Peru LNG 

Position of the United States at the IFC 

February 5, 2008 

The United States recognizes that this project – the largest foreign direct investment in 

Peru and the first LNG export project in Latin America – represents an opportunity for 

the Peruvian people to create a cohesive energy matrix and undertake critical investments 

in poverty reduction in the project’s area of influence. The U.S. has closely followed the 

development of Peru’s hydrocarbon resources since the period leading up to financing of 

the Camisea project at the Inter-American Development Bank (IDB). The United States 

did not support the Camisea project because we questioned the need for IDB’s financing 

given the availability of private financing; we also had concerns regarding insufficient 

application of environmental and social protections. 

While we recognize that the Camisea and Peru LNG projects are both physically and 

financially related, it is important to note that several factors differentiate them. First, the 

sponsors of the Peru LNG project demonstrated a willingness to set a standard of 

environmental and social best practices well ahead of construction. Second, the on-going 

learning process by the Peruvian Government has resulted in improved management of 

hydrocarbon development in the Lower Urubamba. And third, important lessons from 

Camisea have been incorporated into how the lenders approached the LNG project 

design, including environmental and social management. 

In particular, we appreciate the efforts of the Peruvian Government to improve 

management of Peru’s hydrocarbon resources, notably through its extension of the 

Camisea inter-agency coordinating group and Camisea Ombudsman into the LNG 

project. The Government has expedited its request for an IDB policy-based loan (PBL) 

for a sustainable energy matrix, and has recently taken steps to establish an independent 

environment ministry and strengthen protections for indigenous peoples in the Camisea 

region. Furthermore, efforts by the Finance Ministry to simplify procedures for using gas 

royalties are enabling communities to benefit more directly and expeditiously from these 

hydrocarbon revenues. All of these actions took place in the context of a very complex 

decentralization and reform process that continues to unfold, and all parties recognize 

that there is much work left to be done. 

Through Hunt Oil as the lead project sponsor, Peru LNG has committed to using industry 

best practices for the mitigation of environmental and social risks. Peru LNG has 

designed a detailed environmental management plan and has cross-referenced the 

environmental requirements of its multiple lenders. These practices also include the 

purchase of the maximum available emergency insurance to guard against the impacts of 

possible spills or natural disasters. Peru LNG’s community development program is well 

designed and participatory, and Hunt has also agreed to improve community development 

efforts by coordinating them with other funding sources. Finally, we welcome the 

sponsor’s plans to establish a community monitoring program, and expect that it will be 

operational in the near future. 
For all the above reasons, the United States supported the IDB component of this project 

on December 19, 2007. In forming our position on IFC financing, however, we have 

examined the project’s characteristics, the country context, and equally important, the 

justification for IFC’s involvement. With respect to the latter, we examined whether 

IFC’s involvement is likely to improve materially the project’s economic, social and 

environmental outcomes above and beyond those that would have obtained solely from 

IDB’s much earlier involvement. Thus far, the evidence is mixed. 

With respect to environmental considerations, the IFC’s environmental and social 

performance standards are broader in scope than their counterparts at the IDB, including 

labor conditions, community health and security, and cultural heritage. The application of 

these standards to Peru LNG thus reflects environmental and social additionality. 

On the other hand, IFC’s definition of associated facilities for environmental assessment 

is actually narrower than that adopted by IDB, as well as inconsistent with what we 

believe are the standards under U.S. domestic environmental law and international good 

practice. According to its definition, IFC does not consider any component of the original 

Camisea project to be an associated facility. IFC’s determination of no “associated 

facilities” also means that it did not extend its formal analysis of “Broad Community 

Support” to the upstream facilities. 

In lieu of formally applying its safeguards even to the gas field on which the Peru LNG 

project depends, IFC and the other lenders are seeking to manage the risks associated 

with upstream facilities via other mechanisms. Importantly, lenders will require the 

sponsor to use its “best efforts” to induce the gas field operator (Pluspetrol) to prepare 

and implement several environmental and social action plans. Given that the Peru LNG 

consortium controls an aggregate majority share of total Pluspetrol equity, we expect IFC 

to establish a very high bar for enforcing “best efforts”. 

