional foresters, located at Pucallpa, focuses on sup-plying technicians for the logging and forest industries. Field traininghas also been concentrated near the Costa and in the Selva and has notadequately covered areas in the Sierra in greatest need of reforestation.

3.19 The content of training also lacks a multi-disciplinary perspec-tive. Improvements in agricultural practices often prove highly bene-ficial to the forestry sector and wood conservation needs to be incorpo-rated in rural forestry work. More attention also needs to be given tothe sociological aspects of community development 1/ and to the role ofeconomic incentives in rural afforestation. There has also been a tend-ency on the part of field staff to adopt a paternalistic attitude towardpeasant communitites. This will have to be changed now that many commun-ities have demonstrated a high degree of motivation for tree planting.Engineers have tended to prefer conducting research or doing administra-tive work at nurseries, while the small number of field technicians andextensionists are overstretched and overworked.

3.20 Recommendations There is an urgent need to train more technicalstaff for field work, i.e, non-degree technicians and extensionists whohave no office duties. This can be achieved through the establishment ofspecial training centers for diploma-level staff and the establishment of"' mobile training units" to stretch out the capacity of central nurser-ies. There also appears to be room for re-training, through shortcourses, of management-level field staff in social forestry as theirpurely technical approach to rural afforestation is sometimes obsoleteand does not seem to be effective in motivating communitites to planttrees. The incentive system also needs to be revised (e.g., through ahigher per diem for going into the field) in order to encourage forestengineers to do more "hands-on" work. There is also a need to improvethe coordination of forestry operations, i.e., the wet season manpowershortages and the dry season oversupply. The combination of agriculturaltechnical assistance with forestry promotion activities needs to bestudied carefully and findings incorporated in rural forestry work.Finally, training of more bilingual (Quechua/Spanish) field staff isrequired.

1/ For example, the role of women is particularly important in ruralvillages because it is the wives who make decisions on allocatingthe sources and types of fuels used, modifying cooking practices,land use, protection from livestock, and so forth.

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Insufficient Research for the Subsector

3.21 There has been a lack of research related to improving thesituation in the fuelwood subsecWor. Knowledge about Peru's forests, itspotential and, more specifically, about forest energy and its uses hasbeen inadequate. For effective planning, activities need to be initiatedsoon to fill in data gaps in the following areas: the technical feasibi-lity and economic viability of improved cooking stoves, charcoal kilnsand wood-burning devices; potential for agroforestry; opportunities fornative multipurpose plant species such as Quinoa, which is a self-propa-gating food and fuel crop that can be grown on marginal land; potentialof native tree species for reforestation; role of women in nursery andplantation operation and in extension; competition in fuelwood use amonghouseholds, small commercial establishments and the mining industry; andthe potential role of other biomass technologies.

3.22 Although rural forestry projects often tend justifiably to ag-gregate in centers where local capabilities and rural infrastructurefavor successful implementation, care must be taken not to neglect areaswhere conditions are less favorable but where needs may be more urgent.In terms of growing conditions, altitude, slope steepness and wqateravailability differentially affect tree growth, even within the Sierraregion. Valley bottoms, where reforestation has advanced most rapidly,are more conducive to tree production because of propitious soil, climateand moisture regimes. Higher slopes and altitudes, however, tend to bemuch less favored; tree grouth Is practically unsustainable above 3,500to 4,000 meters. As regards the degree of urgency of cooking fuel needs,a study of three high-altitude Localities in the Sierra 1/ reveals thatthe quantities of fuel used and cooking practices vary greatly accordingto fuel scarcities within their respective ecological settings. The twohigher income valley communities in the study consume more non-purchasedfuelwood, while the poorer, high-altitude community spends on commercialfuels the largest proportion of total household expenditure. Gatheringtime is also longer and distances travelled farther for the latter.

3.23 Recommendations Research work needs to be started as soon aspossible on the data gaps outlined above. In addition, the determinationof any future fuelwood supply/demand imbalance and corresponding invest-ment requirements (para. 3.05) requires more accurate information onfuelwood levels and patterns of use, non--wood energy uses distinguishedbeteen the Sierra and the Costa, and the rmagnitude and location of woodsupply sources other than existing plantations and natural forests.

3.24 A rigorous study on the economic justification and logistics ofpromoting private tree-farming is urgently required to serve as the basisfor formulating national policy on supporting private woodlots as anadditional and possibly more eFfective maeans of accelerating reforesta-tion. This analysis should include:

1/ Sarah Lund Skar. Fuel Availability, Nutrition and Women's Work inHighland Peru. Geneva: International Labour Office, January 1982.

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(i) surveys of representative sites to break down more accurate-ly the components of fuelwood retail prices, including per-mit or stumpage fees, chopping/cutting/stacking, loading/un-loading, transport, and distribution and profit margins;

(ii) the structure of the fuelwood market, main consumingcenters, other possibilities of expanding this market tocover non-energy wood demand;

(iii) assessment of the level of control of the fuelwood market byretailing agents and middlemen, options available to theprivate tree farmer for becoming involved in distribution,and the Government's role;

(iv) identification of private plantation sites near urban orothaer main consuming centers so as to minimize transportcosts; conparison with locations of natural forests;

(v) identification of land availability and tenure issues;

(vi) measurement of soil losses and erosion, and preparation ofmaps;

(vii) assessment of the possibilities for integrating agroforestryspecies, especially those providing forage and fruit, withtreefarming activities, rather than focusing almost solelyon Eucalyptus species; and

(viii) assessment of the technical and credit assistance needs ofprospective private tree-farmer.

The role of the universities in reforestation researchi needs to be great-ly expanded, as those with forestry programs appear to be primarily ori-ented toward the Selva.

Absence of a national plan for fuelwood and rural energy

3.25 In spite of its major contribution to national energy supplies,fuelwood has not received adequate attention in the planning area. Theindustrial forestry potential of the Selva appears to receive more con-centrated efforts than tae fuelwood and ecological problems of theSierra. There is neither a comprehensive forestry development policy andprotection program, nor a national reforestation plan for energy andrural development purposes. Project activities in reforestation havebeen ad hoc and fragmented and do not seem to effectively link thevarious capacity-building components of pre-investment work; these acti-vities appear to be influenced primarily by the availability of externalfinancing. Aid coordination also is weak.

3.26 The criteria for selecting reforestation sites are sometimeslimited to communities that actually request seedlings; however, local

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appreciation of reforestation benefits is often correlated with moreeconomically advanced communities, so less-developed areas which haveserious fuelwood needs may be neglected. There also has been a tendencyto focus on planting trees solely for energy purposes. However, theremay be a stronger motivation for planting trees if wood eventually is tobe sold to existing or potential markets, or if an income-generating,small wood products industry is started, with fuelwood and even charcoalas by-products.

3.27 Planning in the fuelwood area needs to be undertaken within theoverall context of rural energy and forest utilization. Due to site-specific species ecology and differing economic actitivies and communityneeds, the rural energy problem in Peru cannot be solved simply by plant-ing trees. In addition, some areas in much higher altitudes are just notsuited for natural forest regeniaration. It is clear that rural energyproject activities in Peru will have to be very site-specific, comprisinga "mix" of measures which includes not only increasing fuelwood supplies,but also improving efficiences of end-use, promoting better use of bio-mass wastes, developing non-conventional technologies to harness renew-able energy resources, and devising appropriate pricing policies.

3.28 Recommendations There is a need for more comprehensive planningfor the forestry sector as a whole, and for the fuelwood subsector inparticular, focussing on the nE!eds of the Sierra population while notneglecting the rational use of the Selva resources. Serious effortsshiould be undertaken immediately in formulating a national reforestationplan and work program, delineating the successive phases and componentsof strengthening local capacity for rural forestry. The Oficina Nacionalde Evaluacion de los Recursos Nacionales (ONERN) has just completed asoil classification map identifying best land use and should be fullyutilized. This planning activit:y would require improved coordination ofexternal aid for the fuelwood subsector.

3.29 It is important that the selection of sites for future refor-estation projects more closely consider significant variations in thefuel situation in the Sierra region; this requires more site-specific andstratified household energy surveys. Special consideration should begiven to the comparatively more urgent needs of community clusters thatare disadvantaged by altitude and poor soil and water conditions. Forthese regions, a balanced strategy of reforestation and possibly switch-ing to subsidized commercial fueLs needs to be defined.

3.30 The preparation of a national plan for rural energy also needsto be initiated. The Ministry of Energy and Mines, through its SectoralPlanning Office, could assume this responsibility with inputs from INFORon fuelwood and reforestation aspects. MEM has been involved in ruralenergy surveys as inputs to the preparation of the national energy bal-ance and will soon inititate a project to identify renewable energy op-portunities in selected areas in the country. The plan should identifypriority regions, target populations, and an action plan for undertakinga more comprehensive rural energy approach, of which fuelwood is a majorcomponent. In particular, this plan should highlight integrated agro-

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sylvo-pastoral systems whlich may better promote the idea of reforestationamong the rural population.

Project Possibilities in Biomass Energy for the Sierra

3.31 Experience elsewhere has shown the importance of pre-investmentwork in building up local capacity for successful rural forestry work.This is certainly true for Peru, where a "critical mass" of field support(e.g, nurseries, nursery technicians, extensionists, carefully selectedplantation sites and appropriate species, trial plantations, training) isnot developing in an integrated manner to serve as a basis for a larger-scale reforestation program.

3.32 For the Sierra there does not appear to be any immediate oppor-tunities for sizeable, self-contained projects because of the low localabsorptive capacity, fragmentation in forestry institutions and the sig-nificant number of external aid agencies already involved in the sub-sector. However, complementary approaches are possible, either by ex-panding successful tree-planting activities or by carrying them to a moreadvanced stage. For example, the area of influence of a successful nur-sery establishment project can be expanded by increasing nursery capaci-ty, providing support for more equipment and transportation, trainingmore field technicians and extensionists, and so forth. Similarly, wherea rural forestry project has been successful, opportunities for develop-ing a wood products cottage industry and identifying or creating localmarkets can be sought as a stimulant to further tree-planting. Such afollow-up project would require market studies, training of extensionworkers and developers of small enterprises, and establishment of creditmechanisms; it could also incorporate the dissemination of more efficientstoves, charcoal kilns and other wood-burning devices. W4here communitiesin a region have shown motivation for and success in tree-planting, cred-it support schemes to expand their work can be identified and financed.Finally, ways to more fully utilize sawmill wastes should be explored.There are about 70 sawmills around the Huancayo valley area alone. Underconservative assumptions 1/, bulk wood wastes (i.e., not counting woodchips and sawdust that can be briquetted) could meet the fuelwood re-quirements of an estimated 2,500 households in the area. Some sawmillshave demonstrated interest in installing efficient charcoal kilns, but itappears that CENFOR-Huancayo has not been able yet to provide technicaladvice.

3.33 Project identification work needs to be undertaken to seekopportunities for "time-slice" activities in the rural forestry area orother projects which would link and/or fill in the gaps in existing

l/ 250 days of operation per year at 50% capacity; 300 sq.m. of sawnwood yield per sawmill; 21 sq.m sawn wood yield per cum input; 50%waste of which 20% is bulk wood; 5 to 7 members per household; 1 cumper capita fuelwood consumption per year.

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projects. The purpose of this work would be to coordinate and enhancepre-investTnent work so that local capacity is developed rapidly. In thesshort term, a possible comprehensive technical assistance project alongthese lines should include:

(i) evaluation and coordination of existing reforestationactivities; preparation of a national reforestation plan;

(ii) training of intermediate or sub-professional field staff;

(iii) species trials in different zones in the Sierra, includingagroforestry species;

(iv) research on: multipurpose plants providing food, fuel,forage, windbreaks, etc.; indigenous species capable ofgrowing at higher altitudes; improved cooking stoves andother woodburning devices; sawdust and coal briquetting;

(v) strengthening of CENFORS through provision of field support,training and advice on rural forestry techniques;

(vi) protection of forests from livestock;

(vii) feasibility study on charcoal production in sawmills in theSierra, and in the Selva, based on logging wastes;

(viii) assessment of the potential for integrated agroforestryactivities and opportunities for creating small woodproducts industries with fuelwood or charcoal as by-products.

As a basis for determining investment projects in the medium term, thisproject could undertake a programming activity to produce as its majoroutput the following:

(ix) a work plan for priority "self-contained" or "add-on"reforestation projects, specifying planting areas, 'ap-propriate species, costs, and other support requirements;

(x) specific recommendations for aid coordination, rational-ization of field operation units, and setting up ofmonitoring and evaluation systems;

(xi) delineation of additional pre-investment work requiredbeyond those in (i) to (viii) above, particularly in theareas of training and research;

(xii) recommendations on procedures to establish a more permanentand effective institutional framework for fuelwood inparticular and rural energy in general.

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Forestry Priorities in Other Regions

The Costa

3.34 The near-desert Costa region, Which covers about three millionhectares, has been largely denuded of its original vegetation and ischaracterized by chaparral-type species of very slow growth. Soils in theCosta region are generally saline and highly susceptible to erosion. Theregion contains about 25% of the country's total cultivated area. Nearlyall of the coastal agriculture is irrigated. To permit natural forestregrowth, the Government of Peru has made the cutting of wood for indus-trial purposes illegal. Around 15,000 hectares of Eucalyptus plantationshave been established so far in the Costa. Except for the extremenorthern tip, climatic conditions are generally unsuitable for expandingforested areas in this region.

3.35 Estimated current and projected wood balances for the region areshown in Table 3.5. About 90% of the urban population reside in theCosta, with more than 25% living in the Lima area. With the exception ofcharcoal for food establishments, most of the energy used by these urbanpopulations consists of conventional fossil fuels. Largely uncontrolledcharcoal production occurs in the Piura and Lambayeque departments of theCosta.

3.36 Forestry development priorities for the Costa include: (1)erosion control; (ii) protection of important water catchments associatedwith irrigation schemes; and (iii) development cf fuelwood plantations inthe northern coastal area.

The Selva

3.37 The Selva region covers about 60% of the territory in Peru andcontains over 20% of the country's total cultivated area. The Selva canbe divided into two principal sub-regions: (1) the high Selva (Ceja deSelva) which covers the eastern foothills of the Andes and is charac-terized by very steep slopes, narrow valleys and torrential rivers; and(2) the Low Selva (Amazon Basin), characterized by hilly terrain, widevalleys and winding rivers. The iRiuh Selva contains around 11% of thetotal forest resource. The Low Selva is almost entirely covered by humidtropical forests and accounts for 87% of Peru's forests. Both the Highand Low Selva have been extensively exploited for their valuable timberspecies. Deforestation in the Selva is occuring at a rate of 100,000hactares per year. 1/ About six percent of the forest area has beenfelled for agricultural purposes. Shifting cultivation is the pre-dominant agricultural practice, making the soils susceptible to compact-ing and erosion. Because of the fragility and low fertility of soilsafter the forest cover is cleared, further agricultural development inthe Selva will have to utilize environmentally sound approaches. It has

1/ INFOR and FAO Project Team.

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been estimated that more than 30% of the total land area suitable forpasture and for cultivation (around 80,000 square kilometers) should bein watershed protection forests.,

Table 3.5: Wood Balances for the Costa, 1983 and 2000(mLllion cu.m.)

1983 2000

DemandFuelwood 0.8 0.0Other a/ 0.9 1.3

Total 1.7 1.3

SupplyNatural Forests b/ 1.6 1.2Existing Plantations 0.1 0.1

Total 1.7 1.3

Balance 0.0 0.0

a/ Includes 70% of estimated national totals for local con-struction and local industry and 20% of mining, paper,and other industry.

b/ Estimated as a residual. Implies extraction at averagerate of about 0.6 m3/ha-yr in 1983 and, after reductionin forest area at about 20,000 ha/yr, about 0.5 m3/ha-yrin 2000. These levels are typical of highly degraded ornear Savanna conditions.

Sources: INFOR, FAO, Mission estimates

3.38 The forestry law of Peru requires extractors to plant two treesfor every cubic meter of wood extracted. However, the regulation is notwell enforced because of inadequate control by the Forest Districts,outright noncompliance by the extractors, and lack of knowledge on where,when, and how to plant on the part of extractors who do wish to comply.There is a critical shortage of nurseries in the Selva region and, as of1976, only 106,140 hectares had been reforested. 1/

3.39 The wood resources of the Selva are too distant from the Costaand from the major consuming centers in the Sierra to be an economicsource of supply for residential and commercial user in these areas.

1/ Science and Technology Division, U.S. Library of Congress. DraftEnvironmental Report on Peru, October 1979, p. 7 0 .

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However, mill wastes can potentially meet process heat and power needs ofthe wood industries located in the Selva. Although forest residues are amore abundant source than mill residues, the absence of roads in the areamake the recovery of forest residues unfeasible. Mill residues availableon site show a greater potential for substituting for diesel fuel use inlumber mills. In other populated areas bordering the Selva such asIquitos or Tarapoto, wood gasifiers potentially could meet local powerrequirements. Biomass waste resources in the Selva also appear adequateto support large-scale charcoal production by industries in and aroundthe Selva area.

3.40 The technical and economic viability of these wood gasificationand charcoal production options needs to be more carefully studied, par-ticularly with regard to the economic justification in specific cases,since technical performance of gasifiers and efficient charcoal kilnsbased on woody biomass is fairly well established. Assessment of thispotential will have to start with the quantification of wood waste gener-ated at sawmills and other wood processing sites, and should also analyzethe following: (i) process heat and power needs of local industries;(ii) size of possible residential and commercial markets for charcoal andelectricity; and (iii) training and extension requirements.

3.41 The High Selva is still largely covered by forests and not yetthreatened by serious erosion problems, but there has been considerableinroads by logging and some agricultural settlement. Forestry prioritiesfor this area include: (i) control of logging operations; (ii) protectionand management of logged-over forest; and (iii) restoration of limitedareas of degraded land, together with the controlled clearance and set-tlement of forest areas suitaDle for agriculture. Forest developmentpriorities for the Low Selva, with its fragile soils and complex eco-logical characteristics, include: (i) preparation and application offorest management and exploitation plans; (ii) national parks and wild-life conservation and management; (iii) control of logging concessionsand operations, and over clearance of settlement areas; (iv) assessmentof potential for wood waste gasification to meet process heat and powerrequirements for wood industries and human settlements; and (v) assess-ment of charcoal production potential for residential and commercial use.For the Selva as a whole, research on the environmental consequences ofutilizing wood resources in the area needs to be expanded, and alterna-tive management approaches need to be identified and developed.

