Peru LNG

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	25390
Company name	Peru LNG
Country	Peru
Sector	Oil, Gas and Mining
Environmental category	A
Department	Oil, Gas, Mining And Chemicals
Status	Pend PDS-IR

Date SPI disclosed	November 6, 2007
Projected board date	January 8, 2008

View Environmental & Social Review Summary (ESRS), click here

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

The liquefied natural gas (LNG) project being developed by Peru LNG S.R.L. (Peru LNG or the Company), consists of the development, construction and operation of a liquefied natural gas plant comprised of a greenfield 4.45 million tons per annum liquefaction train (the LNG Plant) and related marine facilities at Pampa Melchorita south of Lima, as well as a 408-km, 34-inch natural gas pipeline.

The project will liquefy natural gas purchased from Blocks 56 and 88 in the existing Camisea gas fields and sell it to Repsol Comercializadora de Gas S.A. (Repsol CG) for export. The majority of LNG sales are expected to go to Manzanillo, Mexico, where Repsol CG has signed a 15 year gas sales agreement with Mexico’s state power company Comisión Federal de Electricidad (CFE). Remaining volumes will be sold to international markets, including to Asia and North America.

Project sponsor and major shareholders of project company

Peru LNG is a special purpose company created specifically for the development, construction, and operation of the project. Its shareholders (the Sponsors) are listed below (ownership percentage in parentheses).

- Hunt Oil Company (50.0%) – Project Operator

Founded in 1934, Hunt Oil Company is one of the largest privately held independent oil and gas companies in the United States. Based in Dallas, Texas, the company’s principal areas of production and development operations are located in the United States, Canada, Peru, and Yemen. As well as its ownership of Peru LNG, Hunt has ownership interests in the Camisea project (25.2%) and Transportadora de Gas del Peru (“TGP”) (12.4%).

- Repsol YPF (20.0%)

Repsol YPF is an international integrated oil and gas company, operating in over 30 countries. Based in Spain, Repsol is a global leader and a top marketer of LNG. Repsol YPF also has ownership interest in the Camisea Project (10.0%) and TGP (10.0%). Repsol is listed in Madrid, New York and Buenos Aires.

- SK Energy Co., Ltd (20.0%)

SK Energy is Korea’s largest integrated upstream oil refining, marketing, and petrochemicals company. Based and listed in Seoul, the company’s other businesses include lubricants, exploration and production activities. SK Energy is active across the gas chain with extensive experience in the LNG sector. SK Energy also has ownership interest in the Camisea project (17.6%) and TGP (11.2%).

-Marubeni Corporation (10.0%)

Marubeni Corporation is a publicly listed, Japan-based diversified holding company with a wide range of activities. Marubeni holds large investments in oil and gas exploration and production, as well as in the LNG sector worldwide.

Total project cost and amount and nature of IFC's investment

The total project cost is currently expected to be $3.9 billion making it Peru’s largest foreign direct investment. The Sponsors plan to finance the Project with $1.6 billion in equity and $2.3 billion in long-term senior debt from a consortium of lenders including Inter-American Development Bank, Export-Import Bank of the United States, Export-Import Bank of Korea, SACE S.p.A of Italy, and IFC. The proposed IFC investment is an A-loan of up to $300 million for its own account.

Location of project and description of site

The project consists of two parts:

- the LNG Plant, including a marine loading terminal from which LNG will be transported, and
- a gas supply pipeline which will connect to an existing pipeline operated by Transportadora de Gas del Peru (TGP).

The LNG Plant and marine facilities are located at Pampa Melchorita, 170 kilometers south of Lima, situated between the towns of Cañete and Chincha. The site is in an area of arid, uncultivated coastal land. The marine facilities consist of a breakwater and jetty with facilities to load LNG onto tankers for export.

In addition, the project includes a quarry, located approximately 25 km east of the plant site, which will provide the rock required for the construction of the breakwater for the marine facilities. The rock will be transported by truck along an access road, and an interchange underpass which has been built to cross the South Pan-American Highway.

Design and development of the Peru LNG gas supply pipeline began in 2005, with physical pipeline construction expected to begin in early 2008. The 34-inch diameter pipeline will stretch 408 kilometers from Chiquintirca in the Ayacucho Mountains through Huancavelica and Ica to reach the LNG plant.

Anticipated development impact of the project

Fit With World Bank Group Strategy:

The Word Bank Group’s (WBG) Peru Country Partnership Strategy (CPS) is built upon three strategic pillars to support Peru’s efforts to increase economic growth and competitiveness, reduce poverty and inequality, and strengthen the country’s public institutions. Within this overall framework, IFC’s strategy focuses on:

- working to reduce Peru's large informal sector with technical assistance;
- investing and developing projects which address bottlenecks to the provision of basic services and physical infrastructure;
- investing in industries with strong competitive advantages such as agribusiness and tourism;
- expanding growth to new beneficiaries including Small and Medium Enterprises (SMEs), housing, and tertiary education finance, and by building local government capacity to deliver services; and
- supporting sustainable growth, notably in extractive industries, a key sector within the country’s economy.

