Analysis of the Peru LNG Project

Peru is faced with a decision to export natural gas reserves or to use the gas for future domestic consumption. It may appear that natural reserves left underground has little use, while significant export revenues to be generated from these reserves may boom the country's economy. One should, however, note that depleting natural gas reserves will eventually lead to increase in the oil imports for electricity production. In light of this, it is important not only to account for the benefits arising from the natural gas exports, but to compare the present value of these benefits and that of economic costs of the consequent oil imports. The ultimate decision will be affected by the proven quantity of the country's natural gas reserves allowing to postpone the imports. This study estimates the number of years that would allow economically viable exports of Peru's natural gas. Sensitivity analysis is used to estimate the impact of different variables, such as oil prices and discount rates, on the variable. The study concludes that with the current level of proven natural gas reserves in Peru, the decision to implement a project for the export of LNG i.e. the largest foreign investment in Peru's history, would impose significant economic cost to the country. Moreover, the distributive analysis revealed that the private participants of the LNG export project would not bear these costs instead they will impose them on the Peruvian economy.