Foreign investors in Peru’s state oil company risk nation’s turbulent politics

Hello and welcome to Energy Source, coming to you from New York, where the energy industry is considering the implications of Donald Trump’s tariffs on Canadian and Mexican imports.

Products from the US’s closest neighbours face 25 per cent levies. However, Canadian energy imports face 10 per cent duties — the lower rate reflecting US refineries’ reliance on about 4mn barrels a day of crude imports from Canada used to make a range of petroleum products.

Analysts say tariffs on Canadian crude will cause petrol prices to rise, particularly in the northern Midwest US states.

The threat of a trade war has been weighing on oil markets for months but on Monday a decision by Opec+ to increase production sparked a sell-off that drove crude prices down to three-month lows.

Our main item today looks at Peru’s crisis-prone national oil company, which has relied on government bailouts because of problems at a key refinery project.

Thanks for reading — Jamie

Who pays for Petroperú to become profitable?

In late December Peru’s government declared a 90-day “environmental emergency” after the national oil company spilled a crude oil shipment into the waters surrounding its flagship refinery on the country’s Pacific coast.

The spill was the latest crisis at Petroperú stemming from its Talara refinery, which underwent a decade-long $6.5bn modernisation. Upgrades to the century-old refinery wrapped up in 2023, several years behind schedule and well over budget, plunging the company into billions of dollars of debt.

Lima has provided repeated government bailouts, including two rescue packages last year totalling more than $1bn. It also took over Petroperú’s debt payments in the second half of the year, following the mass resignation of the company’s board, which called the company “broke” and “unsustainable” as it criticised the government for dragging its feet on reforms.

Still, Petroperú has continued to attract international investors seeking high-yield or junk-rated bonds who feel confident the government will continue rescuing the company if necessary. And in Latin America, which has a history of foreign moves on its resources, governments have been particularly willing to support their national companies.

“I don’t think Peru would let their national oil company fail,” said Schreiner Parker, managing director for Latin America at Rystad Energy. “Having said that, I don’t think you can ever say definitively in Latin America that something won’t happen, particularly with the [political] situation in Peru right now.”

In a region notorious for political instability, Peru presents an extreme case. The country has had seven presidents since 2016. Its political landscape is highly fragmented: the 2021 presidential election featured 18 candidates and a largely unknown outsider, Pedro Castillo, was catapulted to the top of the polls (he was later imprisoned after attempting to dissolve Congress and rule by decree). His successor, current President Dina Boluarte, has a public approval rating in the single digits, and her tenure has been derailed by corruption scandals.

While default seems unlikely, there is a “pretty wide spectrum of outcomes” for Peruvian politics, said Parker, with implications for Petroperú’s management. “Part of that is someone coming in and saying, ‘Hey, we’re going to do things radically different than what we’ve done in the past.’”

Political instability poses a major obstacle to Petroperú’s turnaround, which hinges on plans to build up production at the Talara refinery.

“Hydrocarbons require long-term vision and long-term planning,” said Parker, but that has been undermined by the “frenetic change in government”.

Petroperú has said it hopes to return to profit in 2025 on the back of the Talara refinery’s increase in processing capacity. As of last December the company said it was processing 90,000 barrels of oil a day — up from 60,000 b/d previously. The new refinery is capable of processing heavier crude transported via pipeline from the Peruvian Amazon.

But a history of leakages from the Norperuano pipeline, which transfers crude from the Amazon to Talara, has generated fierce opposition from indigenous and local communities. Environmental groups say Petroperú’s financial woes are causing the country to double down on fossil fuels as it attempts to become profitable.

“This debt crisis drives Petroperú’s renewed plans to expedite new domestic oil production in highly contested reserves,” non-profit Amazon Watch told Energy Source.

“Ultimately, investors, bondholders, and banks that facilitate this debt play a central role in this ongoing dilemma, as they hold leverage over Petroperú and the country’s ability to transition out of fossil fuels — all while providing the capital that drives the destruction of the Amazon rainforest.”

Petroperú did not respond to a request for comment. (Benjamin Wilhelm)

Power Points

Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu, Tom Wilson and Malcolm Moore, with support from the FT’s global team of reporters. Reach us at energy.source@ft.com and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.