Striking a Balance in Peru

By Luis Ferreira Alvarez

On February 17, Peruvian President Ollanta Humala replaced Energy and Mines Minister Eleodoro Mayorga with Rosa Maria Ortiz, making Ortiz the sixth energy minister under Humala since taking office in 2011. The decision came six days after protests in the district of Pichanaki between indigenous protesters and police turned violent, with one casualty and 144 wounded.

The protests arose as part of public outcry against Pluspetrol’s exploration of natural gas in the Amazonian Loreto region. The clash prompted a drift between Mayorga and Pluspetrol, with the minister asking the Argentine company to end all operations in the area, which ultimately forced his replacement.

Such environmental conflicts are nothing new for Peru. It is estimated that 90 percent of the 140 environmental conflicts registered in January alone were related to mining and energy. Since taking office, President Humala has balanced the interest of investors (including oil companies) with those of indigenous communities, a task that is central to Peru’s development.

Although a daunting challenge, President Humala has an opportunity to put in place a system that will ensure Peru’s future growth. To accomplish this, a concrete plan must be put in place so that all actors understand the rules and will not undermine them. Peru’s economy is highly depended on natural resources, with roughly 4.8 percent of GDP coming from energy and mining investment.

Foreign Direct Investment into Peru by Sector (in millions of U.S. dollars)

Source: ProInversion, March 2015

Peru also holds the third largest natural gas reserves in Latin America after Venezuela, Brazil, and Trinidad & Tobago.

Natural Gas Reserves in Latin America in 2013 (in trillion cubic meters)

Source: BP Statistical Review 2014

These two strengths have helped Peru become one of Latin America’s fastest growing economies, outpacing Brazil and Mexico in recent years.

Annual Economic Growth (% GDP) in Selected Latin American Countries

Source: World Development Indicators, World Bank, March 2015

However, local concerns about environmental effects (through spills and pollutants) have flared up almost daily. Protests and unrest have caused project delays and divestment in oil and gas exploration as well as decreases in mining by 30 percent and 11 percent, respectively, between 2013 and 2014.

President Humala has expended some effort into improving relations with indigenous Peruvians by approving a 'prior consultation' law in 2011, requiring private firms to consult with local communities before projects are approved. However, the law took almost a year to implement, and consultations dragged on, delaying projects and investment.

Conflicts persisted as Humala also prioritized attracting foreign investment, especially in the hydrocarbon sector. To do so, laws were modified to ease environmental regulations, such as stripping the Ministry of Environment from setting the acceptable levels of pollutants and give the decision to the National Service for Protected Areas, which falls under the president’s power. 

However, public consultations apply only ro new projects, grandfathering other projects such as that of Pluspetrol, which dates back to 2005. Similarly, other stimulus packages designed to promote economic growth were put in place to promote investment. Perupetro, the country’s hydrocarbon regulatory agency, took steps to speed up the process while the government took steps to ensure protests did not get in the way of development, such as by declaring a state of emergency and engaging armed forces against protesters. Mayorga’s replacement signals the president’s decision to side with the hydrocarbon companies and maintain the status quo.

Despite the government’s position, President Humala still has a chance to put in place a system that would better balance Peru’s economic development with the rights of local communities. The first task would be to maintain Ortiz as energy minister for the remainder of her allotted term. This will end the uncertainty in policy that a change in minister presents, which undermines government trust on both sides.

A second step would be to appoint a team to study multiple mitigation options that should include representatives from all interested actors to ensure that all sides have a stake in the new system. Once such a system is signed off by Humala, it can be ratified by congress and enforced by the ministry of interior.

Distrust runs deep between private firms and indigenous groups, and the only way to solve these disputes is through dialogue as both sides contribute to Peru’s development. Their differences will not be solved within days, weeks, or months, but in years. President Humala has a great opportunity to end these disputes, and has the political reason for taking action: under the Peruvian constitution, presidents cannot run for a consecutive term. If the system is established and it works, it would not only leave Humala with a prominent legacy, but possibly even a second term in 2021.



Luis Ferreira Alvarez is an Energy Analyst & Latin America specialist.

[Photo courtesy of Ministero de Relaciones Exteriores]

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