Specifically, the expected fit between the project and the WBG CPS for Peru is evident in a number of areas. The project will be developed in an environmentally and socially sustainable manner, i.e. with a minimal footprint during both construction and operation, thereby adequately mitigating environmental impacts, and augmenting social benefits for the surrounding region. The project will further enhance the country’s gas pipeline infrastructure and provide Peru, as well as the wider region’s, first internationally competitive LNG liquefaction facility. In addition, the significant increase in natural gas production to supply the project will also result in an increase of associated liquids (condensates) which will become available for consumption in Peru, thereby reducing the need for expensive imports and potentially serving as the basis for further development of downstream industries such as petrochemicals. The project is expected to convert Peru into a net exporter of hydrocarbons after 2010.

Anticipated Development Impact:

This project will support the monetization of hydrocarbons in Peru. While the country has modest reserves of liquid hydrocarbons, it has significant reserves of natural gas. The project will contribute to the development and strengthening of the country's natural gas infrastructure, and will play a part in satisfying the growing domestic demand for hydrocarbons. In addition the project will significantly impact both regional and national economic growth over the coming years through a combination of local investment, generation of export revenues, taxes, and royalties.

Looking at the wider region beyond Peru, a majority of Peru LNG’s exports are destined for Manzanillo, Mexico, where the gas will be fed into the national grid as a cleaner fuel for electricity generation (replacing fuel oil), and/or domestic consumption, or may also used as feedstock for petrochemical production thereby serving an important development purpose for Mexico as well as Peru.

Specifically, the project is expected to generate the following development impacts:

- Creating Local Employment:

During the planning and construction phases, the project will generate over 5,200 skilled and unskilled, direct and indirect jobs. During the operating phase, 150 to 200 direct jobs will be created at Pampa Melchorita, with additional jobs being created upstream in gas production, and indirectly through supplier businesses. From engineers to security personnel and administrative support, a vast majority of the Project’s staff will be Peruvian. Peru LNG expects that over $1 billion of the Project investment will be in local goods and services, primarily centered around the LNG Plant site.

- Contribution to Peruvian Government Revenue:

It is expected that the Government of Peru will receive substantial fiscal receipts in the form of corporate taxes, paid by Peru LNG, as well as royalties and taxes generated from the production of hydrocarbons by the upstream Camisea project. In the longer term, the average tax revenue generated from the Project alone is expected to exceed $100 million per annum. Incremental royalties generated by supplying the Project with gas for export are expected to exceed $225 million per annum. A sizeable portion of these revenues will accrue directly to the regions impacted by this Project and the upstream Camisea project.

- Community Development:

Peru LNG is developing a broad community engagement program in line with its commitment to the sustained economic development of the neighboring communities of Pampa Melchorita, and those located along the Project’s pipeline route. IFC in partnership with Peru LNG are building on the company’s existing social development programs to develop new areas for collaboration to enhance local benefits. Specifically, IFC is exploring projects with the company and sponsors to:

- Improve the company’s social investment strategy, and enhance stakeholder participation in its design and implementation through the development of third party evaluation and monitoring capacity;
- Enhance the company’s strategy on local procurement to advance the inclusion of SMEs in its supply chain thereby promoting the long term sustainability of local businesses, and contribution to the local economy; and
- Develop a program to further enhance the capacity of local governments in the management and use of tax revenues, in addition to improving social accountability to increase the impact of local public investments.

The key development indicators that are proposed to be monitored during the life of the IFC investment are:

- Annual LNG sales;
- Annual taxes paid to the Government of Peru by PLNG;
- Annual direct jobs created;
- Annual spending with local businesses; and
- Implementation of community development programs including governance capacity.

Governance risks assessment

It is expected that substantial benefits from the project will accrue to different levels of government in Peru in the form of taxes and royalties from the upstream Camisea project. In coming to a view on whether to support this project, IFC has reviewed a range of assessments including, but not limited to, the World Bank Institute’s Governance Indicators and Transparency International’s Corruption Perceptions Index. Also taken into account is Peru’s current engagement with the World Bank Group where the Bank is engaging with Peru on enhancing transparency and building regional government capacity. At the national level, Peru has already achieved a relatively high standard on accountability and transparency in the collection and distribution of oil, gas and mining revenues, and there is strong national commitment to the Extractive Industries Transparency Initiative (EITI) and its principles. On balance, given the governance situation in the country and the Project’s expected development benefits, IFC believes that this is a project in which it should invest.

IFC's expected development contribution

IFC has several important roles to play in the Peru LNG Project:

- Long-Term Funding:

IFC’s long-term support to the Project through debt financing as well as through technical assistance on environmental and social issues, and on community development initiatives will provide comfort to other potential investors and stakeholders.

- Environmental and Social Standards:

IFC is helping Peru LNG to develop a robust environmental and social management plan consistent with IFC’s Performance Standards. IFC is working very closely with Peru LNG in not only ensuring that the Project meets IFC’s Performance Standards and Peruvian government regulations, but also in the action plans in relation to the Project and its upstream suppliers. See Environmental and Social Issues section below and the ESRS document posted separately.

