Peru scraps Southern Gas Pipeline contract in Odebrecht fallout

Peru’s finance ministry has cancelled the contract to build the Southern Gas Pipeline after the consortium to build it missed a key financing deadline.

The Southern Gas Pipeline consortium which included the scandal-embroiled Odebrecht, Peruvian firm Graña y Montero and Spanish company Enagas failed to raise required financing on Jan. 17. A group of 22 banks had refused to provide more money until Odebrecht sold its 55% stake in the project, which the company failed to do after Sempra Energy pulled out of negotiations in November.

“The pipeline project will not go forward with the current partners,” mining and energy minister Gonzalo Tamayo said. “The consortium was not able to continue [working on] the pipeline because the financial system does not believe in them.”

Tamayo added that a new auction would be held for the same contractual terms in order to complete the pipeline, which is slated to bring cheap gas from fields in Camisea to cities in southern Peru.

Odebrecht failed to sell its stake in the project due to a clause which rendered the contract null and void if acts of corruption in the bidding process were discovered. The banks financing the deal demanded Odebrecht withdraw in the wake of Brazil’s Carwash scandal, and the contract became truly toxic after the company admitted to the U.S. Department of Justice that it paid $29 million in bribes in Peru.

The $7 billion pipeline is just over 30% completed as Peru’s government scrambles back to the drawing board to keep work going. Officials hope the pipeline will help develop cities in the impoverished Andean highlands and provide cheap energy for petrochemical plants and large mines.

Legal experts told El Comercio that a new contract will take at least one year to complete, and any deal is likely to include changes such as how the companies are paid from utility charges and even the route of the pipeline.

Finance minister Alfredo Thorne told Bloomberg that Odebrecht’s corruption scandals would hold back Peru’s economic growth in 2017.

“It is likely that some of [Odebrecht’s contracts] will not materialize and we will have to look at a plan B,” Thorne said. “We are focused on private-sector-partnered projects and public works in a portfolio of infrastructure projects worth $40 billion that will help offset [the losses].”

Graña y Montero shares have plunged over 40% from over $8 in November, when Sempra Energy was in talks to buy Odebrecht’s stake, to $4.50 today.

“It is clear that we are mistaken in this association,” Graña y Montero CEO Mario Alvarado told Caretas magazine. “Regarding next steps, we are studying our legal options to make a decision.”

The company was not originally a member of the consortium, acquiring a 20% stake in 2015. The company has previously said that the state would have to compensate the consortium for over $1 billion in investments. The government, on the other hand, said it intends to collect a $262 million guarantee from the consortium for breach of contract, according to Reuters.

Sources

Gobierno pone fin la concesión del Gasoducto Sur Peruano (El Comercio)

Gasoducto Sur Peruano: ¿Qué puede pasar con el proyecto? (El Comercio)

GyM reconoce que se equivocó al asociarse con Odebrecht y sus acciones caen 14% (Gestion)

Alfredo Thorne: “El tema Odebrecht golpeará aumento del PBI en 2017” (RPP)

Peru will not compensate Odebrecht for natgas pipeline project (Reuters)