Oil in the Ground or Pie In The Sky

Oil in the Ground or Pie In The Sky: The Fight for Ecuador’s Yasuní National Park

(Gerard Coffey/Alborada.net)

Monday 1st March 2010,

The resignation of the Ecuadorian Foreign Minister, Fander Falconí, came as a real shock to most observers; it was probably not something Falconí himself had foreseen. His departure in January provoked a minor earthquake within government circles, but a reading of his dispute with President Rafael Correa suggests that whatever the personal grievances, the major problem is not what his resignation implies for the long term well being of the government. The real issue is the future of the complex project he was answerable for, and which led to his exit.

As Foreign Minister, Falconí was responsible for the plan to leave the oil of the Ishpingo- Tambococha-Tiputini (ITT) fields, located in Yasuní National Park, in the ground in exchange for international financial support. The initiative, proposed in 2007 by then Minister of Energy, Alberto Acosta, another of the founders of Alianza Pais, has a great deal of merit and international support, but has met with internal scepticism (at times shared by the President) and even outright opposition. Falconí was responsible for the negotiations, but whatever the shortcomings these may have had, the possibility of his departure was never part of the equation. It seems surprising even now.

Harsh words were exchanged after President Correa declared in his Saturday broadcast that the terms of the negotiation were “shameful”, and had been imposed by foreign governments who could “stick their money in their ears”. The statement was later rectified. It was not foreign governments he said, but a ring of infantile environmentalists that was trying to impose their conditions on the country at large. This is not the first time local environmentalists have been called infantile or been the object of the President’s outbursts. But neither Falconí nor the environmentalists are infantile. Their motivation is Climate Change, an extremely serious phenomenon, and the desire to preserve Yasuní National Park, an area of the Amazon that is not only important nationally but to humanity as a whole.

Oil in the Ground

According to Acosta, the Correa’s remarks could be seen as an attempt to distance himself from the proposal. That may well be true. This is after all a groundbreaking proposal, one that in traditional economic terms will cost Ecuador half the value of the oil in the ground: some US $3.5 billion. But a reading of the document presented as the basis for the Trust Fund to be set up to manage any money received – administered by the United Nations Development Programme (UNDP) – shows that whatever his verbal excesses, the President’s criticisms are not totally unfounded.

An agreement to establish the Fund was to have been signed during the Copenhagen climate Change Summit in December of last year, but was delayed by Correa’s unease over the conditions. As part of the contract Ecuador would not only have agreed to leave almost 20% of its oil reserves in the ground, but would also have protected 38% of Ecuadorian territory (some 9.8 million Hectares (“one of the highest percentages in the world”[1]). Any money generated was to have been spent on renewable energy projects and any income received from those projects would be used for conservation, reforestation, energy efficiency and support for local populations in the protected areas. In addition, the funds would have been spent on projects submitted by “national institutions” (undefined, but most likely large NGOs) rather than by government institutions(2).

The goals are laudable; there is clearly nothing shameful here. But all this probably comes as a surprise to most Ecuadorians, who imagined that any money donated would have been a simple exchange for leaving the oil in the ground. The conditions add a whole new dimension to the plan, a dimension that Rafael Correa was reportedly concerned about when he met with the chief negotiator, Roque Sevilla, in early December.

The original Trust Fund document also raises some questions about the conditions under which it was negotiated. For instance, did the prospective partner governments really know nothing about the conditions that would later appear in the document, as claimed by Sevilla, a founding member and ex president of one of Ecuador’s largest environmental NGOs, the Fundacion Natura. It is possible, although unlikely, that potential contributors such as Germany were willing to offer large sums of money knowing nothing about the conditions under which the money would be used, even if these were not fully defined at the time. Did the negotiators also imagine that it would be acceptable that none of the money could be used for national social programs such as Health, Education or Pensions?

And while the negotiations appeared to have been advancing fairly well, there is still a long road ahead. The German government has stated its support for the project, while other probable partners are said to be Belgium and Spain (a debt swap in the latter case); France and Sweden are considered “possibles”. On the other hand, despite a number of attempts the prospect of money from the United States seems distant, although that might, possibly, change depending on decisions taken by that country’s Senate with regard to climate change. India, China and even Iran have been suggested as other options. Carlos Larrea, advisor to the ITT technical team, suggests that another possibility might be a multilateral fund set up as a result of any post Kyoto Protocol Climate Change agreement.

No matter what the state of negotiations or any doubts about European Economic stability give the economic troubles in Greece, Spain, Portugal and Ireland, according to Alberto Acosta the amounts of money in play are small, and in practice the project’s success will depend more on the President’s political determination than any other factor. Hopefully Acosta will be proved correct, but at this point no one knows for absolutely certain that the money can be raised(3). Rafael Correa’s role apart, that will depend on the willingness of other nations to assume responsibility for Climate Change.

