Staring down the barrel: what Peruvian oil company’s crisis means for the public

“Unfeasible”. “Unsustainable”. “Immoral”. PetroPerú’s directors had painted an ominous picture of the state-owned oil company’s management and finances over recent months. Then, on 10 September, they all quit.

Their mass resignation was the latest chapter in the financial crisis engulfing a company whose fate holds major implications for Peru’s economy, Indigenous communities and globally important ecosystems.

The board largely blamed the company’s woes on the spiralling costs of its flagship Talara oil refinery – the subject of a $6.5bn revamp – as well as the government’s failure to intervene further after months of warnings.

The company’s mounting debt includes a billion-dollar bond issued in 2021 for the Talara project. Earlier this year The Bureau of Investigative Journalism (TBIJ) revealed that Santander and HSBC worked on the deal despite policies protecting recognised wetlands, which a pipeline set to serve the plant slices through.

Days after the resignations, the government ordered an overhaul of the company’s management, as recommended by the outgoing board, and confirmed a bailout of over $1bn to help with its running costs. It was the second rescue package of the year for PetroPerú, which is the country's main fuel supplier.

It said the government’s support would allow it to “continue its important work of supplying fuel to the entire country, especially in the most remote areas, such as the jungle and the high Andean regions”. It reiterated its commitment to restructuring in line with government requirements.

But in the long term, the company has a big problem. It is billions of dollars in debt; its core business is oil; and the world is decarbonising.

Leading scientists say that the world must reach net zero emissions by 2050 in order to rein in catastrophic climate change. This will require huge adjustments on the part of fossil fuel companies.

It’s a future for which PetroPerú is unprepared, the company’s former president César Gutiérrez told TBIJ. “It has no tools for this,” he said.

Gutiérrez warned that PetroPerú will need to repay millions of dollars next year. And before then, it may need additional funds to pay for equipment that will enable the Talara plant to produce oil complying with new rules on lower sulphur content.

Months of silence

As a state-owned company, PetroPerú’s fortunes hold particular repercussions for the nation at large.

The company’s bailouts have already cost the public purse around $3bn. Gutiérrez said that if the state was to keep pumping money into PetroPerú then it would need to borrow more, and there are laws in place limiting the amount of government debt.

Back in May, the directors said it would be “immoral” to ask for more money from the taxpayer without making far-reaching changes to how the company was run, bringing in private managers who would not be hindered by political and union interference.

Three months later, the board claimed that bankruptcy could be on the cards for the 55-year-old company – warnings that were met with silence from the government.

“The lack of a response reflected the [current president] Dina Boluarte government’s inability or unwillingness to articulate a clear strategy for PetroPerú,” said Theodore Kahn, director for the Andean region at the political consultancy Control Risks.

Kahn said that Peru’s recent political instability – there have been six presidents in as many years – has meant successive leaders have focused mostly on their own short-term survival. And some moves that could help PetroPerú’s finances, such as partial privatisation or wholesale reform, would prove politically unpopular.

But dissolving the company was never a realistic outcome, according to Gutiérrez. He said the directors’ threat of declaring bankruptcy was “pure sensationalism”.

A bankruptcy declaration, he told TBIJ, would “give bondholders the right to request an immediate repayment of everything”.

If PetroPerú can’t repay them, he said, creditors could demand the money from the state – not because the state is obliged to take on the debt but because it would “look bad” if it did not repay the debts of a company it owns.

More Amazon oil?

The saga’s possible ramifications are not limited to the national economy. Peru’s sprawling Amazon rainforest, home to 1.6 million Indigenous people and a vital buffer against climate change, is also in the firing line.

PetroPerú’s main business is refining and transporting oil, much of it from the Peruvian Amazon to a terminal near Talara through the 1,000km Norperuano pipeline. But in 2021 it acquired rights to drill in the Amazon, signalling a return to oil production for the first time in more than 25 years.

According to a new report from Amazon Watch, an NGO, PetroPerú’s dire financial situation means it is more likely to push for more oil extraction in the Amazon, where it has met strong opposition from Indigenous and environmental groups. Amazon crude is needed to feed Talara so it can operate at greater capacity and become profitable, the report claims.

Amazon Watch also warned that Talara risks becoming a “stranded asset” – something that has lost value in a changed market – if the world’s need for cleaner energy sources means the oil is no longer worth extracting.

And activists have successfully launched campaigns against banks backing Amazon oil projects, which could make it more difficult for PetroPerú to secure finance in the future, said Kahn, the analyst.

The most likely outcome for PetroPerú is that the government keeps injecting money into it to keep it afloat, Kahn said. Longer term, the global phase-out of fossil fuels remains a major concern for the company, on top of its pressing problems of enormous debt, unprofitability and management crisis.

“The company’s sole focus on oil and gas in a world that needs to transition to cleaner energy sources is one of the many issues that would need to be addressed in any restructuring,” Kahn said.