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IV. OIL AND GAS

Petroleum

Reserves and Production

4.1 All of the major onshore geological provinces in Peru hlave pro-duced petroleum. A well drilled at Zorritos in 1863, on the northwestcoast made Peru one of the first countries to have produced oil fromdrilled wells. This northwest coastal zone (onshore and offshore) stillproduces significant quantities of an excellent, high gravity, low sul-phur crude. Between 1907 and 1940, a small oil field was exploited atPirin, on the shores of Lake Titicaca; two small oil fields were dis-covered in the Central Selva at Ganso Azul and Maquia in 1938 and 1957,respectively. In the 1970s, important oil fields were discovered in theNorth Selva and, with the completion of the Northern Peru Oil Pipeline(Transandean) 1/ to the Pacific Coast in 1977, the Selva became the majorproducing area of the country (See Map IBRD-17126).

4.2 Table 4.1 shows Peru's oil reserve as evaluated by Petroperu atthe end of 1982. The North Selva, which is one of the three most im-portant sedimentary basins of the Amazon region, accounts for 54% of theproven reserves, and 24% of probable reserves. The northwest, where mostof Peru's petroleum production has been obtained, still accounts for 46%of proven reserves and 76% of undeveloped and probable reserves.

4.3 In 1965, Peru produced 62 MBD of oil and exported 3.3 MBD. Highgrowth rates of consumption, together with a slow decline in the outputof oil during most of this per-iod, forced Peru to begin importing oil inthe late 1960s and, by 1977, it was importing about 41 MBD even thoughproduction had risen to 91 MBD. However, with early success in exploringthe northwest selva area and with the completion of the transandeanpipeline in 1977 and a branch connecting additional fields in February1978, domestic production again exceeded consumption. Average dailyproduction rates rose from 112 MBD in the first quarter of 1978, to 181MBD in the fourth quarter. Production since then has generally stayed inthe 190-195 MBD range, but is likely to be only about 176 MBD in 1983 dueto flooding in the northwest producing areas and landslide damage to thepipeline. Table 4.2 shows the evolution of production by area and com-pany as well as net exports from 1977 to 1983 (estimated).

1/ Petroperu has run the pipeline since 1977, bringing oil from SanJose de Saramuro in the Selva to the Bayovar terminal on thecoast. The pipeline includes a 856 km trunk line, a 253 km northernbranch to Occidental's fiLelds, and a 204 km feeder line which linksall Petroperu fields.

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'fable 4,1. Oil Reserves end-1982 a/(mETTf6?ior barrefs

Proven ProbableArea Develooed _TNot developed

NorthwestTalara & Lima 60 62 346Turmbes 1- Belco ZiA (offslore) -- 1Belco Z2A (offshiore) 65 46 63Oxy-Bridas a/ 83 36 -

Subtotal 209 143 411

North SelvaPetroPeru 85 42 99Oxy Bloc"k 1 AA 108 82 5Oxy Block 1B 30 55 4Ramilton-Petroinca 2 11 6Unassigned areas - - 13

Sub-total 226 191 127

Selva Central

PetroPeru ___ 2 6

Total Peru 439 336 544

a! Secondary recovery

Source: Petroperu

Table 4.2: 0il Production and Net Exports, 1977-83a/(thousand barre's per day)

1977 -978 1.979 1980 1981 1982 1983 a/

NorthwestPetroperu 33 32 23 22 23 24 14Belco 29 29 28 28 27 28 27Oxy-Bridas = - '1 18 20 19 14

Sub-total 62 6L 62 68 70 71 55

SelvaOccidental 10 71 106 106 105 95 90Petroperu 19 19 23 22 19 29 31

Sub-total 29 90 129 128 124 124 121

Total Production 91 105 192 195 193 195 176Net Exports -41 6 48 43 42 44 30

Note: "Net exports" include trade in refined products as well as crudeoil.

a/ Estimated

Source: Petroperu, mission estimates0

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4.4 Peru is now down to a reserves-to-production ratio of about 11years, which implies that oil production will shortly start to declinerapidly unless a major discovery is made or additional secondary recov-ery/rehabilitation projects are brought into production within the nextthree or four years. The most important recent development project, theOxy-Bridas secondary recovery project in the northwest, is producing atonly about half the projected level and appears unlikely to exceed thisin the short term, since most of the production is actually coming fromnew infill wells rather than secondary production, and the overall levelis actually declining. In the Selva, Occidental's management does notexpect any increase in production over present levels. The proportion ofwater being produced with the oil from Occidental's fields is increasing,so progressively more wells are required to maintain a given productionof oil. The average density and viscosity of oil produced is also in-creasing (due to producing a higher proportion of heavy oil), reducingeffective capacity of the pipeline.

4.5 The reserve situation has been deteriorating for several years.Petroperu's most recently revised data series indicate that provenreserves peaked in 1978, the last year in which a major discovery wasmade. Since that time production has exceeded new discoveries by afactor of seven. A comparison of reserve estimates prepared at the endof each year indicates continued growth in proven reserves to a somewhatlower peak in 1981, but this apparent growth is due primarily to revi-sions in the estimates for pretviously proven reserves. Table 4.3 showshow these revisions, actual additions to reserves through secondary re-covery projects, other discoveries, and production have combined tochange reserve estimates since 1970. Aside from the importance thatrevisions have had in year-to-year changes in reserve estimates, it indi-cates that secondary recovery and rehabilitation have been about as im-portant as new finds and extensions in adding to proven drilled reservessince 1974. An independent review or audit of reserves may be a usefulstep in establishing not only the extent to which recent upward adjust-ments in reserve estimates are technically justified and the urgency ofincreasing exploration activity but also the relative priorities of al-ternative exploration targets and strategies.

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Table 4.3: Evolution of Proven Oil Reserves, 1971-82(million barrels)

As originally As reconstructedpublished post-1982

end-1970 311 3441971-1974Revisions in estimates +20 -Discoveries and extensions +496 +496Production -59 -59end-1974 768 781

1975-78Revisions in estimates -226 -Secondary recovery, rehabilitation +141 +141Other discoveries and extensions +189 +189Production -143 -143end-1978 727 968

1979-82Revisions in estimates +242 -Secondary recovery, rehabilitation +49 +49Other discoveries, and extensions +40 +40Production -283 -283end-1982 775 775

Source: Compiled from Petroperu data.

4.6 The total area of Peru which is considered by Petroperu to beprospective for petroleum is 74.8 million hectares, of which only 15.2million are under any form of exploration. In the Selva region, with 59million hectares of prospective area, only 14 million are being explor-ed. The prospects of making further oil and gas discoveries within thesame type of cretaceous configuration in the Selva region are good, butthe likelihood is for the discovery of relatively small fields, and/orheavy oil which cannot easily be produced or transported. Four foreignoil companies have exploration contracts in the Selva (Occidental,Superior, Shell, and Hamilton-Petroinca), and one of these (Superior) isreportedly about to relinquish its holdings after drilling two unsuccess-ful exploratory wells. The level of exploratory activity is clearlyinadequate for the area, and in terms of the number of exploratory wellsto be drilled, is even more so. Petroperu plans to drill 15 exploratorywells in the northern Selva (the only area accessible to the existingpipeline) between 1982 and 1985, but it seems unlikely that it will haveeither the funds or the technical staff to carry out its proposedprogram. Occidental is expected by Petroperu to drill 10 exploratorywells in the same period, Superior 4, Hamilton-Petroinca 11. These

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numbers are far in excess of couit:ractual obligat--ions and most of thesewells will not be drilled if oil is not found in t'he early part Of theprogram. 1/ Apart from Petroperu and Occidental, there arei o irmn commit-ments to drill only four exploratory wells in ;ne huge aree o: the AmazonBasin in the next four vears. Of these, toe two we'is to be drilled byShell on a 20,000 square kilometer area in, Southern Selva are soremote from the existing pipeline that a ne, pi pel.ne ; Q the Paci-ficwould be required if oil we-re prod.uced. Thos.i 'on frorn. this areais unlikely to reach the market before 1990

4.7 Exploration prospects in the northiesi<: har,v bby ic moeans beenexhausted. Despite the long production history of tlne northwest fields,the area may still be explored w,rith more rKzodern ;Gsls a.nd mtore advancedtechniques. The geology of the area is extreme:.y c;oxp ex bot-h tectonic-ally and stratigraphically. Se.is m i. s.I y- v i- y c .oo- of- thre onshoreareas is rendered difficult by a superfici.Fl li; econglor.merate cov7erknown as the "Tablazo". The last land se:i'si(l S.-'J3' in the area operat--ed by Petroperu in the northwest (ONO' w as iad-e i. 17 71 Te hniquesand equipment have improved corssiderab sY sp vCe t1hat t-lme and a new ef fortmay well be justified, especiall.1y since it appoeTars - i.rCSt of Ithe wellsin the ONO area classified as 'exploraisl'toa are ar'-.is-VLl-T ster)-oist w.nellsfrom existing oil accumulations, rathe- rv-han genuine e EO discovernew oil accumulations. Given the-h st of a e,n s on geo-logical complexity, it is not u-areasoia4ale to t`iink. r<at nev,.f o-il accumu-lations might be discovered by new>.Y a7id anre scphistic.ated seis-ic sur-veys, even close to or with-iin preser-;- p-rod0cing arteas-O ne probleim infostering exploration of this area, however at ind.ivival oil ac-cumulations are very small; so that the :i v!-1wes-roent or private capital isdiscouraged by the provisions of the petrolcum s.

1/ Superior Oil, operating in Block 2, seemi's likeLy to wi.thdraw, as itstwo exploratory wells were bothn dry ho les. II-he compar.y decidesto continue, it will be obligaLec F-o Jr'lL t- Js' nore wells.Harnilton-Petroinca operates Block 7 or tle roure of tlhe NorthPeruvian Pipeline and has an o'ligawtlon to dri' l t-Jo we1s½. resuults

on the first of whichl are being evaluai i 0Ccidental dr0illed twoexploratory wells in 1982 wits poor resu1-;ts. aad wlii1 dr.I:Y fourmore in 1983, but is apparently running shOfcr o£ drJillable prospectson its existing blocks. C,cci1enta1 eeoc oes r1no> expect itspresent exploration progranm to do more t.slan th-- decline ofexisting fields. Negotiations are s o-'11 "ro<-> wIth sisparno Iet al. for Block 50 in 'he nortbrer. Se]>-r-7a, and w-itb Occiden'tal inthe Huallaga basin. Petropenr holds te -a-raes blocc's :-n bot'h thenorthwest and in the Selva lts block 8 ln i n-;'r"lrn Se^tve coversalmost 60,000 square kilomecters, vhile h} iccks 31 and 35 £n thecentral Selva cover some 20,000 square kibometersC Petroperu has anambitious exploration progr.am for it-,s .Sel holdgs also.; b-ut be-cause of the same financial and person.nel cons-ra3ints seems unl7 ikelyto be able to carry it out-

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4.8 Belco is contractually committed to drill two more explorationwells in Block Z-IA offshore and a minimum of five in Block Z-28. Petro-peru has an ambitious exploration program onshore in the northwest, in-cluding seismic and drilling in the Sechura desert, but seems unlikely tobe able to carry it out because of financial and personnel constraints.

4.9 Petroperu's capacity to contribute significantly to the neededincrease in exploration efforts either in unexplored "new" areas or in-completely explored "old" areas is severely limited by a number of fac-tors, but mostly in terms of people and money. Petroperu is extremelyshorthanded in many types of technical staff, especially petroleum en-gineers and geophysicists. Combined with a reluctance to use consultantsto do work which its own staff is technically capable of doing but forwhich it does not have the time, the result is that the capacity to dothe necessary preliminary studies and planning has become a bottleneck inthe identification and preparation of worthwhile projects. Financial re-sources have been another constraint, as the bulk of the difference be-tween the cost and selling price of Peruvian oil has been used elsewherein the economy, leaving relatively little for reinvestment in the sector.

4.10 These constraints are reflected indirectly in organizational andplanning gaps as well as directly in the inability to identify, prepare,and implement projects in a timely manner. Petroperu has disbanded thebasin study group formerly responsible for updating the geological pic-ture of each sedimentary basin as new information becomes available andproposing appropriate changes in the exploration and development strategyfor the basin. Planning has been sacrificed to operations, and theresult has been both unexploited opportunities (e.g. infill drilling,rehabilitation, exploration targets) and underutilized resources (e.g.drilling rigs). This year, of course, this type of problem has only beenmade worse by the need to cope with the flooding in the northwest and itsaftermath.

4.11 Some progress has been made in the last several years in aug-menting Petroperu's capacity and improving its efficiency, and much morecan and should be done in this direction, but it will continue to benecessary for some time to rely heavily on foreign companies to carry therisks and handle the exploration and development projects that are neededin the short term to maintain production over the medium term.

Attracting Foreign Investment

4.12 Between 1945 and 1969, the Government kept the domestic price ofoil products at very low levels, with the result that demand expandedrapidly and the country became a net oil importer, while the financialreturn to the private oil companies operating in Peru was greatly re-duced. Under these circumstances, investment in the maintenance of theold producing fields and in exploration for new reserves virtuallyceased. After a period of increasing friction between the Government andthe private oil companies, the principal private producer, InternationalPetroleum Co., the Peruvian subsidiary of Exxon, was expropriated in1969, and a state oil monopoly, Petroleos del Peru (Petroperu), was

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established to manage all aspects of the petroleum industry. Followingthe establislment of Petroperu, the Government in 1970 instituted a sys-tem whereby private oil companies could act as "contractors" for Petro-peru in exploring for oil, thus preserving the legal state monopoly whilepermitting the renewed entrance of private capital for oil exploration.The terms of the initial exploration contracts were such that the privatecompany took all the exploration risk and shared any resulting production50/50 with Petroperu, while the latter undertook to pay the contractor'staxes owed to the Peruvian Government. This system was financiallyattractive to private venture capital, providing that sufficiently largeand productive fields could be found to offset the very high cost ofexploration in the Selva.

4.13 Soon after the establishment of the "contract" system, some 18of 59 consortium negotiated agreements with the Peruvian Government forexploration in the Selva, and by 1976 had drilled a total of 45 wells andinvested about US$750 million in exploration activities. Petroperu andOccidental both found oil, but the only other discoveries were of smallnon-commercial oil accumulations, because of the heavy crude encounter-ed. An isolated discovery of dry gas at Aguaytia was made also by Mobilin 1961 in the central part of the Amazon zone. In the face of (i) theserelatively discouraging results; (ii) a US Internal Revenue Service rul-ing under which the income taxes paid by Petroperu to the Peruvian Gov-ernment on behalf of the contractor ceased to qualify for compensatingtax credit; and (iii) changes in the US tax code that motivated US com-panies to relinquish their contract areas in 1976 in order to be able towrite off exploration losses against US tax liabilities, 16 of the con-sortiums withdrew.

4.14 Because of the continued escalation in the cost of imported oiland the fact that Petroperu by then did not have adequate technical andfinancial resources to carry out: the required level of exploration in theAmazon area, after the collapse of the exploratory effort of the earlyseventies, the Government in 1977 initiated an active campaign to againattract private foreign companies. In the meantime, the Governmentcarried out a review of the contractual framework for petroleum explora-tion and production in view of the developments in the oil industry atthat time. Decree-Laws 22774 and 22775 which went into effect on Decem-ber 6, 1979, redefined the basis for contracts with private oil companiesand provided for: (i) flexibility for Petroperu in negotiating the pro-duction-sharing contracts to take into account the geological character-istics, exploration costs and presumed development costs, giving Petro-peru the option to participate in joint ventures with private oil firms;(ii) the carrying out by Petroperu of all secondary or tertiary recoveryprojects; and (iii) direct payments of income taxes to the PeruvianTreasury by the contractors, thus making US firms eligible for full taxcredit in the United States.

4.15 In 1980, additional incentives were devised to attract newinvestment by oil companies which was needed to maintain a satisfactorydegree of petroleum self-sufficiency. As part of this strategy, Petro-peru's role was confined to the relatively less risky exploration and

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development activities which did not involve special technology or largefinancial requirements. This new policy was embodied in Decree Law23231, issued on December 26, 1980, which has two major features:(i) execution of secondary recovery projects on a contract basis (as inthe case of Oxy-Bridas instead of by Petroperu exclusively); and (ii) in-troduction of a reinvestment tax credit scheme to attract new capitalinto exploration and development.

4.16 As a result of the new tax investment credit, the investmentclimate improved considerably. Exploration activities by companies al-ready operating in Peru increased between February 1981 and the secondsemester of 1982, a new contract was signed with Belco and explorationcontracts were signed with Hamilton, Shell, and Superior. However, atthe end of 1982, exploration efforts again slowed when negotiations withthree consortiums (led by Elf, Hispanoil and Union Texas) were suspend-ed. No specific reasons for the waning interest were given, but theworldwide decline in oil prices apparently has been the key factor ascompanies changed their investment plans. At present only two privatecontractors are producing oil in Peru, Occidental (in the northern Selva)and Belco (offshore from the oil producing areas of the northwest).

4.17 Peruvian exploration contract terms offer too little to pros-pective investors and are structured in such a way as to be particularlyunattractive to companies who would anticipate finding the relativelysmall, expense to develop fields that appear to be characteristic of thecretaceous age oilfields already found. According to the recentA.D. Little appraisal, the minimum field size that could be economical,assuming a 25% rate of return, is 10 million Bbl in the Selva. Since1981, there has been a change from a seller's to a buyer's market inexploration rights and Peru has not remained competitive. A company con-templating investing in exploration could expect to retain roughly 15% ofthe profits fron development of a high-cost field in Peru versus above17-20% in several other oil exporting countries with higher geologicpotential for hydrocarbons than Peru and 36-40% in a number of oil im-porting countries.