- Enhancement of the Company’s Stakeholder Participation and Social Investment Strategy:

IFC is working with Peru LNG to further develop its community consultation processes currently under way, and detailed Stakeholder Engagement Plan has been prepared. IFC will bring its expertise and experience from similar projects to support the adoption of a collaborative approach in the coordination, design and on-going monitoring of the various development programs implemented. This process is aimed at ensuring that the concerns of the respective communities located in the vicinity of the Project’s operations are addressed, the community is actively engaged, and that the intended outcomes of the various development programs are realized.

- Local SME development:

In order to boost the economic benefits for SMEs in the area of influence of the Project, IFC is working with Peru LNG to identify additional ways of incorporating local SMEs into Peru LNG’s supply chain (including the activities of Peru LNG’s contractors). To achieve this, potential local and regional suppliers are identified, following which their business and technical skills will be evaluated by IFC and Peru LNG. A program would then be designed to enhance the targeted business skills of the SMEs. The ultimate aim of such a business linkages program is to give local SMEs the economic opportunity to compete effectively for contracts supplying the project.

Building on past experiences, IFC believes that large projects such as Peru LNG can provide a sustainable long term contribution to the local economy when it incorporates SMEs into the supply chain.

- Local Governance

The project will trigger significant incremental flows of royalties from upstream gas production, to both the resource-extracting department of Cusco, and the communities living in the vicinity of the existing and new pipeline infrastructure. The gas royalties are generally distributed to the region where the resource is produced. However, the national government has created a mechanism to also distribute royalties to the departments along the gas and liquids pipeline route from the production area to the coast. This mechanism is the Camisea Fund for Socioeconomic Development (FOCAM) which was created with a portion of royalties generated by the upstream production from Blocks 88 and 56. These funds will accrue to the departments of Ayacucho, Huancavelica, Ica and the Provinces of Lima.

Similar to the pioneering work done by IFC with respect to the Canon Minero fund in Peru’s Cajamarca region (zone of influence of Minera Yanacocha, an IFC portfolio client), IFC and Peru LNG have commenced discussions to create a technical assistance program to work with local and regional governments in Ayacucho and Huancavelica. This program is intended to help increase local governments’ capacity to manage and apply the revenues they receive, leading to a more efficient application of royalties.

In parallel, IFC will help support the processes of revenue distribution and use by increasing transparency and knowledge about these revenues through the development of an independent monitoring mechanism. This mechanism will be administered by civil society and will promote public disclosure and accountability related to the use of revenues accruing from the extractive industries sector. In addition, at IFC’s request, Peru LNG will disclose all payments it makes in the form of taxes, bonuses or otherwise.

Environmental and social issues - Category A

The review of this project consisted of appraising the project’s technical, environmental and social information, several visits to the project’s LNG plant, marine facilities, quarry and pipeline right-of way, and visits to the upstream facilities (Block 88, Block 56, Malvinas Plant, and TGP pipeline) and interviews with company managers and operations’ personnel, and with some representatives of project affected communities.

Performance standards applicable to this investment include:

- PS1: Social and Environmental Assessment and Management Systems
- PS2: Labor and Working Conditions
- PS3: Pollution Prevention and Abatement
- PS4: Community Health, Safety and Security
- PS5: Land Acquisition and Involuntary Resettlement
- PS6: Biodiversity Conservation and Natural Resources Management
- PS7: Indigenous People
- PS8: Cultural Heritage

The following environmental and social management elements were assessed:

- The adequacy of the Project’s ESIA.
- The project’s cumulative effects assessment.
- The sponsor’s E&S management system and the project’s management plans.
- The sponsor’s E&S organizational capacity.
- Consultation and community engagement processes.
- Occupational health and safety management.
- Employment conditions.
- The project’s pollution prevention and abatement practices: including atmospheric emissions, greenhouse gases, energy efficiency, noise, marine facilities, project’s footprint, waste management, hazardous materials.
- Emergency response plans.
- Community health and safety plans
- Security arrangements.
- Land and easement acquisition and compensation.
- Biodiversity assessment and conservation management plans.
- Indigenous Peoples consultation, participation and development plans.
- Cultural heritage preservation plans.

In addition to the assessment of the project, the key environmental and social impacts of the upstream facilities were reviewed using a risk-based assessment approach.

IFC’s due diligence findings and application of IFC’s Environmental and Social Review Procedures to this suite of aspects and issues resulted in this Project being classified as Category A.

Peru LNG has prepared plans to address the potential environmental and social impacts of the Project and to ensure that the Project will, upon implementation of the specific agreed measures, comply with all environmental and social requirements (the Peruvian laws and regulations and the World Bank/IFC environment and social policies and the environmental, health and safety guidelines). Information about how these potential impacts will be addressed by the Peru LNG is summarized in the Environmental and Social Review Summary (ESRS) and in the Action Plan agreed with the client.

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