IFC’s project document references the Strategic Environmental Assessment (SEA) 

conducted by the Government of Peru as a tool for managing the broader cumulative 

environmental and social impacts from hydrocarbon development in the Lower 

Urubamba. However, IFC does not appear to have a role in promoting implementation of 

the eight programs proposed under the SEA. IFC and IDB are also seeking to catalyze a 

Lower Urubamba producers group that would coordinate their implementation of 

safeguards; we are disappointed with the slow progress to date in establishing this group. 

The primary linkage of Peru LNG to poverty reduction is through the flow of gas 

royalties. For the gas extracted to serve the Peru LNG project, 63% of the royalties 

collected will flow to regional or local governments. In this regard, we welcome that IFC 

will support increased transparency of revenue distribution and use through independent 

monitoring in the provinces of Ayacucho and Huancavelica. Since Peru LNG will also 

generate major revenue streams to Cusco, we ask that IFC include this province as well in 

its monitoring and reporting efforts. 
With respect to demonstrating additionality in the area of extractive sector governance, 

the IDB is complementing its support for the Peru LNG project with a forthcoming $50-

million public sector operation aimed at strengthening the Government of Peru’s 

management of its energy sector. We would welcome similar complementary efforts by 

the World Bank Group. We are thus encouraged by the grant agreement between the 

World Bank and the Government of Peru, under which a pilot project to enhance revenue 

transparency will be started by the World Bank in the Cusco region. Consistent with the 

most recent Country Partnership Strategy for Peru, the Bank is planning an 

environmental development policy loan (DPL) for early in FY09, followed by an 

additional DPL later in the fiscal year. We welcome these planned operations, notably 

the link to this Peru LNG investment by supporting environmental institutions and 

governance. 

Considering both the project characteristics and IFC’s additionality, the United States 

supports IFC financing of this project. The potential for IFC to contribute uniquely to 

positive development outcomes is sufficient to warrant its involvement, although we 

would have liked to see more progress in several initiatives. Given the relatively nascent 

stage of these activities thus far, we encourage IFC Management to devote significant 

attention to post-Board monitoring and reporting to IFC’s Board as well as to civil 

society. We have several suggestions in this regard. 

First, IFC should strengthen its plans to report on development outcomes from the 

project. According to the project document, IFC will enhance and measure poverty 

reduction impacts but reporting details are lacking. Although current IFC information 

disclosure policy does not require it to report on project-level development outcomes, we 

urge IFC to do so in this case. In particular, we suggest that IFC measure the following 

for each district and province receiving gas royalties: annual trends in poverty rates and 

income; annual trends in access levels to basic services (e.g., water, sanitation, electricity, 

education); and trends in employment rates. Collecting such data is within IFC’s 

capacity. We welcome IFC reporting on the indicators in the Project Supervision Report 

and on the inputs and outputs from various programs, but these are not a substitute for 

outcome indicators related to poverty reduction. 

Second, we urge IFC Management to work with other Peru LNG lenders to strengthen 

the independence and coordination mechanisms of the overall monitoring framework for 

this project, and to extend them retroactively to the Camisea project. Doing so would 

help mitigate some of the distrust and misperceptions that are associated with Camisea. 

IFC would add value to the project’s community monitoring program by applying its 

experience from another IFC-financed extractive project in Peru, the Yanococha gold 

mine. In that case, a Peruvian university was engaged to assist communities in some 

technical aspects of the monitoring program. 

Third, given that the lenders will have a common terms agreement, we encourage IFC to 

coordinate closely with IDB in preparing and presenting monitoring reports. We 

understand that IFC has proposed annual reporting to the Board on this project. This 
schedule may suffice given that IDB management has indicated a willingness to provide 

quarterly reporting to its Board as the project goes to financial closure and execution. 

Finally, we urge IFC to support the U.S. Eximbank proposal to establish an advisory 

panel within six months that would conduct annual reviews and report to the lenders on 

all phases of the Camisea and Peru LNG projects (similar to panels established for the 

World Bank-financed Nam Theun 2 and Chad-Cameroon projects). This panel would 

accept input from civil society and its reports would be made publicly available. 

In conclusion, this investment has the potential to impart significant benefits to the 

Peruvian people in terms of revenues for local development, expanded energy 

infrastructure, and development of hydrocarbon resources. We wish the Peruvian 

authorities and the project sponsors much success in realizing the benefits of this project, 

and we support IFC’s investment in Peru LNG.