4.18 Substantial changes should be made to the existing legal andcontractual framework in order to attract foreign investment into explo-ration in Peru in significant amounts to reverse the declining trend inhydrocarbon reserves. Those changes should be aimed at providing incen-tives to explore and develop marginal fields, which are the most likelyto be found in Peru and to restore the competitiveness of its economicparameters in line with industry's expectations of reasonable rates ofreturn on risk investment. The existing taxation and accounting rulesshould also be reviewed to eliminate distortions because of the highdevaluation of the sol.

Production Prospects

4.19 Oil production projections developed by the mission and byPetroperu are shown in Table 4.4. Regional breakdowns of these proj-ections are shown in Annex IV.1. The mission's low case has been

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developed on the assumption thal: 41 million bbls. of new reserves will beadded each year for the next five years. Under this assumption, produc-tion would peak in 1985 and then decline steadily to about 140,000 BD by1990. The mission's high case is based on the assumption that it will bepossible to find an average of 82 million barrels/year. Petroperu'sforecast, as of late 1982, showed oil production almost doubling by1990. This projection assumed that several major discoveries would bemade and brought into production immediately. This forecast, while notimpossible, appears unlikely. The most recent projection, as of May1983, appears much more reasonable.

Table 4.4: Projections of Crude Oil Production, 1984-90(MBD)

Mission estimates Petroperu estimatesYear (Low) (High) (11/82) (5/83)

1984 195 195 230 2021985 195 200 238 1931986 186 205 266 1781987 181 211 299 1871988 173 214 334 1891989 157 219 353 1941990 140 192 378 218

Source: Annex IV.1

Refineries

4.20 Petroperu has six refi'neries with a total capacity of 187 MBD.Two of these -- the La Pampilla Refinery near Lima, with a capacity of100 MBD and the refinery at Talara, located on the northwest oil fieldsand near the terminus of the transandean pipeline, with a capacity of 65MBD -- account for about 92% of the total refining capacity in Peru. Theremaining four refineries are very small, ranging from 1.2 MBD to 10.5MBD in capacity.

4.21 With increased domestic prices and depressed economic growthexpected to hold the growth rate of internal demand for petroleum pro-ducts well below the 6.2% p.a. rate of the 1970s, existing refinery capa-city may be adequate for the rest of the decade. Table 4.5 compares theexpected production capacity with the projected structure and level ofdemand. It indicates that the supply of gasoline, diesel oil, keroseneand fuel oil will exceed requirements until the end of the decade, andthat the supply of jet fuel and LPG will be sufficient during the firsthalf of the decade, although they may need to be imported beginningaround 1987.

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Table 4.5: Petroleum Products: Capacity and Demand Balance(Ktoe)

Fuel Type Demand a/ Capacity b/ Demand c/1981 1985-90 1985 1990

Gasoline 1336 2013 1370 1583Diesel Oil 1372 2169 1387 1460Kerosene 827 1073 932 1147Jet Fuel 456 595 514 632Fuel Oil 1687 2488 1748 1910LPG 120 179 154 187

a/ MEM: Energy Balance 1981b/ Assuming that no other programs except those under

advanced planning and/or implementation are undertaken.c/ MEM and mission projection - Base Case

4.22 Energy conservation is a priority investment in the refineries.Energy consumption in the two major refineries is high because they werebuilt when energy was cheap and the main emphasis was on keeping capitalcosts low. With appropriate energy conservation measures, an estimated20-25% savings in energy could be achieved with a payback period for theinvestment involved of about one year. These measures might include:(i) using air preheaters, waste heat boilers, and efficient burners inthe furnace section; (ii) making modifications/additions to the heatexchanger system; (iii) reducing hydrocarbon losses (from the currentlevel of nearly 1.5% to 0.7%); and (iv) improving operational effi-ciency. An estimated 125,000 tons of hydrocarbons per year could besaved using these measures. At current fuel prices, this savings isworth about US$21 million per year, while the investment cost for achiev-ing that is US$20-25 million. Thus, the payback period for the invest-ment would be about one year. These options are being examined in detailunder a study 1/ expected to be completed in early 1984. Meanwhile,Petroperu is carrying out investments of about US$15 million at Talara toreduce fuel oil output and more closely adjust the product mix to de-mand. The company is also doing feasibility studies (giving particularattention to energy conservation) for a new fluid catalytic cracker atthe refinery complex at La Pampilla and a new refinery. However, due tothe recent decline on demand, these investments are not likely to beneeded before the end of the decade.

1/ Financed by the IBRD through a Petroleum Refineries EngineeringLoan, Loan No. 2117-PE, March, 1982.

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blatural Gas

4.23 Natural gas presently plays only a minor role in meeting Peru'senergy requirements (less than 2%). The development of natural gasreserves has not been given high priority in the past because known re-serves appeared to be too small and too remote to justify the cost ofdevelopment and infrastructure required to bring gas to major consumptioncenters. A recent natural gas discovery has raised the possibility ofusing gas in place of oil which could instead be exported and this hasgenerated renewed interest in ga.s.

Reserves

4.24 Natural gas reserves were estimated by Petroperu at the end ofDecember 1981 to be 1.2 TCF pr oven plus 0.7 TCF probable. Proven andprobable reserves together total 45 MTOE, (1% of commercial energy re-sources or 23% of the oil reserves). The geographic distribution ofthese reserves is summarized in Table 4.6.

Table 4.6: Natural Gas Reserves, End-1981(BCF)

Proven PlusArea Proven Probable Notes

Selva 507 928Central (Aguaytia) 443 862 Non-associatedNorthern 64 66 Associated

Costa (Northwest) 693 949Onshore 405 546 Predominantly associatedOffshore 238 403 Predominantly associated

Total 1200 1877

Source: Annex IV.2

4.25 The major known natural gas reserves are the Aguaytia field inthe central Selva, where proven and probable reserves are estimated byPetroperu at 443 BCF and 419 BCF, respectively, and the northwest coast,where Petroperu estimates proven and probable onshore associated gasreserves at 546 BCF, and offshore associated gas reserves at 403 BCF.

4.26 The non-associated gas reserves of Aguaytia were discovered in1959, but no development work has been undertaken since the 1960s, exceptfor a detailed seismic survey commissioned in 1974-75 by Petroperu. The

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cost of developing the field has been estimated 1/ at US$.85/MCF (about$5/barrel equivalent), but much more would have to be spent on a pipelineto carry the gas to the Lima market. There might also be a possibilityof discovering other structures in the area.

4.27 The offshore northwest fields are operated under productionsharing contracts with Belco Petroleum Corporation of Peru. Although themajor reserves are of associated gas in block Z-2A, Belco has discoverednon-associated gas in two wells in block Z-1A. The data on these twowells, which produced at about 5NNCFD and are separated by about 30 km,is not sufficient to accurately estimate the potential size of the non-associated gas reserves and production. The cost of delivering onshorean average of 45 MMCFD of gas has been estimated at about US$1.60MMBTU. 1/

4.28 The onshore northwest fields are operated by Petroperu, whereproven and probable reserves are mostly for associated gas (447 BCF),although some non-associated gas has also been discovered in ONO andfurther south in the Sechura desert.

4.29 The north Selva fields, even further from major potential con-sumption centers than Aguaytia or the northwest, are operated by Petro-peru and Occidental; known reserves there are too small (65 BCF) to beeconomically exploited for uses other than field consumption.

4.30 The gross production of natural gas is difficult to evaluate, asa significant portion of associated gas is either reinjected into the re-servoirs to maintain pressure or used for gas lift. Table 4.7 summarizesaverage net daily production in the last three years.

4.31 On the basis of the projection of oil production presented inTable 4.4, an illustrative forecast of future gas production in thenorthwest is shown in Table 4.8, based on a GOR (gas oil ratio) of 2,300cubic feet per barrel of oil produced.

Existing Demand

4.32 The only market where gas is presently consumed in activitiesother than oil operations is found in the northwest coastal'region. Thisunique and isolated gas market is a consequence of local necessity ratherthan any design to exploit the gas reserves. As incremental amounts ofgas were identified they were used for field or industrial consumption,and therefore these increments were recovered and supplied to the marketon a piecemeal basis; the system does not use a centralized pipelinetransportation system in the classical sense but rather is made up ofmany, large and small gathering and distribution lines.

1/ Assuming a 13% discount rate.

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Table 4.7: Natural Gas Production a/(MMUbJ)- -

1980 1981 October 1982

Northwest CoastPetroperu 45.0 44.7 52.0

Oxy-Bridas 21.0 22.5 7.0Belco 56.0 50.0 42.0

Subtotal 122.0 117.5 101.0

North SelvakPetroperu 1.9 1.4 2.1Occidental 14.2 14.0 14.0

Subtotal 16.1 15.4 16.1

Total Peru 138.1 132.9 117.1

(MTOE/year) (1.18) (1.13) (1.00)

a/ Net gas production, excluding gas produced and recycled toreservoirs, and gas lift operations in the field.

Source: Petroperu

Table 4.8: Natural Gas Production in Northwest Peru(billion cubic teetjyear)

1981 1985 1990Bank Petroperu bank Petroperu

Associated GasPetroperu 58.2 70.7 59.2Belco 50.0 56.7 53.7Subtotal TU.Z T2774 a/ 230.1 b/ lTl.9 314.4 b/

Non-associated GasPetroperu 9.3 21.9 21.9 24.7 24.7Belco 45.0 45.0Subtotal T.2 Z1.7 Zb9./

Total NW Peru: 117.5 149.3 252.0 182.6 384.1

a/ Based on an average of high and low estimates.F/ Based on high estimate.

Source: Petroperu and mission estimates - Annex IV.2

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4.33 In October 1982, consumption was about 72 MMCFD (production was101 MMCFD), of which 27 MMCFD was used for field production, 16 MMCFD inthe refinery and LPG plant, 19 MUGFD in the fertilizer plant, 4 MMCFD forelectricity generation in the Talara area, 1 MMCFD in the carbon blackplant, and 5 MMCFD for residential consumption in the Talara area (freefor Petroperu's workers).

4.34 If Petroperu undertakes a rationalization program of its currentnatural gas uses in the area, the demand in ONO could be reduced, makingavailable significant quantities of gas. It has been estimated that upto 26.5 MMCFD (equivalent to over 4 MBD) could be saved by eliminatingwastes and improving efficiency in Petroperu's producing field operations(possibly up to 15 2MMCFD), reducing flaring when feasible (Petroperu'sestimated 4.5 MMCFD), implementing an energy conservation program in therefinery (up to 2 MMCFD), and reducing residential consumption (up to 4.5MMCFD). In addition, 18 MMCFD (3 MBD) consumed in an apparently econo-mically marginal fertilizer plant might be made available for alternativeuses.

Potential New Demand

4.35 Developing new sources of gas or conserving gas that is current-ly wasted will of course only yield benefits if there is a market to beserved. The potential markets for natural gas in Peru are principallypower generation and industrial fuel substitution. For the northwestarea, the break-even cost for gas used in power generation (in gas tur-bines) has been estimated at about US$4/MMBTU 1/ when compared with 10-20MW diesel plants, and US$5/MMBTU when compared with small hydroelectricprojects. In industrial uses, the break-even cost would be US$5/MMBTUfor diesel substitution and US$4/MMBTU 1/ for fuel oil replacement.Increasing the use of natural gas as feedstock for fertilizer plants orpetrochemical industries could not be considered a priority before 1995,because the lack of a domestic market does not justify the constructionof world-scale facilities.

4.36 If sufficient reserves of natural gas can be proven to supportdelivery of the required quantities, potential industrial fuel substitu-tion and power demand along the coast from Talara to Lima would bringtotal demand to an estimated 171 MMCFD (29 MBD equivalent) in 1987, 200I4MCFD (34 MBD equivalent) in 1990, and 244 M4MCFD (41 MBD equivalent) in1995. This estimate includes the substitution of fuel oil, and dieseloil, when feasible, for industrial consumers along an hypothetic coastalpipeline route. The major industries are Petroperu (La Pampilla),Paramonga, Siderperu, and several cement plants, agricultural coopera-tives and fish processing companies. These industries are principallylocated in Piura, Chiclayo, Trujillo, Chimbote, Paramonga and Lima, plusthe cement plant in Atocongo (40 km south of Lima). The plans for expan-sion of these industries and for new industries have been taken into

1/ Based on a border price (fob export) of US$34/Bbl for diesel andUS$29/Bbl for fuel oil.

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account in constructing these estimates. Industrial demand in Cerro dePasco, La Oroya, and Tarma in t:he Sierra has been estimated at 16 MMCFDin 1987, 17 MMCFD in 1993, and 24 MUCFD in 1995; these could be suppliedby a pipeline from Aguaytia to Lima.

4.37 The estimated incremental demand for natural gas estimated forpower generation accounts for about one-third of these totals. Thesefigures are based on the assumption that the northern region from Tumbesto Piura would be interconnected but not tied to the country's centralgrid. The aging diesel generators now in service in the northern regionwould be shut down, with all demand being met by existing and new gasturbines. The Chiclayo area would not be connected to the country'scentral grid, but the diesel generators there would also be replaced bygas turbines. Hydro power would continue to supply most of the power forthe Central Peru system; natural gas would be used only as a marginalsource of fuel in this system. Table 4.9 shows the potential demandunder these hypotheses from 1987 to 1995.

Table 4.9: Potential Natural Gas Demand(Average flows, MMCFD)

1987 1990 1995Power Total Power Total Power Total

Tumbes-Talara-Piura 20.1 23.0 26.3 29.7 38.9 43.2Chiclayo 10.6 24.3 13.5 29.5 18.9 39.5Trujillo 1.8 22.8 1.8 26.6 - 29.4Chimbote 4.4 15.5 4.4 16.9 - 14.3Paramonga - 10.0 - 10.0 - 10.0Lima 16.7 75.2 16.7 87.1 18.1 107.9

Total Coast 53.6 170.8 62.7 199.8 75.9 244.3

Cerro de PascoLa Oroya-Tarma - 16.2 - 17.3 - 19.0

Source: Mission estimates

4.38 To obtain a preliminar;y assessment of the economics of bringingnatural gas to the major load centers, eight illustrative pipelineschemes have been analyzed. Table 4.10 summarizes the average transport-ation cost and the reserves required over the length of the pipeline fromZorritos (landfall adjacent to Belco's Z-1A Block area) or Aguaytia toAtocongo.

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Table 4.10: Alternative Natural Gas Pipeline Schemes

Pipeline AverageFarthest Required c/ Design Length Investment TransportationCity Reserves Throughput (km) Cost Cost

Supplied (BCF) (NMCFD) ($ million) ($/MMBTU)

From Zorritos (landfall adjacent to Belco offshore area)I Talara 110 17 120 17 0.60II Talara 210 35 120 20 0.35III Piura 280 65 240 49 0.55IV Chiclayo 550 116 460 118 0.73V Trujillo 700 148 660 175 0.85VI Atocongo 1660 300 1225 724 1.65

From Aguaytia (Central Selva)

VII Atocongo a/ 860 151 800 433 1.80VIII Atocongo b/ 700 125 700 299 1.46

a/ Centers supplied: La Oroya-Cerro de Pasco-Tarma-Lima-Atocongo.b/ Centers supplied: Lima-Atocongo.c/ Required reserves have been estimated by totalling the average

demand in the year 1987 through 1995, and maintaining the 1995demand thereafter; assuming a 20-year project life.

Note: The pipeline costs have been estimated excluding field gathering,treatment, and LPG separation. The different schemes are presentedfor illustrative purposes, as there are some doubts about theactual size of proven and probable reserves.

Source: Mission estimates

The major characteristics of each of these schemes are as follows:

Case I: The minimal project, this case assumes an averagedelivery of 15 MMCFD, all of which would be consumedin gas turbines installed to meet growth in powerdemand in the Talara area; the gas supply could meetthe demand as early as 1986, the first year where theproject could be operational. The average transpor-tation cost would be about US$0.60 per MMBtu.

Case II: Assumes that Belco's offshore field could deliver 30MMCFD. As in the previous case, a pipeline would bebuilt as far as Talara and the gas would be used tosatisfy electric energy needs, but the increase indemand would be progressive and the peak demand would

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only be reached in 1988. The average transmissioncost would be US$.35/MMBTU, a unit cost considerablylower than the preceeding one because of the largervolume of gas transported.

Case III: Assumes that Belco will prove sufficient reserves todeliver an average 45 MMCFD, the maximum deliverythat can be reasonably assumed under current know-ledge on reserve data. This would require that about280 BCF be proven. In this case, the pipeline isassumed to extend as far as Piura, raising theaverage cost to US$0.55/MMBtu.

Case IV: Would include the construction of a pipeline fromZorritos to Chiclayo, 460 km south, at an averagecost of US$0.73/MMBtu. To supply the average demandof 47 MCFD in 1987 and 83 MMCFD in 1995 and there-after, 550 BCF would have to be proven. Currentindications on the non-associated gas reserves makeit unlikely that such an amount could be proven inblock Z-1A alone.

Cases V and VI: These cases require greater amounts of proven re-serves and become increasingly hypothetical. Itshould be noted however, that a pipeline schemedesigned to supply the demand along the coast fromTalara to Lima would require an investment of aboutUS$724 million and would increase the average trans-portation cost to US$1.65/MMBTU.

Cases VII and VIII: The two transandean cases are based on the assumptionthat all the proven and probable reserves of theAguaytia field (862 BCF) could be developed to servethe Lima market and, potentially, the Central Sierraindustrial centers.

4.39 The economic comparison shows that the cost of transportation ata 13% discount rate would vary between US$.35/MMBTU for a small pipelinescheme designed to supply the power demand in the Talara area, toUS$1.80/MIBTU for a pipeline across the Andes serving the Lima market andthe industrial loads of Cerro de Pasco, La Oroya and Tarma. W4hile in-vestment costs would appear manageable for a small-scale pipeline extend-ing as far as Piura (US$49 million), or even Chiclayo (US$110 million),they increase sharply with distance and diameter to reach about US$724million for a 26" - 1200 km coastal pipeline to Lima.

