Peru - Mining and Oil

Mining and oil

The mining sector, including oil, accounted for only 9 percent of GDP in 1988 but nearly half of the country's export earnings. Its share of total exports increased from 45 percent in 1970 to 48 percent in 1988. Copper alone accounted for 24.4 percent of total export earnings in 1970 and 22.5 percent in 1988.

Mining developed as an export sector, first for precious metals and then chiefly for nonferrous metals needed by the industrialized countries rather than by non-industrialized Peru. Mining has always been an enclave, only weakly related to the domestic economy for its supplies or for its markets. But it has been a principal provider of the foreign exchange and tax revenue needed to keep the rest of the economy going. That key role made the dominance of foreign ownership, especially in copper and oil, a focus of bitter conflict for many years. The sector became the center of intense debate over dependency, exploitation, and national policy toward foreign investment.

Foreign investment was the main source of mining development up to the 1960s, starting from the turn of the century in copper and extending to a wide range of metals after the highly favorable Mining Code was enacted in 1950. The sector was divided between the largest mines, which produced roughly two-thirds of metal output and owned by foreign firms, and the small-to-medium size mines , which supplied the other one-third of output and were under Peruvian ownership. Following the Mining Code of 1950, foreign investment flowed into iron ore, lead, zinc, and other minerals, and metals exports grew from 21 percent of total exports in 1951 to over 40 percent a decade later.

When the military overthrew the government of Bela�nde in 1968, the immediate issue was a conflict with IPC, the foreign firm dominating the oil industry. The Velasco regime quickly nationalized IPC and then in the 1970s also nationalized the largest copper mining corporation, Cerro de Pasco. It established the Peruvian State Mining Enterprise (Empresa de Miner�a Peruana- -Mineroper�) as the main state firm for development of copper and the Peruvian State Mineral Marketing Company (Mineroper� Comercial--Minpeco) as the new state mining marketing agency.

Output of metal products was erratic in the early 1970s but then took a big jump with completion of a major new copper-mining project, Cuajone, in 1976. By 1980 value added in the sector, at constant prices, was 1.5 times as high as in 1970. But then in the 1980s, value added began to fall, along with practically everything else. By 1988 it was 14 percent below the 1980 level. The decrease could be explained to some degree by the general disorganization of the economy, but more specific problems were caused by increased guerrilla violence interrupting supplies and deliveries, and by prolonged strikes.

Extraction, refining, and domestic marketing of oil were under control of the Petroleum Enterprise of Peru (Petroleras de Per�--Petroper�) from 1968 to 1991. Foreign firms have been allowed to participate in exploration for new fields, although negotiations over their rights often has proved to be difficult. One foreign firm, Belco Petroleum Corporation, maintained offshore production until 1985, when its operations were nationalized after a dispute over taxes with the Garc�a government.

Output of oil products increased greatly in the course of the 1970s: its value at constant prices was 2.7 times as high in 1980 as in 1970. But then oil production joined the collective downtrend: it fell sharply between 1980 and 1985. Again, both the general disorganization of the economy and the increase in rural violence contributed to the decrease. Additionally controls on prices of oil products held them far below costs of production in the second half of the 1980s. That fact put Petroper� deeply into deficit and constrained its ability to finance both production and exploration. In 1990 petroleum contributed US$263 million to the value of the country's exports. The major changes introduced by the Fujimori government in 1990-91 included invitations for new investment by foreign oil companies, ending the monopoly position of Petroper�. Several foreign oil companies immediately entered negotiations to begin exploration activities, either independently or in collaboration with Petroper�.

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