New drivers for clean-diesel emerging in Peru

Diesel Fuel News, April 15, 2002 by Jack Peckham

Lima, Peru -- A ground-breaking effort to slash air pollution in Peru's capital and other major cities, refinery moves to cut sulfur, and huge new projects to monetize stranded natural gas -- including gas-to-liquids (GTL) diesel -- point to the birth of a "green" fuels movement here, a phenomenon that's spreading throughout Latin America.

In interviews with Peruvian government and industry officials here, Diesel Fuel News explored the reasons behind new clean-fuel developments, including Syntroleum's pioneering "Talara" GTL project aiming to produce ultra-clean diesel fuels.

Besides local environmental and diesel fuel demand factors, other key factors include:

* Growing demand for diesel fuel, along with strong growth in diesel vehicle sales;

* Refining investment plans favoring desulfurization;

* An emerging "Clean Air Initiative for Lima-Callao" multi-sector agreement to slash vehicle and stationary-source emissions;

* Readily available, underutilized gas near Talara, along with a favorable straight-royalty scheme on gas production that would help Syntroleum's Talara GTL project viability;

* The gigantic "Camisea" stranded gas field that will begin to be commercialized via new pipelines to the Pacific coast as early as 2004, possibly triggering a second GTL clean-fuels project.

"Recent changes in Peru's hydrocarbon laws and the ability to negotiate much lower royalties have placed Peru in a favorable position versus major producing countries such as Venezuela and Argentina, which are going just the opposite way to higher royalties and higher government take," as Syntroleum's GTL-Peru project advisor Ron Roberson explains.

What's more, Peruvian government officials indicate that based on favorable circumstances here, cleaner diesel fuels (including GTL) should look feasible for the current and future commercial domestic market.

"Peru is importing more diesel fuel" thanks to a sharp increase in sales of fuel-efficient diesel vehicles in recent years, explains Jose Robles, senior advisor for Peru's Ministry of Energy & Mines (MEM). The diesel supply deficit is approaching about 5 million barrels/year, mostly high-sulfur fuel (between 0.3% to 1% sulfur) from Venezuela, he said.

While sufficient low-cost gas in the near-shore, shallow-water "Northwest" fields near Talara indicates support for expansion of GTL production, "the real challenge is to prove to the rest of the world that GTL can work" at a competitive cost, Robles said. This depends not only upon Syntroleum proving its GTL technology on full commercial scale, but also upon world oil prices rebounding to around the $25/barrel range that OPEC aims to defend, Robles said.

Meantime, finding a hungry nearby market outlet for diesel shouldn't be a problem.

Some 60% of vehicles imported into Peru (no domestic new-car assembly exists here) today are now diesel. On the other hand, over 75% of car imports are used rather than new vehicles, mostly due to Peru's relatively small class of consumers willing or able to buy new cars.

Many of the taxis on Lima's streets today are old, "dirty" Japanese diesel vehicles converted from right-hand to left-hand drive by local "chop shops" not noted for the highest quality standards, according to Araper, the trade association representing the world's major automakers here. Higher-quality vehicles would require higher-quality fuels, like those from GTL plants (and/or low-sulfur diesel fuels from crude refiners).

Hoping to boost the market for more modern, lower-emissions vehicles, Araper is pushing for much tougher standards (or even a ban) on importing used vehicles into Peru. Automakers hope that future government regulations will encourage more new-car sales rather than relatively "dirty" used-car imports, Araper spokesman Peter Davis told us here.

This effort is beginning to bear fruit: Following extensive discussions over the last three years between oil industry, automakers, environmental advocates, the World Bank, and federal and local officials, the Peruvian government is now moving forward on a "Clean Air Initiative for Lima-Callao."

This effort includes new technical standards and emissions limits on imported vehicles, an air pollution monitoring network and transportation/traffic rationalization.

It also includes inspection & maintenance (I&M) on in-use vehicles, changes to fuel/vehicle tax-rates, and improved fuel specifications to encourage cleaner fuels, explains Gladis Macizo of the Transport Ministry's environmental division.

The formal plan should be officially presented by May, following consultations now underway with local government officials charged with enforcing parts of the plan, she said. However, the multi-sector committee charged with developing the Initiative will continue working on more new features, as well as updates and revisions to current plans, over the next several years.

While all the diesel fuel specifications haven't been officially approved or finalized yet, the plan envisions a steep cut in diesel fuel sulfur for metro Lima (including a "superior" grade with a 350 ppm sulfur limit, down from about 7,000 ppm sulfur today) probably by around 2004-5, along with a 2,000 ppm sulfur limit for the other diesel grades elsewhere.