4.40 The development of Peru's natural gas resources consider notonly resource availability and demand, but also the prevailing financialand institutional constraints. For the short term, investment in small-scale projects designed to take advantage of the resources in northwestPeru is recommended. For the medium to long term, however, the Govern-ment should consider the development of the gas resources of Petroperu's

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Aguaytia and ONO fields. In any case, a number of demand and supply un-certainties need to be resolved before any natural gas project proceedsto the detailed design stage.

4.41 On the supply side, the first step required is an evaluation ofthe potential reserves from Belco's Z-1A block. Data provided by the twofirst wells (para. 4.27) cannot confirm that sufficient reserves exist tomeet the minimum delivery requirements. The negative results of well CX-12 (January, 1983) confirm the need to be prudent in evaluating the sizeof the reserves. Petroperu should therefore wait for the test results ofthe wells to be drilled from the C-18X platform to formulate its ownopinion on the potential size of the reserves and the deliverability ofnatural gas.

4.42 Petroperu should also undertake a review of the existing naturalgas supply and consumption in ONO to determine the additional gas thatcould be made available for more economical uses. In particular, a fieldsurvey should be made to identify locations where natural gas is beingwasted in field operations and to analyze residential consumption, whichshould be controlled. A decision should also be taken on the economicsof continuing to operate the fertilizer plant. The depressed price ofurea would allow importation of this product at a price less than theoperating cost of the plant, unless natural gas is supplied at less than$2.45/MMBTU. This also implies that, on pure economic grounds, it wouldbe better to use the gas for power consumption which would bring a higherreturn. (This preliminary analysis will be superseded by a studyfinanced under World Bank Loan 2117-PE.)

4.43 On the demand side, the Government should undertake a detailedmarketing study for increased natural gas consumption in the Tumbes-Chiclayo area. The study should determine the optimum timing, locationand type of power facilities to be installed to satisfy electrical loadgrowth in the Tumbes to Piura areas and possibly as far south asChiclayo. The study should provide a basis upon which all interestedparties -- Government, the power companies, major industrial consumersand Petroperu -- could agree on a preliminary committment to use naturalgas at a given price. In view of the limited funds available toElectroperu, it may be preferable to create a regional utility withprivate capital participation to generate electricity in the Talara-Piuraarea. Electroperu and the major industrial consumers in the area,including Petroperu might be the major shareholders in such anenterprise.

4.44 Once Petroperu has sufficient assurances that: a) reserves arelarge enough to supply a project for 20 years, b) the gas from Belcofields will not displace gas which would otherwise be wasted and c) theGovernment and major consumers are willing to provide preliminary commit-ments to purchase gas-fueled electricity, Petroperu should negotiate withBelco a sales agreement for associated gas. Such agreement should beflexible enough to provide for various reserve and demand scenarios andcorresponding purchase prices for gas.

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4.45 Following this agreement, a detailed design study should beundertaken for the pipeline, and the power generation and transmissionfacilities and financing arrangements should be finalized. Constructionof the infrastructure should only be undertaken after the reserves havebeen certified by an independenl: consultant.

4.46 For the longer term, further investigations of the potentialreserves in the Central Selva area should also be undertaken as a poten-tial alternative for a supply to the Lima market. Given the size of theinvestment, the Government should consider including the private sectorin a joint venture with Petroperu to explore, develop and transportnatural gas. Petroperu should also determine the non-associated gaspotential in ONO and the Sechura desert, as it would be more economicalto produce onshore gas where inifrastructures exist than to produce off-shore gas. Finally, the creation of a subsidiary or an independent,state-owned company to handle the transportation and distribution ofnatural gas should be studied.

Institutional Aspects

4.47 The corporate structure of Petroperu was reorganized in early1983 following recommendations from an organizational study undertaken bythe consultants A.D. Little. 1/ The General Manager now oversees sevenmanagement areas: Exploration/Production, Industrial Production, Market-ing/Transportation, Corporate PLanning, Finance, Logistics/Administrationand Human Resources. The new organization has been designed to makemaximum use of the relatively few experienced staff available withinPetroperu who were previously divided between field and head office man-agement areas. The need to strengthen production activities has beenfully recognized in the new organization, as have been the development ofhuman resources and the improvement of logistics services.

4.48 Petroperu employees number about 9,000; about 1,400 work at theheadquarters in Lima, 4,200 in Talara, the major field office, and 900 inIquitos, the main base of operations in the Selva. Petroperu's seniorexecutives in general are competent and have extensive experience in thepetroleum industry. Middle management, however, is much less experiencedand has been weakened by the loss of technical and administrative staffover the past several years, due primarily to salary difficulties withinthe company. In 1980, the Government adopted a series of measures toimprove the salary structure of all the major public sector enterprises,including Petroperu. For example, these enterprises were freed fromsalary ceilings which had severely limited their ability to raise compen-sation to competitive levels, an action which allowed Petroperu toauthorize a series of salary increases accompanied by additional benefitsbeginning in March, 1980. The salaries of Petroperu professionals arenow comparable to those offered by private petroleum companies and, as aresult, the manpower drain has been almost eliminated. Petroperu still

1/ Funds were provided by [BRD Loan 1806-PE, Petroleum ProductionRehabilitation Project, July, 1980.

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needs to recruit experienced professionals for positions in field de-velopment and operations, but it has decided to recruit consultants tofill these positions on an interim basis.

4.49 It is important that recent efforts to enhance Petroperu's capa-city be continued and extended. The mission recommends three complemen-tary approaches: (i) using consultants when needed to get specificstudies and other tasks done in a timely fashion, even if Petroperu'sstaff could (eventually) do them, as well as to fill gaps in the com-pany's staff; (ii) recruiting and holding young technical and adminis-trative staff and giving them training through assignments working withconsultants, and (iii) rehiring former staff.

4.50 At the same time, it may be possible to increase Petroperu'sefficiency by limiting the range of demands made on it. Considerationshould be given to separating the heavy financial and administrativeburdens that Petroperu bears in its role as intermediary between theGovernment and foreign oil companies and in subsidizing domestic petro-leum consumption from its operations as an oil company in its own right.Under this concept, Petroperu would be treated in its exploration andproduction operations on the same basis as the foreign companies that arenow its contractors and as a service company in its refining operations,while the function of clearinghouse for taxes and subsidies would behandled by the Ministry directly. Adoption of such an arrangement wouldpermit a fair evaluation of Petroperu's performance and also help to putit on a sound financial footing.

4.51 Consideration should also be given to establishing subsidiary orseparate companies to handle some tasks now assigned to Petroperu. Man-agement of the Northern Peru Oil Pipeline might be handled through aspecialized subsidiary (as is the tanker fleet) or contracted with aprivate company to remove from Petroperu's management to need to organizeand undertake the repair work necessary (and necessarily a high priority)each time a landslide interrupts the line. Selling some industrialoperations to the private sector, if feasible, could also help to stream-line Petroperu's operations and make it easier for the company to concen-trate on its principal objectives.

4.52 Distribution and retailling of petroleum products is a part ofPetroperu's business that in large part could be handled efficiently bycompetitive private firms. The Peruvian market is sufficiently large tosupport a number of private distributors who, spurred by competition,could probably provide better service at lower cost. A subsidiary (asfor LPG distribution) or separate company could be established if need beto assure distribution in areas where this is unprofitable but consideredsocially desirable with, again, a benefit in terms of clarifyingPetroperu's accounts.

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V. ELECTRICITY

5.1 The most reliable estimates indicate that slightly over 40% ofthe population in Peru has electricity service. Table 5.1 shows thesituation in 1979. There is unsatisfied demand in the areas served bypublic service utilities, and some industrial and agriculturalenterprises located close to electric systems generate their own energybecause there is no alternate supply. Limitations imposed by the incomelevels of the 60% of the population not now served, the limited resourcesavailable for investment in this sector, and geographic isolation allobstruct a rapid extension of electricity service.

Table 5.1: Access to Electricity in Urban and Rural Areas1979

Peru Cities Towns Rural>20,000 inhab. <20,000 inhab. Areas

Population(thousands) 17,147 8,725 1,573 6,849

With Service(%) 40.5 68 63

With Access ButWithout Service

(%) 19.5 32 37

Without Access(%) 40.0 -- -- 100

Source: Ministry of Housing and Construction

Resource Base

5.2 Primary sources of energy which can be used for power productionare abundant in Peru. An important hydro potential is complemented bygeothermal resources, hydrocarbons, coal, and wood. The first country-wide survey of hydroelectric resources was conducted between 1977 and1979, which estimated a theoretical potential of 206,000 MW, 30% of whichhas since been identified as technically feasible. The richest watershedis that of the Amazon, comprisi.ng the eastern slope of the Andes and theSelva, with 85% of the total installable capacity. The Pacific watershedaccounts for 14% but offers interesting possibilities of high head devel-opments close to the markets. The remaining potential corresponds to the

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Lake Titicaca basin. Rainfall is relatively heavy but highly seasonaland variable from year to year and, unfortunately, correlated from onebasin to another. Coal could also be used for power generation. Naturalgas, if reserves prove sufficient, could fuel a regionally interconnectedpower system in the northwest. Geothermal sources seem promising in thesouthwest, and wood-based plants may be a viable option in the Selva.

5.3 The difficulties involved in linking plants based on these re-sources to the major markets, cities along the coast and mining centersin the Sierra, are in some cases formidable. Many of the distances in-volved are very long, and the construction and operation of transmissionsystems in Peru present complex problems. Altitudes exceeding 4,000meters raise the cost of transporting materials and of construction.Maintenance is hampered by lack of access in the case of the Sierra andby environmental pollution along the coast. These factors, plus thedifficulty of effectively guarding against acts of sabotage, reduce thereliability of the transmission system and suggest the need for anexhaustive study of the advisability of extending transmission lines,particularly where distances are great and loads low.

Sector Structure

5.4 The electric system in Peru is divided into five regions on adepartamental basis (See map IBRD 16094R) serving these regions are threemajor power systems (central-north, southwest, southeast) and numerousisolated generation stations, operated by public service utilities. Inaddition there is a significant amount of auto-generation.

5.5 The organization of the power sector in Peru has undergone sub-stantial changes in the last dozen years. In 1972, the Government issuedthe Normative Electricity Law which made the state the principal agent inthe sector. Electroperu was created as the state's executing agency bymerging four existing entities involved in different aspects of powergeneration and distribution. Power sector assets which previously hadbeen financed by customer contributions were declared property of thestate, thereby substantially increasing state ownership of electric util-ities. In addition, the Government acquired control of foreign-heldpower utility shares, and a policy of national electricity tariff equali-zation was adopted.

5.6 Under the 1982 General Electricity Law, not yet fully implement-ed, the structure of the electricity sector is to be decentralized.Electroperu will have overall responsibility for sector management anddevelopment, while electric service will be provided by regional andlocal utilities. Eight regional utilities are to be fonmed by expandingthe concession areas of existing utilities, or by forming a new utilityon the basis of the existing Electroperu operating unit. Four of theregional units have been established to date, and the process is expectedto be completed by 1985. Electroperu will retain responsibility forgeneration and transmission planning and for the construction of major

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hydroelectric projects. MEM may also grant concessions to autoproducersor independent companies to develop hydroelectric or geothermal resourcesas a complement to Electroperu's national power development plan. 1/ Theplanned Yuncan project entity will probably be the first example of thisapproach. The success of decentralization will depend to a large extenton the ability of the regional utilities to attract capable engineers andmanagers.

5.7 Eight public service utilities now operate in Peru. Six ofthese have defined service areas: metropolitan Lima and Callao;Arequipa; Ica 2/; Piura; Huancayo; and Chimbote. Electroperu isresponsible for public electricity service in the rest of the country andsupplies power to 482 localities; it also constructs and operates hydro-electric plants in various regions of the country. The eighth company,Jiidrandina, is basically a bulk supply utility selling power to otherutilities for distribution. Municipal authorities sell power to 223villages, and autoproducers provide service in 97 localities.

5.8 Electrolima is the largest of these companies, serving 56% oftotal consumers, all in metropolitan Lima; next follows Electroperu, with24% of total consumers distributed throughout the country. Autoproducersaccount for one-third of Peru's total installed capacity, led by the min-ing enterprises Southern Peru Copper Corporation and Centromin-Peru. Thehigh proportion of captive plant reflects the state of underdevelopmentand unreliability of public service outside metropolitan Lima. Thelargest autoproducer is CENTROMIN, a copper mining and smelting complexin the Sierra, located 150 km northeast of Lima; it operates 146 MW ofhydroelectric plants. Its system will be interconnected with the Center-North public service system in 1984.

Demand Growth

5.9 Total generation of e]lectricity in Peru grew by an average 5.9%per year during 1972-80, witl-i production by public service companiesgrowing at 8.1% p.a. while autopoducer generation grew at only 2.6%p.a. Growth during 1972-80 was highly variable, with a slight decline inproduction in 1975 and low growth (1.6%) in 1978. The present conditionof the Peruvian economy and its development will undoubtedly affect thegrowth of the electric market (it is expected that demand will actuallyhave dropped in 1983). However, several characteristics can be identi-fied for the next few years: 'i) The evolution of energy consumption inthe existing public-service electricity systems during the next five

1/ Extension of this concept to gas might also encourage the develop-ment of this resource.

2/ This is the compania de Servicios Electricos, S.A., the only one ofthe six whose name does not include that of the principal city inits respective service area.

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years (1982-87) will be limited by installed capacity and energy avail-ability. (ii) For Peru, the correlations of electricity demand withglobal economic indicators are erratic in the short term. For example, arecovery of. the mining sector following an improvement in world priceswould have little impact on public-service demand growth, because themining operations generate their own power. (iii) As the supply of ener-gy depends on successful investment in the electricity systems, if thepresent tariff problem is not corrected, it cannot expect overall growthrates during the rest of the 1980s to be greater than those experiencedin the 1970s. A 5.5% average annual growth in overall generation over1981-90 is optimistic.

Investment Choices

5.10 The sector has recently completed an updated Master Plan(November 1983). However, the projects included in this plan have notyet been financed. Electroperu, the entity in charge of planning sincemid-1982 (and MEM before it) for the power sector, has lacked clearinternal objectives and priorities needed to handle this responsi-bility. For the short term - 1983-87 - important decisions should betaken as soon as possible on how to supply the increased demand; theYuncan hydro project and/or a possible thermal plant are the majorprojects which require decisions without futher delays. 1/ For themedium-long term Electroperu needs to establish a strong planning groupwith enough staff and authority to effectively guide the planning insector. The following paragraphs discuss investment choices in thedifferent electricity regions in the country.

Central North System

5.11 The Central North interconnected system serves the metropolitanarea of Lima and extends from Marcona in the south to Trujillo in thenorth. Interconnected installed capacity (i.e. excluding isolated plantsin the region) was 1,792 MW in 1981, or 55% of the national total, ofwhich 264 MW was thermal plants (mainly gas turbines for peak service)and the remaining 1,528 MW in the form of hydroelectric plants character-ized by a highly seasonal stream flow and a relatively modest storagecapacity. Together with constraints on the capacity of the transmissionsystem this means that, in practice, the system operates with a verysmall reserve (10%) in spite of the fact that installed capacity substan-tially exceeds maximum demand. The location of the main generating andtransmission facilities of the Central North interconnected system isdepicted in Map IBRD 16094R. Table 5.2 shows interconnected installedand firm capacities, maximum demand, and reserve margin. During 1981-82,hydro supplied most of the generation required in the system; in Novem-

1/ The decision to construct Yuncan has already been taken.

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ber, 1982, two gas turbines were installed in Lima (Santa Rosa - 110 MW)as a system back up.

Table 5.2: Central-Nort'h Interconnected System Capacityand Generation Balances

Hydro Stations Installed Firm a/ Average (GWh/year)by River Basin Capacity Capacity Generation

Mantaro 798 448 3526Rimac 540 454 1719Pativilca 40 26 257Santa 150 91 1184(Subtotal Hydro) 1528 1019 7696

Thermal Stations 264 230 330 b/Total 1792 1 24T 8026

Maximum Demand 1136Reserve 113

a/ Firm capacity is normally defined as that which can be suppliedunder the most adverse hydrologic conditions. The firm capacity ofthe Mantaro plant is, however, limited by that of the transmissionline linking it to the gri(d.

b/ 3000 hr/year.

Source: Electroperu

5.12 Landslides and poor planning played key roles in the creation ofthe Central-North system and are also at the root of some of the majorproblems facing it today. The biggest plant in the system, Mantaro, wasoriginally built in anticipation of industrial development in the Junin-Huancavelica region, where the Mantaro power station is located. Whenthis failed to develop, the decision was made to transmit Mantaro's ener-gy to the coast. Then, a landslide in the Canon del Pato put the powerstation of that name out of service; this led to an extension of thetransmission system northward as far as the city of Chimbote, some 400 kmfrom Lima. The limitations inherent in a line as long as the one thatlinks Lima with Chimbote (dynamic stability, transitory stability, andreactive compensation) restrict its capacity to 50 MW, which results in alow utilization of investment.

5.13 More recently, landslides threatened to put the Mantaro plantout of service. Recent episodes of sabotage of the Mantaro-Lima trans-mission lines, have caused short-term outage in the system and shown itshigh dependence on Mantaro. A slowdown in investment programs as a con-sequence of Electroperu's and the Government's financial situation hasonly complicated the problems involved in trying simultaneously to cope

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with these immediate problems and to undertake the projects needed tomeet demand growth over the medium and long run.

5.14 For the short term, the timely completion of projects underconstruction (Table 5.3) will increase the actual available capacity inthe Central North system by 529 MW during the 1982-87 period. If demandgrows as expected, the margin of reserve will be 20% on average duringthose years, and a reasonable improvement in the quality of service canbe achieved. (Annex V.1.)

