Peru's phenomenal economic growth in recent years has boosted the country's prominence in Latin America. It has also caused more than a few headaches for government planners, as energy demand has expanded faster than expected. Inadequate transmission and natural gas pipeline capacity has further exacerbated the problem, putting Peru under threat of power outages and forcing generators to increase imports of high-cost diesel.

If the government is to be believed, the problem will be short lived, as projects are underway to increase generation and transmission capacity and expand natural gas pipelines. But the current energy crisis will have long-lasting consequences, as it has forced the country to rethink how best to take advantage of its newfound natural gas wealth. It's becoming increasingly clear that Peru will not expand its natural gas export program beyond the one liquefied natural gas project that is on track to start operations in about a year.

That's not to say, however, that the LNG project is under threat, as work is proceeding on schedule to start operations in the first half of 2010, according to the project leader, Dallas-based Hunt Oil. And a key part of the puzzle fell in place earlier this year when the project consortium, which includes SK Energy of South Korea with a 20 percent stake, Spain's Repsol YPF (20 percent) and Marubeni of Japan (10 percent), secured $2.25 billion in loans for the $3.8 billion initiative. When complete, the LNG terminal will boast nominal capacity of 4.45 million tons per year with a daily supply of 625 million cubic feet transported through a 34-inch, 254-mile pipeline.

Meanwhile the project's upstream portion is progressing well. In October, the E&P consortium Consorcio Camisea started production from the Pagoreni well in Block 56. Led by Argentina's Pluspetrol, the consortium aims to continue drilling in coming years to ramp up output to 1.8 billion cubic feet per day from the current 1.22 Bcfd.

Hopefully the Camisea consortium's upstream success will continue in coming years, as the government plans to change its deal and set aside production from the nearby Block 88 for domestic use. That would force the LNG project to rely exclusively on Block 56 for supply. The government decision, which would violate an agreement it has with the consortium, reflects Peru's increasing concern that fast-growing demand for natural gas could outstrip supply in coming years.

The government is largely behind the soaring demand, as it has tried to promote the use of domestic gas in the Peruvian economy. The state provides incentives to convert cars to run on vehicular natural gas, which in October this year was running about 30 percent cheaper than gasoline. And the government has kept natural gas prices low at less than $5 per million Btu, thereby encouraging generators to build natural gas-fired capacity rather than hydro. The government is also expanding the use of gas for petrochemical production.

Meanwhile, the government in September 2008 awarded a group led by New York-based private equity investment firm Conduit Capital Partners to build a $1.2 billion pipeline to transport Camisea gas 675 miles to the port city of Ilo on the Pacific coast. And Peruvian transport company TGP is investing to expand existing capacity and relieve the natural gas bottleneck to existing generators by the second half of 2009.

The LNG consortium is not likely to put up much of a fight against the government, as it's widely believed there is more than enough gas in block 56 to supply the export contract. In fact, the original deal for gas exports only included block 56 but was later expanded to include 88 to give the export consortium peace of mind.

But previous hopes of expanding the export project to include additional trains are becoming increasingly unrealistic, as the state clearly wants to keep as much gas as it can to itself. Peru undoubtedly will become South America's first LNG supplier, with much of its output heading for Mexico or California. But it is unlikely to be a major part of the global export trade for the foreseeable future.