The cost of failing to prevent gas supply interruption: a CGE assessment for Peru

Since 2000, there has been a noticeable progress in social and economic indicators of Peru. Even though the country risk has diminished dramatically, several threats remain. One of the key dangers is the possibility of involuntary (transitory or permanent) interruptions of the natural gas pipeline transportation system. Shortages of natural gas due to pipelines failures can wreak havoc on the Peruvian economy because it is a basic input for domestic manufacturing and household energy consumption, and because it generates important sources of revenues for the government. Given the significant endowments of natural gas reserves in Peru (Camisea gas field) and the relevance that this fuel has taken in the Peruvian energy matrix and the national economy, it is important to analyze the impact that a transportation constraint on gas flows could have for the domestic consumers, as well as for LNG exports. Earthquakes, unexpected social unrest or intentional actions could interrupt the service of some of the fundamental pipelines of the grid, generating adverse impacts on the stability of the Peruvian economy. One pipeline with three branches connects the upstream to the distribution centers. To have a quantitative appraisal of the cost of disruption we built a CGE model for Peru, containing 26 sectors, two households (Rich and poor), a government and the rest of the world. To take into account the economy wide impact of the interruption of gas supply, it is necessary to construct a model that gives the economic value of the infrastructure considering modifications of relative prices, markets reactions and income effects. This assessment can be also used to evaluate projects of protection and adaptation of the infrastructure. We simulate different scenarios considering the three most important branches of the Camisea pipeline. The results show that those shocks would represent an important decline of GDP in the short run when substitution is limited (about 51% in annual terms or 0.14% by day) and an abrupt reduction of welfare for households. The estimated daily cost is in the range of 227 million of US dollars for the worst case scenario.