Table 5.3: Additions to Capacity, Central-North System, 1982-86

Installed Firm Average FirmProject capacity capacity energy energy

Year under execution MW tMW GWh/yr GWh/yr

1982 Santa Rosa Gas Turbines (2) 110 110 330 3301984 Mantucana-2nd

underground pondage - 30 - -1984 Mantaro-Transmission a/ 228 177 1590 11131985 Restitucion 217 197 1657 11601986 Yuracmayo - 15 88 62

Total 555 529 3365 2665

a/ Additional capacity/energy available.

Source: Electroperu

Tablachaca Reservoir

5.15 The security of the Tablachaca Reservoir has been a criticalproblem for the Central-North System. The flow of the Mantaro River iscontrolled by an 80 m high dam which creates a reservoir with a submerg-ing intake to a 20-km tunnel leading to the Mantaro power plant and,further downstream, the site of the planned Restitucion power stations.The possibility of slides on the right-bank slope near the dam was recog-nized when the project was designed. Since its commissioning in October1973, superficial movements were verified, and between 1979 and 1981,evidence of probable deep slippage was detected. An acceleration of theslippage to a rate of 14cm/month in the most active zone was observed,and at the beginning of 1982 it became apparent that there was a high andimminent risk that 3 million m3 would slide into the reservoir whosecapacity is 7.7 million m3. Such a slide would obstruct the intake worksand put the Mantaro power plant out of service. The loss of 45% of itsavailable capacity would, to say the least, severely disrupt the opera-tion of the entire central north power system. Starting in March 1982,when the dam was declared to be in an emergency situation, consolidation

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works were studied. Immediately iollowing, the necessary infrastructure,surface treatment for storm drainage, deep anchoring to hold in placevolumes presenting slippage risk, underground drainage works by means ofdrainage tunnels and special dri]Lling works, and a support abutment atthe foot of the slope were constructed. It is expected that the conso-lidation works already completed will reduce the risk to an acceptablelevel, although permanent monitoring of the slopes continues and is anecessity.

5.16 Taking into account existing uncertainties (hydraulic con-straints, time delays during construction of major projects, growth ofdemand), a detailed simulation study of the system's monthly operationshould be carried out for the Central North system. The study shouldcover the 1983-88 period and show whether additional thermal capacity(given the short term horizon), is needed and when it should come onstream. Adding steam boilers and turbines to the Santa Rosa station touse the exhaust heat of the gas turbines in a combined cycle might add40-50 MW and improve the efficiency of the whole thermal system.

5.17 For the medium and long term, priority should be given to har-nessing the water resources of the basins of the Rimac, Pativilca andSanta rivers, making better use of the existing installations and build-ing new generation sources by means of medium-sized plants (100-200 MWinstalled capacity), with construction periods not exceeding four or fiveyears. If such projects are delayed or if further investigation of sys-tem operations prove the need, engineering studies should be ready toallow construction of a steam thermal plant equipped to burn domesticcoal or fueloil on the basis of 50-100 MW units. Recently, the 70 MWJicamarca project for the lower Rimac area has also been approved at thepre-feasibility level and the feasibility study is now being carried outwith IBRD support. Two important: projects for the medium term; Yuncanand Mayush are described briefly below. Major projects under consider-ation for the longer term are discussed in Annex V.2.

Yuncan Hydroelectric Project

5.18 The proposed project constitutes the second phase development ofthe hydroelectric potential of the Paucartambo river basin in the Cerrode Pasco area, which includes more than 60% of total production of non-ferrous minerals in Peru. While it would be interconnected with theCentral-North system, most of its output would be consumed locally by theCentromin complex with only minor exchanges of power with the publicservice grid. The Central-North power expansion program for 1983-1990 asrevised by Electroperu at the beginning of 1983 indicates that the Yuncanproject remains attractive economically under all possible alternativesanalysed to meet, at least cost, the increased system demand up to 1990.With an installed capacity of 126 MW, estimated average generation wouldbe 900 GWh a year. Owing to the daily control effect of Yuncan on Yapuithe latter plant will increase its effective annual energy by 180 GWh andits maximum output by 25 MW. The effective power and energy attributableto the project would thus be 151 MW and 1080 GWh/yr respectively. Theestimated base cost of the project excluding contingencies, escalation,

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and financial charges, is US$390 million, or $2582/kw, including theadditional 25 MW at Yapui. The cost per kWh computed at an 12% discountrate would be about $0.06. 1/ While not inexpensive, a study prepared byconsultants to Centromin indicates that Yuncan is a lower cost alterna-tive than an equivalent thermal power plant either burning domestic fueloil or coal up to discount rates ranging between 14% and 21%. This pro-ject is expected to be commissioned in the second semester of 1989 if themain civil works start late in 1984. This project should be acceleratedas much as possible to reduce consumption of fuel-oil in new thermalpower plants. A conservative estimate indicates that the annual savingsin fuel-oil which could be expected ranges between US$56 million andUS$60 million at current oil prices.

Mayush Project

5.19 The harnessing of a 450m head is under study upstream of theCahua power station, some 180km north of Lima in the basin of thePativilca River. Hidrandina has contracted a consortium of foreign andlocal consulting engineers to review the schemes analyzed previously,amplify the field work and prepare a feasibility study which was onlycompleted in late 1983. The final project and bidding specificationswill be ready in another 8 months. Construction time for the works willdepend on the drilling of the 15 km conduction tunnel. By choosing asuitable alignment, this tunnel can be attacked on four fronts simultane-ously, which would reduce the length of each section to 4km or less. Anunderground power station would also be installed, with a capacity of 130MW and an average annual production of 930 GWh. Assuming that the worksstart in mid-1984 and construction take 4 years, this power station couldbe added to the Central North System by 1988.

Southwest System

5.20 There are now two separate systems in the southwest, although aproject to interconnect them is underway. The first supplies electricityto the city of Arequipa and its vicinity. The Arequipa market experi-enced a growth in electric energy consumption of 10% p.a. during1976/81. The public service company has a total installed capacity of70 MW, 30.2 MW of which comes from five small, run of-the-river hydro-electric stations on the Chili River, and the rest from thermal capacitylocated in the Chilina power station near Arequipa. Streamflow vari-ability limits available capacity to about 30 MW, while in 1980, thesystem's maximum demand was about 39 MW. The deficit brought on ration-ing from April 1980 to February 1981. This problem was resolved in early1981 when a 17 MW gas turbine was brought on line. The exhaust gases ofthe turbine are being used to produce steam in a boiler tube added to the

1/ Based on an estimate of investment cost forward to the commissioningdata, which will depend on the time profile of the expenditures, of$500 million and including 1% p.a. for operation and maintenance.

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Chilina steam thermal station ito form a combined cycle plant. TheArequipa system is being interconnected with that of Tacna, which isbased on the Aricota hydro power station (35 MW), and the thermalstations of Southern Peru Copper Corporation.

5.21 The current expansion program for the southwest system includesthe addition of 10 MW of diesel capacity in Chilina and the constructionof the Charcani V hydroelectricity station which began in 1980 to meetthe growth of demand expected in the Southwest interconnected system.This project, upstream of Charcani I, II, and III (there is no CharcaniIV) draws water from the Chili River at 3760 m above sea level through a9.8-km tunnel to the Charcani Grande area, where the power station isbeing built underground. The net: head is 680 m, with an installed capa-city of 135 MW in three units. This project, expected to be completed in1985, originally cost US$160 million. A subsequent analysis raised thebudget to US$600 million, 50% of which had been invested by the end of1982. This yields a rather high unit cost of about $4,000 KW and $0.13per KWh. 1/ As the project is now well advanced, the only thing that canbe done is to complete it.

5.22 A wide range of other projects need to be considered in theregion. The area's geothermal potential should be investigated with aview to harnessing it for generating electricity. Improving the utiliza-tion of the existing hydroelectric plants by means of regulating works inthe basin of the Chili River is another possibility. From the standpointof the electricity sector, the viability of the Lluta I (210 MW) has beenestablished, according to the updated feasibility study. The Ministryrecently has requested Bank finance for the engineering studies of thisproject. Moreover, the Molloco (300 MW) hydroelectric project should beinvestigated and, if proven economical, it could be built and equipped instages.

Southeast System

5.23 The southeast system serves the city of Cuzco and the townshipsof Urubamba and Calca. Its principal source of power is the Machu Picchuhydroelectric station, with a capacity of 40 MW, located about 90 kmnorthwest of Cuzco. There is also a very small amount of steam-poweredthermal capacity (13.1 MW) in the city of Cuzco, which was its source ofsupply before interconnection with Machu Picchu. The present maximumdemand of this system is estimated at 30 MW.

5.24 Both the Cuzco and the Puno areas have adequate water resources,the study and harnessing of which should be fostered. The Quishuarani(30 MW) power station may be able to supply these markets.

1/ Serious doubts exist about the project; irrigation and technicalconstraints related to Charcani I, II and III would reduce installedcapacity even more.

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Isolated Systems

5.25 The rest of the country is served mainly by isolated thermalplants. The greatest demand comes from the departments of Lambayeque,Piura and Tumbes in the extreme northwest of the country. More than 600of these plants generating a total 1164 MW are associated with industrialuses, although many of these sell energy to their workers and to neigh-boring townships as well. Mining operations and sugar mills account forthe greater part of such sales. A significant fraction of the generatingplant operated by Electroperu and Municipalities is out of service be-cause funds for spare parts and maintenance are lacking. In accordancewith the General Electricity law, management of the isolated systemsoperated by Electroperu should be decentralized and their sales revenuesused to finance the rehabilitation and regular maintenance of thesesystems. The installed capacity, number of power stations operated byautoproducers, and distribution by economic sectors for 1980 is shown inTable 5.4. With the exception of the bagasse used as fuel in sugarmills, thermal capacity installed by autoproducers consumes petroleumproducts.

Table 5.4: Autoproducers(1980 figures)

Sector Installed Capacity Number of power stations(MW) (%)

Mining and Oil 772 66.4 137Industry 173 14.9 218Sugar & Fishing 203 17.4 114Others 16 1.3 130

Total 1164 100.0 599

Source: Electroperu

Northwest

5.26 Isolated electric systems have been developed in the departmentof Tumbes, Piura and Lambayeque, based on thermal generation using dieselsets and gas turbines. Although until now the scale of demand and thedistances between these power stations have not justified their intercon-nection, the projected evolution of the markets points to the possibilityof creating a regional system. Local generation at Tumbes and Piura iscostly because of the problems posed by the operation and maintenance of40 units of diverse origins, capacities and ages.

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5.27 To supply the departments of Lambayeque and Cajamarca, Electro-peru is constructing the Carhuaquero hydroelectric power station on theChancay River. Installed capacity of 75 MW was determined following afeasibility study carried out in 1978. Subsequent studies of the secondstage of the Tinajones irrigation project suggest, however, that thedesign of this project should be reviewed. The growth of demand foreseenfor the local systems led to a decision to expand the thermal capacityfor the cities of Chiclayo and Piura. In Chiclayo, Electroperu built anew thermal plant west of the city, where two new diesel generator setsof 5 MW will be installed. In Piura, the local utility installed a 7.6-MW low-speed diesel set in June 1982 to reduce the serious shortfall.The work program prepared by bEM in 1981 provided for the construction ofa 177km high-tension line (220 kV) which would link Trujillo withChiclayo as the first stage of interconnection to Piura and Talara. Thehydroelectric projects of Poechos, Curumuy and Culqui were rejectedbecause of their high cost.

5.28 To take advantage of the natural gas in the Talara area, (ifsupplies of natural gas are confirmed), and Tumbes and Piura could beintegrated in a first stage by means of 138 kV transmission lines. Onealternative would be to expand the installed capacity at Malacas to some140 MW by 1988, consisting of gas turbines with unit capacities of 18-35MW, and subsequently expanding the installed capacity at Piura beginningin 1990, assuming that a gas pipeline carrying the natural gas fromTalara to the south has been built by that time. A new power stationequiped with two 35-MW gas tur'bines would be created and a third unit ofthe same capacity would be installed by 1995. Other expansion programsare of course possible and should be carefully considered. If freshwater is available, the option of a system of combined-cycle generationwould have to be considered.

5.29 Any gas-based scheme of course depends on the quantification ofthe natural gas reserves and the economic convenience of producing andtransporting the gas. The price that the electricity sector can pay forthe natural gas it consumes for thermal generation could not be higher,for the same calorific power, than the international cost FOB Talara ofthe residual fuel oil it replaces. If natural gas were not available, analternative to the proposed gas turbines would be to study theinstallation of slow diesel sets which consume fuel oil.

Program of Provincial, District and Rural Electrification

5.30 To alleviate the probLem of supplying electricity to the 60% ofthe country's population that lacks service (representing some 2,000villages and hamlets), Electroperu and MEM have defined a work program tocreate 220 small electricity generation, transmission and distributionsystems. The project has received technical and financial support from anumber of foreign governments; it is also supposed to obtain half of theproceeds from the levy created by Decree-Law 163 which imposes a 20%surcharge on users who exceed 150 kWh a month. The estimated total costof this program for the next five years is about US$200 million, of whichUS$25 million was invested during 1982.

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Small Hydro

5.31 Studies commissioned by NEM in 1979 identified 1,138 rural cen-ters with populations between 500-10,000 and hydroelectric possibilitiesof about 50-200 KW. About half of these centers currently have no accessto electricity. Fifty centers covering 94 communities were selected forfurther study, on the basis of possible diesel plant substitution, com-pletion of previously initiated projects, new projects, or economicneeds. On the basis of this study, a small hydro development program for1980-85 comprising 50 projects was published in July, 1980.

5.32 A more coordinated planning approach would be to unify the pri-orities for rural electrification projects, whether they be hydro, dieselor interconnection. Recent progress in this direction is encouraging.In 1982, rural electrification activities within Electroperu were consol-idated under a single department called Gerencia de ElectrificacionProvincial, Distrital y Rural, with two separate divisions handling ther-mal generation and hydro generation. The priorities in managing thisprogram now appear to be: (i) Coordinated planning approach. Separatemethods are being used to establish priorities among small hydro plantsand interconnection projects. Efforts to build small hydro plants, in-stall diesel sets, and interconnect rural communities with existing sys-tems appear to be treated as separate programs instead of integratedunits of a comprehensive rural electrification plan. (ii) Data Require-ments. Data on rural energy demand is lacking, so there is no firm basisfor plannino rural electrification programs. The MEM, in coordinationwith Electroperu, should pursue more vigorously its efforts to carry outa research program on demand for all types of energy in rural areas andcurrent sources of supply. A more solid data base is needed to determinethe feasibility of expanding the role of electricity in meeting ruralenergy needs. (iii) Promotional Programs for Electricity Use. Greaterattention should be given to the development goal of increasing ruralproductivity through rural electrification, rather than just providinglighting. Special efforts are needed to link rural electrification proj-ects with promotional programs for small industrial and agricultural usesof electricity - some of which could be identified through existing ruraldevelopment projects. (iv) Domestic turbine industry. There appears tobe potential for developing a national industry for producing small hydroturbines. Developing or redeveloping national capacity for manufacturingturbines may be a useful approach to reducing the costs of small hydroprojects. (v) Standardization. To reduce cost and facilitate the main-tenance of small hydro projects, technical designs, construction typesand materials should be standardized. (vi) Local Management. Local con-trol and responsibilty for operation and maintenance of small, isolatedsystems may be less costly and improve reliability relative to operationby Electroperu or one of the regional utilities.

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VI. COAL AND OTHER ENERGY SOURCES

Coal

Resources

6.1 Coal bearing formations in Peru are distributed widely through-out the mountains, but not all of them contain mineable coal. Geologicalinformation on all but a few, intensively mined areas is at the recon-naissance stage and has scarcely been improved in fifty years. As aresult, there is much uncertainty about the actual quantity of reservesand estimates vary widely, although several sources have suggested re-serves to be about 1 billion tons. How much of this is actually recover-able by mining is an open question, as detailed studies are lacking. Thetectonic complications of the deposits are likely to limit the effectivedepth of mining to 400 meters below the surface, or less, and many coalbearing areas are so inaccessible that their exploitation is unlikely.Table 6.1 presents an estimate of mineable coal reserves in Peru.

Table 6.1: Mineable Coal Reserves(millon metric tons)

Area Reserves Coal Type Calorific Value(kcal/kg)

Oyon 42 Semi-bituminous, 7000-7600weakly coking

Gazuna 25 proven Semi-anthracite 7000-7600& probable

Ancash (Santa) 250 inferred Anthracite 5000-7500Tarica-Sihuas 80 inferred Anthracite 6000-7300Conchucos 80 inferred Anthracite 6000-7300San Marcos-Huallanca 50 inferred Anthracite Not statedAlto Chicama 329 inferred Meta-anthracite 7000-7500

59 proven & & anthracite 7000-7500probable

Jatunhuasi 60 inferred Sub-bituminous & 6000-7000bituminous highvolatile, weaklycoking

Cajamarca:Yanacancha 25 inferred Bituminous 7000Pinipata 50 inferred Anthracite 6400-7600Cupisnique 24 inferred Anthracite 6000-7500

Yoquegua 3 inferred Sub-bituminous Not stated& anthracite

Total 997Inferred 871Proven 126

Source: "Economia del Carbon y Coque INCITEMI 1977.

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6.2 The mineable reserves appear substantial, even considering thatmany of the quoted reserve figures are "inferred", presumably fromsurface geological evidence, rather than proved by drilling. While someof the coal is sufficiently cokable to be used in a mixture with importedcoking coals, the bulk of it is steam coal. The properties of coal fromvarious areas are shown in Table 6.2.

