omestic exploration for natural gas is in-D deed a risky business. In international gas developments, although the risk of dry holes has historically been lower than domestic, risk is still present. Sensitivity analysis can be used to quantify such risk.
Information about Peru's Camisea project, a natural gas field, can be used as a basis to show how sensitivity analysis can be applied on a broad scope to international natural gas development projects. Camisea lies approximately 300 miles from Lima, across the Andes Mountains.l The project has three distinct phases: exploration and production, pipeline construction, and fractionation plant construction. According to published sources, the field's estimated recoverable reserves are 11 trillion cubic feet of gas . . . and 800 million barrels of condensate. The total cost of the project is US$3 billion and the project life is 40 years. The Peruvian government's tax revenues and royalties are estimated at US$7 billion.* . . . sensitivity analysis can be applied on a broad scope to international natural gas development projects.
Using these figures and making other assumptions concerning operating expenses allows a sample sensitivity analysis to show the risk associated with such projects.
Development of the Field
Camisea was initially discovered by Shell Oil Company in the mid-1980s. It attempted to explore Camisea and come to terms with the previous Peruvian administration under Alan Garcia. Negotiations never came to fruition, but terrorism from the Peruvian group Sendero Luminoso threatened. Thus, negotiations were terminated in 1988.
Peru's new government, under Albert0 Fujimori, has adopted neoliberal market economic policies and has eliminated the security issues proposed by the terrorist movements. Major oil companies returned to Camisea in 1996 and commenced test drilling in 1997.3 The concession allowed for test drilling until May 1998, with a possible 60-day extension until July 1998-then the developers would enter a formal development agreement with the Peruvian government.
In July 1998, the developers declined to enter a formal development contract with the Peruvian government. The reasons cited were the following:
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The inability to agree on price; 2. The government's refusal to allow one operator to control the entire development, from production to marketing and distribution; and
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The government's refusal to allow any export of gas production.
The second and third reasons are political in nature. Thus, they have been ignored for this article's purpose, in order to concentrate solely on the price issue. The benchmark price offered for Camisea's development was $1.61 per thousand cubic feet. The sensitivity analysis in
R. P. Sanders lllmanages administration of expatriate energy personnel for assignment in Latin
America and other locations. He also is a graduate student in finance, with 8 Latin American concentration, at St. Thomas University, in Houston. He wishes to thank C. Joe Ueng, Ph.D., of St. Thomas for his review of this article.