Table 6.2: Analyses of Coals

Pampahuay Lord Victoria Jatunhuasi YanacanchaMine (Oyon) (Ancash) (Alto Chicama) (Huancayo) (Cajamarca)

Moisture % 6 3 - 6 4 - 6 5 - 6 8-12Volatiles % 16 -22 4 - 6 2.5- 4.0 34 -37 28-30Ash % 6 -12 8 -20 6 -10 9 -16 8-12Fixed carbon % 65 -75 65 -75 80 -85 40 -55 45-55Sulphur % 0.5- 1 0.4- 1.0 0.5- 3 0.6- 2.5 1- 2Calorific value(kCal/kg) 7000-7600 5000-7500 7000-7500 6000-7000 7000Type of coal Bituminous Anthracite Anthracite Bituminous Bituminous

Source: "Economia del Carbon y Coque", INCITEMI, 1977

6.3 In addition to these coal deposits, lignite is known to exist inthe region of Tumbes, in the far northwest of the country, and in thenorthern part of the Selva region where it has been found in oil explora-tion wells. The Tumbes lignites are very thin at outcrop; four bedsvarying in thickness from 0.2 to 1 meter have been observed. Consider-ably greater thicknesses have been noted at greater depth in wells drill-ed for oil. The calorific value of this lignite is reported to be 2,700to 4,300 kCal/kg 1/ with a relatively high sulphur content of four tofive percent. No systematic study appears to have been made of thisdeposit, which would be of interest only if a sufficient thickness werefound at a depth suitable for open-cast mining.

6.4 Until the end of World War II, Peru had a prosperous coal miningindustry. However, since then production has declined steadily. Between1950 and 1975, annual production fell from nearly 133 KTOE(200,000tonnes) to 16 KTOE(24,000 tonnes); exports of anthracite coal fell from40 KTOE(60,000 tonnes) to zero. Production began to pick up after 1975,growing to 37 KTOE in 1980 and 71 KTOE in 1981. Similarly, imports ofcoking coals for metallurgy and siderurgy have declined substantiallysince 1975. Table 6.3 shows the evolution of coal production and importssince 1970.

1/ "Economia del Carbon y Coque", INCITEMI, 1977.

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Table 6.3: Coal Production(Ktoe)

Year Production Imports Demand

1970 42 6 481975 16 33 491980 37 24 611981 71 22 93

Source: MEM - Energy Balances

6.5 Coal deposits in Peru are considerably younger in geologicalterms than the major coal beds in most other countries, its depositsbeing of the Upper Jurassic and Lower Cretaceous periods. IHowever, thecoal beds have been caught up in the Andean mountain building movementand subjected to intense compressive stress, so that they are, for themost part, vertical or steeply inclined, broken up by both major andminor faulting, and severely crushed. In places they have been invadedby molten igneous rocks, a process which has expelled many of the vola-tile components, leaving most: of the coals anthracitic or subituminous,and with low volatility. Where metamorphism of the coals has not beentoo extreme, many have weak coking properties and could be used to makemetallurgical coke if blended with higher grade, imported material.

6.6 Another effect of the geological stresses is a break up of thecoals during mining; in some. cases 80% of the production is fines anddust. The coal beds frequently occur in "packets" in which several in-dividual coal beds with thicknesses of 0.5 to 2 meters are separated bybeds of barren material of similar thickness. However, in addition tothe normal variations in the thickness of coal beds resulting from stra-tigraphic variations, the intense tectonic compression to which thesebeds have been subjected has caused the coal to flow, and wide variationsin thickness of individual seams are found to occur over short dis-tances. These variations in thickness, combined with geologic faultsaffecting the coal seams, will affect the efficiency and productivity ofmining operations.

6.7 The nature of coal deposits in Peru is not suited to the large,highly mechanized mines typically envisaged by the large state corpora-tions and their foreign consultants. For example, Electroperu had in-tended to set up a 300 MW thermal generating plant north of Lima, underthe assumption that Mineroperu would provide it with 1.25 million tonsper year of anthracite from a mine in the Alto Chicama area. As there isnot enough water near the mine to supply the power station, it was thenproposed to construct the pourer station on the coast at Puerto Chicama,and transport the coal from the mine to the coast by means of a cablewayand a new railroad. However, to be economically viable, it appears that

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the transport system would have to carry more coal than the mine cansupply -- three million tons per year, so the project was put on stand-by. 1/

6.8 Another large project sponsored by the Government is the miningof coking coal at the Pampahuay Mine in the Oyon area. This project wasinitiated in 1971 by Minero Peru to substitute coke and coking coal forimports used in the metallurgical industry. Initially, based on studiesby the Polish group KOPEX, the project was transferred in 1975 to SiderPeru. In that year (1975), imports from the United States were 5,500tons of clean coking coal, and 190,000 tons of coke from Japan; it washoped that one third of the imports could be replaced with coals from theParupahuay mine for mixing with better quality imported coking coal.Again, reserves from just one mine were insufficient, and the requiredquantities probably would have been obtained from a number of small,privately operated mines.

6.9 All the coal mining areas occur at elevations of 1500-4000meters, mostly in rugged mountainous terrain, so that accessibility hasbeen a prime factor in deciding which deposits should be exploited. TheSanta mining area, located 120 km from the port of Chimbote, was Peru'sprincipal coal mining area between 1870 to 1960, in part because it had arail link to the coast. Unfortunately, the railway was destroyed in the1970 earthquake and subsequently scrapped. Physical access to the miningareas will be of prime importance in any plan to develop coal mining inPeru.

Development Strategy

6.10 A number of small private mines operating in the Alto Chicamaarea carry coal out by truck to Trujillo for sale at US$36-40 a ton. Alarge power plant at Puerto Chicama could probably be adequately suppliedby 20 or 30 such mines in closer areas such as Cupisnique and Banos Chimuwhere there are coal deposits and old mines which could probably supplythe coal at lower cost and with greater security of supply than if itdepended on one or two large mines. Timing would not be a problem, asthe construction time for such a mine is about one year, while a coal-fired power station would take years to construct. The first thermalplant probably should have dual firing facilities for fuel oil and coal;when the coal industry built up and coal supplies became more stable, allplant operations could be shifted to coal.

6.11 Small mines of this type do not need drilling programs to provereserves, and water and gas are not problems in most cases because themines are opened above the local water table at outcrop (except at

1/ The estimated project cost was US$1.04 billion; $580 million for thepower station, $257 million for the mine, $136 million for thetransport system and $66 in other infrastructure. A much lower costestimate has since been made, based on a different mining tech-nology, by Charbonnages de France.

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Jatunhuasi), and the anthracitic coal has little gas. The coal producedthere would not be washed and therefore might contain 15%-20% ash.

6.12 Economic Considerations The feasibility of obtaining adequatesupplies from these small coal mines was discussed with representativesof the coal industry. They unanimously agreed that this could be done,if a firm market was established and credit made available to the mine-owners. Further investment by the state in improving access to the coalmining areas would also be helpful. According to the Asociacion de Pro-ductores de Carbon de Peru, the capital investment required for a 100ton/day mine probably would be about $20/ton/year, or $700,000. Thetotal delivered cost of coal in Lima or elsewhere along the coast wouldbe on the order of US$50/tonne, as shown below.

US $ per tonne

Coal mine operating cost 10Interest, mining rights & royalty, taxes, misc. 10Depreciation and dividends 10Transport of coal to market 20

Delivered cost 50

Coal Markets

6.13 The most important consumers of coal today are the steel indus-try (75,000 tons in 1981), and small smelters and brickworks around Limaand Trujillo (64,000 tons in 1981). However, the potential market forcoal is much larger if one considers the future needs of consumers thatnow use petroleum products, such as thermal power plants, cement works,metal smelting, and small industry and households

6.14 Coal Briquettes In household uses, coal could substitute forkerosene and wood as a cooking fuel. Much of the poorer urban populationuses kerosene for cooking, while poorer rural areas rely principally onwood. The price of kerosene is heavily subsidized and demand is increas-ing; while deforestation is widespread in rural areas. Some of theseproblems could be alleviated by providing smokeless coal briquettes as asubstitute. The manufacturer could be a local cottage industry in theneighborhood of the mines, where the dust and fines could be used, orlarger industrial-scale enterprises as demand develops. A suitablebinder for the coal would have to be determined, as well as the shape andsize of a standard briquette, for which molds could be made and specialstoves designed. A demonstrat:ion program for the coal stoves would thenbe needed, possibly funded from international technical assistancesources for a demonstration program backed with Government-sponsored pub-licity and a phased increase in the price of kerosene. Once the feasibi-lity and utility of a coal briquetting program was demonstrated, theprocess of manufacturing briquette molds and stoves should be within thecapability of the local industry and involve no foreign exchange cost.

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Institutional Aspects

6.15 A step toward reorganization of the coal sector was made in June1981 with the establishment of the state-owned Empresa Promotora delCarbon S.A. (Procarbon) under the management of four large state corpora-tions: Mineroperus Cofide, Centromin, and Electroperu. So far, the com-pany has been given wide terms of reference to promote renewal of thecoal industry but very little in the way of funds, equipment, or tech-nical staff. It is clear that Procarbon will not be capable of promotingdevelopmaent of the coal industry in Peru unless it is given a sufficientbudget allocation to contract qualified staff and obtain the necessaryequipment. These large state corporations have established claims toknown reserves of coal without actually making plans to develop them.The smaller mining companies in operation seem to be working either smalldeposits, or small individual claims within larger deposits surrounded bythose of the state corporations -- a situation which would effectivelyprevent their expansion if this became economically possible. Organizingthe coal industry in a manner consistent with the natue of the depositsand the scale and sophistication of the mining techniques best suited totheir development should be a high priority in the energy sector, giventhe possible long-term contribution of coal development to the country.

6.16 Constraints Efforts to organize and develop the coal industrywill have to cope with a series of limitations: (i) lack of suitablecoal burning equipment for household and industry use, and lack of ex-pertise to install and operate it; (ii) inappropriate nature of large-scale, mechanized mining for prevalent geological conditions; (iii) in-ability of small and medium-sized mines (100 to 500 tons/day output) toobtain credit without an assured market; (iv) difficulty of transportingcoal from the mines in the mountains to potential consuming areas on thecoast; and (v) lack of detailed geological surveys of the numerousoccurrences of coal-bearing strata throughout the mountains of Peru.

6.17 Recommendations: The Government itself can take direct actionto remedy the last three points. The lack of coal burning equipment andexpertise could probably be rectified as soon as the private industrialsector were assured of a market. The coal briquetting program, however,might require official support to overcome initial consumer resistanceand to demonstrate its clear economic advantages in fuel cost. The inap-propriateness of large-scale mechanized mining for the prevalent geolog-ical conditions implies that development of coal resources should be leftto the private sector, and that large state corporations should abandontheir attempt to lock up coal reserves in the principal coal bearingareas. Some of these same state corporations could, however, provide themarket for coal mined by the private sector if they would advertise theirwillingness to pay for coal delivered to specified collecting points.This would make it possible to operate centralized beneficiation plantsand use bulk transport to deliver coal to the final consumer. If neces-sary, they could enter into contracts with individual mines for the pur-chase of specified quantities of coal, to enable the mine owners toobtain credits from the Banco Minero or from COFIDE.

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6.18 The mission recommends that the Instituto Geologico Minero yMletalurgico (INGEMET) and Procarbon be given the financial resources,equipment and additional staff to detailed studies of coal bearing forma-tions and the extent and occurence of the various types of coal inPeru. INGEMET apparently has made some studies of coal resources inPeru, but the results have not been published.

6.19 The mission also recommends a pilot project be set up to attemptto develop a strong commercial market for coal in one or more areas onthe basis of a number of small privately-operated mines. Major consumerscould be power plants or large industrial establishments for cement,minerals and sugar refining. The first step in such a project would beto identify one or perhaps several combinations of: (i) suitable coalreserves, (ii) a substantial user who can be adapted to dual-fuel opera-tion (coal when available, oil otherwise), and (iii) a transport routebetween the two. Technical assistance in the form of geological and/ormining engineering advice might be needed to help establish the mines.The project might have to invest in development of a transport route fromone or two central coal delivery points to the market, but if the projectis successful it should be possible to recover this investment throughhandling charges added to the: coal price of the collection point.Financial participation in the conversion investments needed to adaptpotential users to burn coal may also be necessary, but should be linkedto participation in the savings made if and when coal is used.

Geothermal Energy

6.20 Data on geothermal energy in Peru are insufficient to estimatethe size of the potential resources. However, considering that thethermal gradients in South America generally are high in the Andes area,and because the Andes occupy a large area of Peru, the geothermal re-source base for the country probably is large compared to the world aver-age. Table 6.4 presents estimat:ions of geothermal resources at tempera-tures 1/ higher than 180°C and lower than 180°C. These are rough esti-mates based on broad volumetric technics.

6.21 In the southern part of Peru, in the vicinity of Arequipa, thereis an extensive area of young volcanic rocks with high temperature therm-al manifestations and favorable geological structures. A study financedby OLADE and performed by Italian Consultant, in cooperation with INGEMETstaff, has recently completed a geological reconnaissance of the area andhas reported favorably on it. This survey included the analysis ofthermal waters but did not extend to geophysical surveys. The same groupwill be making a similar survey in Cajamarca.

1/ The production of electricity (economically) requires minimum under-ground temperatures of about 170OC to 200OC.

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Table 6.4: Estimated Geothermal Reserves and ResourcesSustained Over a Five Year Period

Economic (Reserves)Temperature MW TOE

Over 180°cInferred a/ 100 8Speculative b/ 2,000 159

Under 180°cInferred 300 24Speculative 6,000 485

a/ Inferred: Based on broad knowledge of geologic characterof the deposits for which there are a few samples ormeasures.

b/ Speculative: Undiscovered resources that may be present.

Source: Joint Peru/United States. Report on Peru/UnitedStates Cooperative Energy Assessment, US-DOE, 1979

6.22 Finding an appropriate market for geothermal power in southernPeru presents a possible problem. Electroperu estimates that it willneed 20 MW of thermal power in the area by 1990, which is about the rightsize and time scale for an initial geothermal generation project. How-ever, a 20 tW demand is not in itself sufficient to justify the risk of ageothermal exploration program probably costing US$20 million, with anadditional US$50 million for development and power generation facili-ties. A large-scale geothermal development would have to compete withLluta and other potential hydro as well as possible coal projects in thearea. Technical assistance should be used for studying these optionsand, if appropriate, developing a framework to encourage foreign com-panies with expertise in geothermal exploration to undertake such a pro-ject. Until recently, little interest has been shown in geothermal powerin Peru, despite the fact that the geology in the southern part of thecountry is very favorable to geothermal development. Electroperu is nowshowing some interest, and Southern Peru Corporation, which has coppermines and a smelter in the south of the country, also has shown an inter-est in developing geothermal resources there. However, the management ofSouthern Peru Corporation is reluctant to pursue development under theterms of the present law governing electric power generation.

6.23 There are serious institutional problems to geothermal develop-ment in Peru. The private sector is inhibited by the law on electricpower, while neither of the two state institutions involved, Electroperuand INGEMET, has the required experience or specialized equipment.INGEM4ET is an institution that could not assure a market for geothermal

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steam, even if it had the personnel and equipment to carry out the geo-physical surveys and drill the wells to develop it. Electroperu intheory has the resources to contract for the required services but, inpractice, has financial constraints which would prevent this.

Solar and Wind

6.24 Because of its location between the equator and a latitude of170S, Peru receives favorable levels of solar insolation, particularly inthe Sierra and the northern and southern coasts. The Central Coast tendsto be cloud covered. Although a comprehensive assessment of solar re-sources has not been carried out: for the entire territory, available datareveals very high solar insolation levels for a wide range of sites(Table 6.5):

Table 6.5: Average Solar Radiation Over Selected Sites

Altitude (m) TOE/m2-year

Arequipa 2380 0.21Puno 3850 0.21Huancayo 3270 0.20Moquegua 1470 0.19Ayacucho 2750 0.18Chiclayo Coast 0.16Ica Coast 0.16Cuzco Coast 0.16Piura Coast 0.16Trujillo Coast 0.15

Source: ITINTEC. Experiences in the use of Non-conventional EnergySupplies in Rural Areas of Peru. September 1982.

Solar water heaters have been :installed in a cheese factory, a school,and in the residences of CENTROMIN miners in Morococha, Casapalca and,soon, in Cerro de Pasco; solar pre-heated water also will be used forwashing wool inma textile indust:ry in Arequipa. CENTROMIN is planning toconstruct 7,000 housing units between 1981-89, which could be an import-ant solar water heater market, substituting for electricity in caseswhere hot water is indeed provided. ITINTEC estimates that a small solarwater heater industry of 2,000 sq.m./year (about 1,000 uniits) could bestarted, based on the mining sector alone. At an installed cost of$600/unit (a 150 liter tank and two collectors of 1.1 sq.m. each), thepayback periods are 2.2 years and 2.7 years for large industrial andresidential consumers, based on Electroperu's December 1981 tariffs (in-cluding tax).

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6.25 More data is available on wind energy. The national meteoro-logical network (SENANHI) publishes reports on daily observations at0700, 1300 and 1900 hours. ITINTEC has also undertaken studies on thehourly wind velocity and approximate daily variations in Piura andArequipa; a similar study is planned for Puno. lMaps identifying promis-ing sites for wind pumping installations have been published. Accordingto these data, steady winds of 18 km/hr are characteristic of the nrthern coast around Piura. At 70-100 m above ground level, highlyvariable wind velocities averaging up to 30 km/hr have been recorded.These windspeeds are adequate to justify wind-powered pumping where waterdepths are not excessive and may make small-scale wind-electric genera-tion feasible in isolated areas. There are, in fact, said to be some2000 windmills being used to pump irrigation water in the Miramar area ofPiura.

6.26 Work on solar and wind energy in Peru is characterized by thepredominance of a strong technological research institute ITINTEC and arelative vacuum in the commercialization and dissemination of renewableenergy technologies. One university (Universidad Nacional de Ingenieria,UNI) is also involved in renewables to some extent but also in researchand development. There appears to be little work in the area of demon-strating and building-up local capacity to manufacture technically proventechnologies, and even less awareness of their economic viability and themechanisms and incentives through which they might be marketed. ITINTEChas been conducting seminars and distributing technical manuals, butprivate sector production does not seem to be developing. This situa-tion, however, cannot be the sole basis for judging the role of renew-ables in Peru, given the fact that renewable energy is a relatively newphenomenon. The promising evidence of renewables potential in rural,commercial and industrial applications has not been adequately assessed.Rural applications include windmills, improved cooking stoves, solar cropdryers and, possibly, solar greenhouses and space heating in the higheraltitudes. Potential applications for commercial establishments includesolar water and air heating in small industries, large-scale biogasplants attached to areas of livestock concentration, producer gas systemsbased on sawmill wastes, and improved charcoal kilns. In industry, thereis a law requiring mining companies to provide domestic hot water fortheir workers and, while compliance so far has been low, this potentiallycould become a large market for solar water heaters.

6.27 Almost 20% of ITINTEC's budget over the past ten years has beendevoted to energy research and development, including renewable energy.ITINTEC has a very capable staff of 14 engineers and seven techniciansinvolved in projects in which include solar water heaters and solardriers, solar distillation, wind pumps for water supply and irrigation,family-size and semi-commercial scale biogasifiers, turbines for mini-hydro plants and small wind generators. Publications resulting fromthese projects and from seminars ITINTEC has organized are of a hightechnical caliber and reveal an effort to adapt technologies to Peruvianconditions. In addition, ITINTEC publishes construction manuals and hasconducted training courses in various universities.

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6.23 ITINTEC's major assets are its strong links with industrialfirms, some of which have agreed to fabricate prototypes of renewableenergy technologies designed by ITINTEC. Given ITINTEC's capability andits close links to the industrial sector, it appears that the task aheadwill be to bring renewable energy technologies to a point where they aresuitable for commercial-scale local manufacturing. However, there are anumber of steps that need to be taken before this stage is reached.First, ITINTEC's activities should be incorporated into the rural energyplanning mainstream, now being coordinated by the Sectoral PlanningOffice of the l4inistry of Enrergy and Mines. This will require:(i) identification of the most promising applications, w'hich will requirea careful analysis of the economic competitiveness of these technologiesand initiation of detailed markelt demand assessments; (ii) additional butselective resource assessments, starting with the compilation and evalua-tion of work already performed by Senanhi, Itintec, MEM, universities;and (iii) identification of an official, permanent planning arrangement,training of rural energy planners, and establishment of a monitoring andevaluation function for this ent:ity. Second, ITINTEC's work would haveto be reoriented toward technologies which address the most urgent needsand for which local capabilities are best suited, and to broaden its verytechnical perspective. For example, no organization has done any work onimproved cooking stoves which could have a significant impact on energy-poor rural populations. Nor has attention been given to improved char-coaling techniques and other biomass technologies for utilizing sawmillwastes or logging residues in the Selva. Third, ITINTEC, in cooperationwith otlher universities and prospective users, needs to undertake morefield testing and demonstration. Training of field-level technicians andextensionists is an essental step in filling this gap. Training of econ-omists for the energy technology division will be particularly useful.Promotional programs aimed at informing potential manufacturers and com-mercial or industrial users of t:he economic viability of these technol-ogies should be undertaken to balance the heretofore purely technicalapproach to information dissemination.

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ANNEX S.1

TECHNICAL ASSISTANCE PRIORITIES IN THE ENERGY SECTOR

I. Sector Planning

A. Reinforcing the National Energy Commission

II. Demand ManagementA. Industrial AuditsB. Transport/Conmercial/Household PotentialC. Establishment of the Energy Conservation Center (Technical

assistance, training, legislation and promotion)

III. FuelwoodA. Organization - Roles of DGFF, INFOR, MEM, etc.B. Planning

1. Identify, quantity, locate needs, priority areas2. Develop workable, replicable modes operand: for

reforestation in SierraC. StovesD. Training Program for Technicians

IV. Oil and GasA. Petroperu Investment Programming and BudgetingB. Petroperu Project Preparation

1. Exploration2. Infill and extension, secondary recovery

C. Organization1. Petroperu/MEM division or responsibility2. Divestiture of pipeline, retailing

D. Gas Utilization in the NorthwestE. Petroleum Law - Incentives for Exploration, Accounting and

Taxation FrameworkF. Reserves Audit

V. PowerA. Electroperu Investment Programming and Budgeting

1. Up-date the catalog of hydroelectric projects2. Re-estimate project costs3. System planning4. Small hydro (standardization of technical designs,

construction types and materials)B. Implementation of Regionalization

1. Northwest - set up new utility2. Rest of country

VI. OtherA. Coal

1. Reinforcing PROCARBON and INGEMET2. Pilot small mines project3. Pilot briquetting

B. Geothermal Exploration PromotionC. Renewables

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ANNEX I.1

ECONOMIC IND ICATORS

1978 1979 1980 1981 1982 1/

GDP Growth (%) 0.5 4.1 3.8 3.9 0.7

Exports (US$ m) 1,941 3,474 3,898 3,247 3,212

Imports (US$ m) 1,601 2,053 3,062 3,815 3,502

Current Acc. Balance (US$ m) -192 664 41 -1,513 -1,401

Net Int'l reserves (US$ m) -1,025 554 1,285 692 800

Public Sector Deficit (% GDP) 5.7 1.7 5.7 8.0 6.6

Consumer Price Index (% inc.) 57.8 66.7 60.8 72.7 72.9

1/ Preliminary

ANNEX I.2

Page 1 of 3

UNITS: TOE x 1O9 ENERGY BALANCE YEAR: 1970

REPUBLIC OF PERU PRIMA,RY ENERGY SECONDARY ENERGYMINISTRY OF ENEGY AND MINES 1 2 3 4 5 6 7 8 9 10 111 12 13 14 15 16 17 18 19 20 21 22 23

), 0 -w C -~~~~~~~~~~~~~~~~~~~~ 0 S~~~~~a (4- ~ ~~~~~ 0 a~~:zC

EL.SLL - 0 c QW 0 co, Co

- 0 CE v ' . a 2o 8 a z-~ 0 ' 0 0 Ae =:2 2n e. o ~~~~-C ~~~. cO > ~~~~0) 9 0< Cc ( 0 -0 o0C.P 0 Q

(2 ic 0< 0 a- <0 I~~~ ~~~ 0 I-< C) (2 O CZ 2-E 00 u O 0~

2 Importation 6 788 794 8111 92 7 450 61 __ 691 1485

3 nvnor araio (45)__ __ (45) (43) 81 7 27 2 74 29

4 OALSPPY48 2801 615 4368 1248 410 9490 38 173 14 27. 450637505x U) 5 Exportation (304) ___(304) ______(14) (13) ______(27) (331:

I- 6 Unu~~~tilized __(71(781i

7 GROSS INTERNAL SUPPLY 48 2801 615 4064 467 410 8405 38 173 14 13 437 63 738 9143a TOTAL TRANSFORMATION (28) (339) (75) (4078 (460 (410)159)(7 136 60 1091 731 749 9106 45 47 4654 (3

LU 8 .1 Coke Plants, Furnaces __28 _ (28) (1 7) 28 11 (7 :Z Z - _ _ _ _ _ _ _ - - -_ -(

LU 62 Coal Plants _339_ (339) 136 136 (203

2 6.3 Biomass zti I - -- - --- - __~0

84 Refineries (4078 ___ ___4078) __ 30 1016 731 933 1149 62 83 4004 (74: !

8.5 Gas Plants (460 _______ (460) 30 75 1 353 459 (1)o66 Public Service Power Plants (75) __ _ (410) z__ (8)(8)(3)( 7 4 (4

8.7 Self-Use Power Plants c

9~ Energy Sector's Own Consump.- - - _ __ - - __ --- (8) (13) (58)- (351) (2:(432) (432:

10 Losses (Transp. Distrib. Storage) ___ _44__ __ (44) (44)

1 1 ADJUSTMENTS _(5_' 14 (7_ 2 (11 21 __ 1 6 _ (2) (73) (71) (69)

12~ TOTAL FINAL CONSUMPTION 15 2462 540 _ _____ __ __ 3016 201 136 58 1264 737 750 1295 124 31 430 4845 7862

12 1 Final Non-Energy Consumption 22 22 124 123 146

0 12.2 Final Energy Consumption ____2462____ 2995 201 136 58 1264 737 750 1295 31 430 4721 77621221 Residential, Commercial 2125 236 ______2361 1361 52 49027 148930

D 1222 Public 59 37 40 2816 14

0 1223 Transport 1140 170 268 101 1679 1679

12.2.4 Agroindustry______ 282 __ 282 11 6 67 159 28 271 553

12.25 Fishing 2 185 464 11, 662 662

12 28 Mining and Metallurgy 10 10 20 25 17 84 66 1451 3571367

12 27 Industrial 5 33 342 6 27 17 106 477 1 4 1221 75911011

Observations- GROSS SECONDARY ENERGY PRODUCTION I 191 13 60 1109.11 731 1933 11149 1 631 464 [476]5122~

OTHERS:

ANNEX 1.2

Page 2 of 3

UNITS: TOE x 10' ENERGY BALANCE YEAR: 1975

REPUBLIC OF PERU PRIMARY ENERGY SECONDARY ENERGYMINISTRYOF ENERGYAND MINES ~~~~~~~1 2 3 4 56 7 8 9 10 1 1 12 113 141 5116 17 18 19 20121 22 23

MINISTRY OF ENERGY AND MINES - ~ 'A S

M. (CC~A .~l ~>- ' c J0 C C L 'An w c) C

2 'A .2 <E C 2 'Ac- o O >' <'A 'A ~~~.- ~~ 'A 'A'A ~~' 0 'A0. ' ' YaCl ' '- Z0 .O 'C P ~~~~~~ A' 'A .8 O~~~~~~~ 0 .0 C' 'A' 'A . 0 'A .5 0o ir. O< 0 0. 45 2 01 uL F- M 0) 0 fl01 01 00 : OU. Zn. 01 w R8 -O1 Production 1 6 2868 691 3629 1 11251 588 8917 1 1 __ 8917

2 Importation 3 3 235 91.3 9 149 5 68 150 174 1721 Ji8B 6 36

3 Inventory Variation 37 37 (301 (1) (18 (1) (12- (54) (4) __ __ (120) (3(L- 4 TOTAL SUPPLY 49 2868 691 6031 1125 588 11352 119 4 50 149 162 117 44 ___ __ 646 .1998

cce 6 Exportation (204 ___ (204) (10) _____ (16: (301) _______(327) 531)

F_ 6 U nutfirized (575 (575) -55

7 rPO)RRINTFRNAI RI IPPI-Y 4- 88952 _ _ * " " ' ' " - 4 ~0 e 8 TOTAL TRANSFORMATION (20) (289 88) 5688 __ (531)1 (588j - - 7204 (5' 116 1.2L 1565 Ai.2 701 1

1614 6.J8 .5SL fiBA'2&981 Coke Plants, Furnaces (20)1 (2) (5) 1___- 39 1 (46)1 (66)

W 0 Coal Plants (289 (289) 116 - __116 173)

0 8.3 Biomass z04~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~2 8.4 Retineries - 5688 - __ (5688)__ 114 1506 870 1003 1882 64 108 5547 11

as8. Gas Plants 31 t___ 1___ .9A iL .Z 8.6 Public Service Power Plants (88) ______ (588, - - 67 _ - 1__ (200 (268) ____ (46) 644 130 '56) U

8.7 Self-Use Power Plants

9. Energy Sector's Own Consump. I__ (3) (4 )l (17) (72) __ _ (407)1 (2)(505) 5510. Losses (Transp. Distrib. Storage) _____ (46) (46) (6)

i. ADJUSTMENTS (4i) jj1) (139' (19) 163. .13 -_ _18, 4)-L)7 1 6 13 5012. TOTAL FINAL CONSUMPTION 25 257 602__ 3206 21 116 1 16301 966 923

1435 111 144 56 594 912

12.1 Final Non-Energy Consumption - - -- 26 __III __ - ill 1

12.2 Final Energy Consumption 25 2579 576 -3- 180 2 116 117 163 966 923 143 -596.j.~B 91&.28.12 2.1 Residential, Commercial 2222 242 ______2464.__ 116 101 -- 5-78.5.5 ign L040 1;04

UD 12.2.2 Public 1 4 87 523 gL

o 223Trnpr 1497 248 397 126 ______268 2268-3 12.24 Agroindustry 334 __ 334 131 11 47 109 31 211 545FL 12.2.5 Fishing ___ 4 __ 85 16

12.2.6 Mining and Metallurgy 20 20 21 2 30 34 149 26 __ _ 164 666 68612.2.? Industrial 5 37______362T 14 35 47 158 71___ 89 204 268 1630

Observations:FGROSS SECONDARY ENERGY PRODUCTION 19 1616 127 115641 870 11003 11882 1 681 603 6469

OTHERS:

ANNEX 1. 2

Page 3 of 3

UNITS: TOE x 10' ~~~~~~~~~~~~~~~~~~~~~~~~~~ENERGY BALANCE YEAR: 1981

REPUBLIC OF PERU PRIMARY ENERGY SECONDARY ENERGY

MINISTRY OF ENERGY AND MINES .. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 1 7 18 19 20 21 22 23

_ 0 1~~~~~~~~~~~~~~~~~00 0 (L 0 FL Ic ')

o ~~~~~~ 1) ~~~~~~~* 0 ~~~~~~~~ 50~~~C U) 2 ).5 5 a 0 _ ~' w0 `5W W 0 0 0 0 <> 0 2-e 80 o ._I 0

L) E 0< o 0 I C 6- 0 0 Z i2 -W I 0 Za C H

2 Iporodution 71 30161 5221 9901 11032 1928 15470 _____15470

2 Importation ~~~~ ~~~ ~ ~~2 - - - - - 22 851 3 7 - - I - I- 31 - 126 148

3_ Inventory Variation - 4 - - - 4 - (2) (20) (16) (29: 14(7) (6

a 4 TOTAL SUPPLY ~~~~~~~~~93 3016 522 9905 ___1032 928 -15496 85 - 1 (13)1 (16', (29: 1 27 56 15552

£8~ 5 Exportation -- 2117 (2117 - - (340) - (141:(394) (1 - (876) 2993)

Untilized (278) - (2778. - - - -- - (278)1co 7 ~GROSS INTERNAL SUPPLY 93 3016 522 7788 ___ 7541 928 13101 85 - 1(353) ~16) (170: (393) 26 - - (820) 122811

,D U 8 TOTAL TRANSFORMATION (37) (297) (25) 7879: (682)(928) 9848 (40) 119 143 1741 136911592 2225 145 650 907 8851 (997)cc~W W. 8.1 Coke Plants, Furnaces (37) __ (37) (40 ___ 37 (3) (40) 0)

W L) 8.2 Coal Plants (29 7) (297) 119…19(78z 119- -- - - 178 -- -- - -0 8.3 Biomass Z

5 8.4 Refineries (7879: (7879 __ 134 1703 1369 1790 2485 97 108 7686 (193)8 ………____ - - 19-3_

8.5 GasPlats(682i _ 1(682)1 _ 9 38 -- -481 587 6 682C5) - _ -- _ _ _ _ -

8 6 Public Service Power Plants (25) (928) 1953) - - (198: (260) - (82) 907 367 1586) H 8.7 Self-Use Power Plants <

a~ Energy Sector's Own Consump. _______ (7)1 (52) (57: (83) (512) (4) (715)1 (715)1

10 Losses (Transp. Distrib. Storage) I(103) (103) (103)1

11 ADJUSTMENTS 91 (72) (19) (20) (10) (45) (18) 7 (62) (36) (18) ___ (202) (183)

12 TOTAL FINAL CONSUMPTION 34 2719 4971 __ 32721 25 119 134 1336 1283 1372 1687 135 120 800 7011 1028A

12.1 Final Non-Energy Consumption - 1010 - - - - - - -1515 3

2 12.2 Final Energy Consumption 5f 2719 317 3092 25 119 134 1336 1283 1372 1687 120 800 6876 996812.2.1 Residential. Commercial 2342 249 2591 - 119 56 - 826 - - 55 26 132 391

(A 22 Pulc- 40 78 175 57 350 350Z 2 Transport 12511 309 688 2731 5122C) -

<' 12 gridsr - 68 68 - -8 9 4 149 37 252 320

1 2 2 5Fishing - - - - -I - 72 115 21 209 209

12256 Mining and Metallurgy 1~ - - 13 25 - 2 23 301 248 268 232 828 841

12.27 Industrial 4 377 - - - - - ~~~ ~~~~ ~~~ ~~~~~~~~~42Q - - 76 13 31T140 825 65 246 1396 1816

Observations: IGROSS SECONDARY ENERGY PRODUCTION 25 19143 17411 1369117901 248 ~ 145 732 90796

OTHERS-

-96 - ANEX I.3

MEM - OVERALL ORGANIGRAM

_ | ~~~~~~~~~~Advisory |r - ~~~~~~~~ ~ ~ ~~~~~~Mnister r Commisslon

VKe Minister Supreme Courncil of Petroleum Investment

I | Internal I7s ar

General Secretoriat Legal Officer

I | CNivl Defense National EnergyI | Committee l 1 Council

lI Renstltutinl Org.

Office

|Statistics & Data |Processirg Office rn i gOfc

DrAecministratean of LaboM ADfaire oOffice r Otflce

|Pubilc Relotions |Natlonal Defense|Office rOf te

| | ~~~~~~Regional Coorcdin. | Environnmental|j L ~~~~~~~Office rOffice

Directorate of | Directcfaeo Mnlnng Directorcite of|Electricity Min J Council Hydrocarbons

Ir-- r~6' H Mr 8 D ;_ B~~Eectroperu _ Mlearu| Peteru lu

Lz JTa . L.rMIngernmet|Iz gsy 1 Commission I

IPE

Source: MEM World Bank-25150

- 97 -

ANNEX II.1

ELECTRICITY TARIFFS

Average Selling Prices - First Half of 1982 1!(soles/KWh)

ParticipationUtility Residential Industrial Commercial In the Market

Electroperu 22.0 35.35 53.75 23.4

Electrolima 18.79 32.82 72.63 63.7

Hidrandina 12.67 16.72 38.62 4.5

Seal 22.08 32.43 65.58 3.9

Coserelec 23.47 44.78 67.65 1.5

E.E. Piura 22.78 39.52 64.22 1.3

S.E. Huancayo 23.57 43.02 69.17 0.5

E.E. Chimbote 22.31 51.07 61.15 1.2

Source: MEM - General Directorate of Electricity

1/ lUS$ = 660 soles.

_ 98 -

ANNEX III.1

FOREST PLANTATIONS ESTABLISHED AS OF 1980, BY DEPARTMENT(ha)

Until 1964 1967 1970Department 1963 1966 1969 1972 1973 1974 1975 1976 1977 1978 1979 1980 Total

Cuzco 10,000 684 2,158 6,097 1,944 2,333 2,187 2,013 2,187 1,886 1,391 2,735 35,615

Junin 15,000 718 1,606 576 274 343 112 169 253 138 1,065 20,254

Apurimac 45,000 89 852 3,615 2,286 2,132 1,200 1,084 941 1,733 1,661 1,406 21,499

Ancash 3,500 710 1,727 998 706 464 780 500 654 766 297 1,702 12,814

Cajamarca 2,000 27 472 1,146 670 1,182 1,215 549 1,170 388 322 878 10,019

Huanuco 1,500 50 935 1,435 452 652 109 300 145 127 13 64 5,782

La Libertad 3,000 30 48 486 326 163 500 500 232 91 424 315 6,155

Amazonas 100 - - 1,746 411 656 - - 18 - 16 71 3,018

Ayacucho 500 31 468 514 368 281 200 100 286 175 143 512 3,578

Pasco 850 40 482 515 30 236 60 140 1 - 18 58 2,430

Piura 700 5 28 202 109 85 772 300 366 34 17 105 2,723

Huancavelica 700 27 18 240 82 170 210 - - - 158 543 2,148

Lima 700 60 106 92 28 104 - - 68 82 162 698 2,100

Arequipa 500 79 92 109 71 43 68 30 37 38 41 70 1,178

Loreto 100 15 25 35 45 488 - - 355 308 508 218 2,097

Puno 300 3 30 80 150 50 14 10 100 255 377 858 2,227

Tacna 300 - - 21 12 98 114 22 12 21 23 - 623

Labayeque 250 16 28 248 - 10 - - 2 18 - 136 708

Tumbes 50 5 11 184 68 145 - - 35 47 - 101 646

Ica 200 5 37 32 13 36 - - 12 - 1 89 425

Moquegua 200 - - 15 5 22 - - 1 7 5 5 260

Madre de Dics 20 7 14 22 2 5 - - 1 54 - 4 129

San Martin - - - - - 6 - - 59 281 88 40 474

Ucayali - - - - - - - - - - - 245 245

Total 44,970 2,611 9,137 18,408 8,052 9,704 7,541 5,717 6,935 6,311 5,803 11,918 137,107

ANNEX IV.1Page 1 of 2

Crude Oil ProductionWorld Bank Forecast 1/(million barrels/yr)

1975 1976 1977 1978 1979 1980 1981 1982 1983 1/ 1984 1985 1986 1987 1988 1989 1990Petroperu

Ono 12.8 12.0 12.0 11.2 10.4 8.0 8.2 8.9 5.1 9.9 11.2 11.8 11.7 11.2 10.5 9.4Selva Norte .9 1.1 6.5 9.4 7.8 7.6 6.7 10.2 10.0 10.5 9.5 8.5 8.6 9.9 9.7 8.8Selva Central .5 .5 .5 .5 .5 .4 .3 .3 .3 .3 .3 1.2 1.3 1.4 1.4 1.4Sub-total 14.2 13.6 19.0 21.1 18.7 16.0 15.2 19.4 16.3 20.7 21.0 21.5 21.6 22.5 21.6 19.6

ContractorsBelco 10.4 11.7 10.4 10.3 10.3 10.2 9.8 10.1 9.8 9.0 9.0 8.5 8.5 8.5 8.5 8.5Oxy-Bridas .1 6.1 6.5 7.1 6.9 5.0 6.8 6.4 5.5 5.1 5.2 5.2 4.6Oxy-Selva 1.6 2.7 3.8 23.4 38.7 38.6 38.3 31.8 32.8 35.3 34.6 33.0 31.9 29.5 28.5 23.9Other - - - 1.0 3.0 5.2 4.9 4.7 3.9Sub-total 12.0 14.4 14.2 33.8 55.1 55.3 55.2 48.8 47.6 51.1 51.0 50.0 50.7 48.1 46.9 40.9

Total Peru 26.2 28.0 33.2 54.9 73.8 71.3 70.4 71.2 63.9 71.8 72.0 71.5 72.3 70.6 68.5 60.5

1/ Average of law and high estimates2/ 1983 production reduced as a consequence of recent floods (January - June 1983)

0o

- 100 -

ANNEX IV.1Page 2 of 2

CRUDE OIL PRODUCTIONPetroperu Forecast (high case)

(million barrels/yr.)

1983 1984 1985 1986 1987 1988 1989 1990

Petroperu

ONO 9.6 10.8 12.3 21.0 21.2 31.0 36.2 34.0Selva Norte 15.5 17.8 24.1 26.4 30.0 29.5 26.6 30.4Selva Central .5 .6 .9 3.9 6.0 5.9 7.2 9.0

Total Petroperu 25.6 29.2 37.3 51.3 57.2 66.4 70.0 73.4

Contractors

Belco 11.1 13.1 14.6 15.3 16.2 17.0 17.3 17.6Oxy-Bridas 9.6 13.3 9.6 6.1 5.1 4.0 3.1 2.6Oxy-Selva 38.0 27.8 22.3 17.1 15.4 12.7 10.0 8.1Superior - .8 2.6 7.7 11.0 12.8 15.7 16.7Hamilton - - .3 .7 3.9 9.7 12.8 16.1Other -- - - - - 3.7

Total Contractors 58.7 55.0 49.4 46.2 51.6 56.2 58.9 64.8

Total Peru 84.3 84.2 86.7 97.5 108.8 122.6 128.9 138.2

ANNEX IV.2Gas Production Potential Forecast

(billion cubic feet per year)

1975 1976 1977 1978 1979 1980 1981 1982 1983 4/ 1984 1985 1986 1987 1988 1989 1990

World Bank EstimateAssociated GasPetroperu 28.9 26.9 24.6 25.2 24.3 24.1 21.2 20.0 10.8 22.8 25.8 27.1 26.9 25.8 24.2 21.6 2!Belco 22.3 28.9 31.3 24.2 22.8 21.2 19.1 23.0 23.5 20.7 20.7 19.6 19.6 19.6 19.6 19.6 2!Sub-Total 51.2 55.8 55.9 49.4 47.1 44.6 39.4 43.0 34.3 43.5 46.5 46.7 46.5 45.4 43.8 41.2

Non-associated Gas ,

Petroperu 3.4 4.5 5.0 5.5 8.0 10.0 10.0 10.0 9.5 9.0 21Belco - - - - - 10.0 16.0 16.0 16.0 16.0 3/

Sub-Total 3.4 4.5 5.0 5.5 8.0 20.0 26.0 26.0 25.5 25.0

Total NW Peru 42.9 47.5 39.3 49.0 54.5 66.7 72.5 71.4 69.3 66.2

High case using Petroperu oil production forecastAssociated gas 47.8 85.6 84.0 97.5 97.7 119.6 130.0 124.6 2!Non-associated gas onshore 5.0 5.5 8.0 10.0 10.0 10.0 9.5 9.0 2/Non-associated gas offshore - - - 10.0 16.0 16.0 16.0 16.0 oI/

Total NW Peru (high case) 52.8 91.1 92.0 117.5 123.7 145.6 155.5 149.6 0

2/ Assumes average G.O.R. of 2300 cubic feet per barrel and WB estimated oil production -excludes gas recycled for gas-lift.2/ Assumes Petroperu develops known onshore non-associated gas deposits in NW Peru.21 Assumes Belco develops offshore non-associated gas.4/ 1983 production reduced by the floods (January - June 1983)

- 102 -

ANNEX V.1Page 1 of 4

Central-North Power System

Capacity Average FirmExisting Installed Available Annual Output Annual Output

Huinco 258 240 915 650Matucana 120 75/120 658 450Callahuanca 68 55 497 350Moyopampa 63 58 455 350Huampani 31 26 194 110Cahua 40 26/38 257 185Canon del Pato 150 91 1184 850Mantaro 798 448/625 3536 2500Totals 1981 1528 1019 7696 5445

Future Projects

1984 Matucana -- 30 -- --

1984 Mantaro-Transmission 228 177 1590 11131985 Restitucion 217 197 1657 11601986 Yuracmayo -- 15 88 621988 Yuncan 126 n.a. 800 n.a.1988 Mayush 130 n.a. 930 n.a.

- 103 -

ANNEX V.1Page 2 of 4

Central-North Demand Projections

Year Growth Energy Peak Demand Power Factor% GWh/year MW %

1980 5851 1136 58.73.0

1982 6026 1166 59.03.0

1983 6393 1226 59.54.5

1984 6681 1271 60.06.0

1985 7082 1347 60.06.0

1986 7507 1416 60.56.0

1987 7957 1501 60.56.0

1988 8435 1578 61.06.0

1989 8941 1673 61.06.0

1990 9477 1759 61.5

Average annual growth rates (%)

1981-1985 5.1 4.51985-1990 6.0 5.51981-1990 5.5 5.0

- 104 -

ANNEK V.1Page 3 of 4

Central-North Power Balance(MW)

Year 19&L 19~ U 1983 1984 1985 1986 1987 1988 1989 1990

Peak Demand 1136 1166 1226 1271 1347 1416 1501 1578 1673 1759

Available Capacity

Hydro 1019 1019 1019 1226 1423 1438 1438 1438 1438 1438

Thermal 120 240 240

Gas Turbines 230 340 340 340 340 340 340 340 340 340

Total 1249 1359 1359 1566 1763 1778 1778 1898 2018 2018

Reserve Capacity X 10 16.5 10.8 23.2 30.9 25.5 18.4 20.2 20.6 14.7

- 105 -

MUflt V.1

Central-North System - hergy and Powr Balances

Year Project Peak Power Available (hnrntion(M

Hydro Thermal Total Bdro Iher TotalFrns Averns Firm Average

1981 1019 - 230 1249 5445 1/ 7696 - 230 2/ 5676 7926

1982 Santa Rosa - - 110 110 - - - 330 3/ 330 330

Total 1982 1019 - 340 1359 5445 7696 - 560 6005 8256

1984 Matucana-Mantaro 207 - - 207 1113 1590 - 1113 1590

Total 1984 1226 - 340 1566 6558 9286 560 7118 9846

1985 Restitucion 197 - - 197 1160 1657 - 1160 1657

Total 1985 1423 - 340 1763 7718 10943 560 8278 11503

1986 Yuracmayo 15 - - 15 62 88 - 62 88

Total 1986 1423 - 340 1778 7780 11031 560 8340 11591

1988 Turbina Vapor - - 120 120 - - 720 720 720

Total 1988 1438 - 460 1898 7780 11031 1280 9060 12311

1989 Turbina Vapor - - 120 120 - - 720 720 720

Total 1989 1438 - 580 2018 7780 11031 200D 9780 13031

Total 1990 1438 - 580 2018 7780 11031 20oo 9780 13031

1/ 70% of the Average2/ Operation: 1,000 hours!? Operation: 3,000 hours4/ Operation: 6,000 hours

- 106 -

ANNEX V.2Page 1 of 3

POWER SECTOR - DESCRI:PTION OF SOME IMPORTANT PROJECTS

A. Sheque Interbasin Transfer Project With the dual aim of in-creasing water availability and generating energy for the metropolitanarea of Lima, the possibility has been studied of transferring waterflows from the upper basin of the Mantaro River on the Atlantic slope tothe basin of the Rimac River. By means of a complex system of hydraulicworks starting from Lake Junin, the water would be conducted and lifted530 m to the mouth of the exiLsting Marcapomacocha Trans-Andean tunnel4436 m above sea level. By lining and enlarging the width of the tunnel,its3 present conduction capacity can be increased and the peak flow of12m Is doubled. On the Pacific slope, upstream of Electrolima's Huincopower station, a fall of 1,00() m is harnessed in an underground powerstation with an installed capacity of 600 MW. The total cost of thisproject was established to be US$1,800 million, including escalation andinterest during construction. As this is a multipurpose project, a sub-stantial part of the investment (50%) would have to be borne by Lima'swater company Sedapal to meet the growth in its demand. Due to the slow-down of the electricity demand and the very difficult financial situationof Electroperu and Sedapal, Sheque has been postponed for at least an-other five years. However, the study being carried out by Electrolimafor the integrated hydoelectric development of the Rimac basin shouldconsider the alternative of developing the Sheque-transfer project bystages.

B. Projects in the Rimac Basin This basin, whose development as asource of energy for the Central region has reached an advanced stage,still offers wide room for improving and expanding its development. Theworks of the second underground pondage of Matucana and the Yuracmayoregulating dam are examples. Electrolima has hired consulting engineersto study the existing potential downstream of the Huinco power station,which has the generic name of Salto Bajo. The 1300m difference in waterlevel between the Huinco tailwater and the intake that supplies Limaoffers a number of alternatives for study, including over-dimensioning ofthe existing power station of Callahuanca, greater use of installed ca-pacity at Moyopampa and Huampani, and construction of new power sta-tions. In the upper basin of the Rimac it may be possible to creategenerating facilities in the Tamboraque zone; another trans-Andean watertransfer could be based on Lake Pomacocha, which is part of the Mantarobasin. Given the expected future increase in water flows resulting fromthe Sheque transfer project, these developments would make it possible toadd some 500 MW of installed capacity in the Rimac basin and improve theutilization of existing power stations. They have clear objective ad-vantages: well-known hydrology and geology, easy access, short transmis-sion distances, and good construction support in the form of existinginfrastructure. Recently, the 70 MW Jicamarca project for the lowerRimac area has been approved at the pre-feasibility level and the feasi-bility study is now being carried out with IBRD support.

- 107 -

ANNEX V.2Page 2 of 3

C. lMatucana, Second Underground Pondage The Matucana hydroelectricpower station has an installed capacity of 120 MW; this corresponds to aturbinable flow of 14 m3/s, which the upper basin of the Rimac river pro-vides through a 20-km tunnel. The dry-season flow, without regulation,falls to 6 m3/s, which reduces available capacity to 50 MW. Undergroundstorage with 30,000 m3 useful capacity was built to expand availablecapacity to 75 MW during peak-demand hours throughout the year. Con-struction of a second underground pondage of another 30,000 m3 will yield30 MW more in available peak capacity from the two existing machines.Its total cost has been estimated at US$8 million, giving a unit cost ofUS$266/kW, comparable to that of a gas turbine. The project was commis-sioned in 1983.

D. Restitucion Hydroproject The Restitucion project will harnessthe available head (257 m) between the discharge of the Mantaro powerstation and the bed of the river. A pipe bridge crossing the ColcabambaRiver and a 1.3 km, open-air intake tunnel lead to a surge tank whichconnects to the underground power station. Installed capacity of 217 MWconsists of three machines equipped with Francis turbines. Steam flow issufficient to contribute 197 MW at peak to the interconnected system. Theestimated total cost is US$342 million, of which US$224 million will havebeen invested by the end of 1982. The project is expected to be put intoservice by 1985. The transmission line connecting the power station toPomacocha and Lima (at 220 kV) will be a double circuit line extending292 km. Its final design study is now under way; construction will haveto be put out for tender in 1983 so that it can enter into servicepromptly. The sources of financing for this project had not been definedat the end of 1982.

E. Yuracmayo Hydroproject There is also a possibility of buildingan above ground regulating reservoir upstream of the Pablo Boner-Matucanapower station in the upper basin of the Rimac River. The reservoir wouldhave a capacity of 50 million cubic meters and, with the second under-ground pondage already described, would make up the entire installedcapacity available at peak hours, thereby adding 15 MW by 1985. It wouldalso provide 60 GWh of finr energy. The estimated total cost of thisproject at the end of 1982, including engineering, administration, con-tingencies and interest during construction, was US$26 million, with 70%in local currency. The direct and indirect foreign-currency costs arebeing financed by the World Bank.

F. Chili River Studies have been scheduled to improve the reli-ability of or regulate the Chili River upstream of the Charcani hydro-electric plants; resources are available through World Bank loans forthis purpose, but contracts have not yet been signed. Final designs forthe Arequipa-Moquegua-Toquepala transmission line, appraised in 1973,have now been completed; the line will be 114 km long and have a trans-mission capacity of 150 MW. Its cost has been estimated at US$21

- 108 -

ANNEX V.2Page 3 of 3

million, including a new substation at Moquegua and expansion of theToquepala substation. Although financing for this project is available,and start-up investments made, the project has been delayed because of alack of local resources. In the case of the Tacna-Moquegua system, plansare to build a new, US$20 mi:Llion transmission line to strengthen theinterconnection between the Aricota (35 MW) hydroelectric station and theCalama substation (close to the city of Tacna).

pFRU

1981 ENERGY FIOW(TOE x 103)

HYDROENERGY 928

// ELE''TRICAL \EXPORTATION 2117 FOWERPIANTS

AX N

PETOLEUMRE EA .799905 REF NRY ,7789 .NEUST |

GAS PLANTS hB2

$ tz s - : . |~ -COMMERCAL

FIREWOOD 3016 2342 SECTORSECTO(R

IMPORTATIONCOAU71 92

PLANT & AN MAL

FIEL 522 H _ NON-ENERGY| \ CONSUMPTION

S ICSES k 138

V 3bD Jt iQ R LObSES

World B-]k 25151

IBRD16094R

>i_ -i St/_ 40- 77' ;8 74 > / 4MARCH 1982

TUMBES, o 1 ~~~~~~~~~P E R U-/j --=TUMBES/PR

1' . -t CENTRAL-NORTH INTERCONNECTED SYSTEM -i

EXISTING AND MAIN PROPOSED HYDROPLANTS' r'.

r IU /t 4 L3' -'-- i T',o

CH/CUAYO ° -n >t U- -i9-

> Q X A R t s N X z 0V R

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r ) / - ~~AYACUCHC C 45ts

PROPOSED EXIST NO tl10o-°S

Pow* r Sbt oton eps ons > 5 AREGUIPA \ .i

- - Jnternatons~~~~~~l mmnaie

Plvers~~~ ~ ., =W

Yn10tt'E- 1-S I -CI .0

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