Not a Drop

Now, almost than two months after the dispute which led to Falconí’s departure, the political dust has settled. But the debate goes on, sponsored principally by a corporate media that would undoubtedly oppose the project if its proponent were anyone other than Rafael Correa. But no matter how perverse or politically motivated their support may be, it has helped to keep the project on track. A renewed commitment to the proposal has been publicly stated, a new negotiating structure put into place and changes made to the Trust Fund document that reflect the President’s criticisms. According to National Heritage Minister Maria Fernanda Espinoza, Correa himself will head the project, while heading up the negotiating team will be Ivonne Baki, former Minister of Commerce in the government of Lucio Gutierrez (2002-04), and ‘friend’ of US magnate Donald Trump. Negotiating ability and political astuteness apart, her presence is not designed to win friends amongst environmentalists(4).

Baki has stated that “Not a drop of oil will leave Yasuni”(5), which should calm concerns about her suitability, at least to some degree. But leaving the oil in the ground will not be easy. The Yasuní ITT proposal represents a fundamental shift in economic thinking and, above all, planning. The question now is not its intrinsic value, but whether it can succeed in a dirty world of short term political goals, nationalism, and vested business interests.

Oil is a dirty business, and Ecuador – an exporter since the nineteen seventies – is no stranger to the environmental impacts and social conflicts that the black stuff brings in its wake. But as a major part of its national budget depends on income derived from oil, there has never been much interest in leaving it underground. But this particular case is different. Yasuní National Park, located in the North West of the country on the border with Peru and close to the border with Colombia, is a UNESCO Biosphere Reserve and recognised as one of the most bio-diverse areas on the planet. There is little doubt about its importance, and little disagreement about the need to preserve it.

There is also little argument about the threat posed by the overuse of fossil fuels and consequent changes in the global climate. Even a rise of 2oC above the pre industrial average, agreed at the Climate Conference in Bali in 2009, could have massive implications for humanity, and in the long run any campaign to protect the Park will depend heavily on humanity’s ability to reduce emissions. If global temperatures continue to rise, Yasuní and the entire Amazon region could witness a progressive drying out(6).

But even limiting the climate to that apparently small temperature rise appears increasingly unlikely given the failure negotiations in Copenhagen and the apparent unwillingness of the major polluters to reduce their internal emissions. Drastic measures are needed if the planet is to escape with its life; leaving oil in the ground is one of them. And as the only proposal of its kind, it is not surprising that the ITT proposal has received such widespread international publicity and acclaim.

Unfortunately, there is a complication. The ITT proposal will go a long way towards protecting Yasuní, but alone it will not save the Park from the impacts of oil exploration. There are fields in or close to Yasuní and its buffer zones that are already in production, while others, as yet undeveloped, are located close to and even in the centre of the park itself. To save Yasuní National Park from the impacts of oil all these wells would have to be shut down or left unexploited, as would likely be the case with fields on the Peruvian side of the border that, if exploited, could cause impacts within Yasuní. At a minimum the fields located entirely within the park (Block 31) would have to be included. Saving Yasuní from oil will therefore require not only a much larger amount of political will but also greater financial commitment on the part of foreign governments and a greater financial sacrifice on the part of Ecuadorians. The Peruvians would also have to play their part.

Convincing Peru and other, richer, foreign governments of the value of an environmentally cutting edge proposal such as ITT is an evident difficulty, despite the imminent risks of Climate Change and the value of this region of the Amazon. But this is not the only barrier. Internally the project has also had to fight hard for its life against those who think that the plan makes no economic sense given the global recession, rising oil prices, and the need for revenue to underpin the government’s high social spending levels. It is hardly surprising, therefore, that there is a plan B. This has never been a secret, and it is not necessary to be an expert in game theory to realise that without a credible alternative/threat, any negotiations become much more difficult. The threat is made all the more real by the President’s understandable hesitancy to give up half the value of the oil.

Pie In The Sky?

A recent survey(7) in Quito and Guayaquil, the country’s two major cities, showed that more than 70% of respondents favoured leaving the ITT oil in the ground. It is a commendable attitude and one that has doubtless influenced the decision to keep the project alive. But just how far the Ecuadorian government should be asked, or can be expected, to go in order to protect Yasuní and the planet is an open question. Leaving the ITT reserves in the ground is one thing, but adding the fields of Block 31 – which forms part of Petroamazonas’ plans for this year(8) – and Pañacocha – due to enter production next year(9) – as well as shutting down already existing operations such as those of Repsol in Block 16, is another matter altogether. Surveys of this type are also unreliable. If the other fields were included or people were asked to choose between leaving the oil in the ground and free education or health care, the figures might well look quite different.

There is no need to survey the oil industry. The state oil company, Petroecuador, and others would be more than happy to get their hands on the ITT fields and are quite prepared to put pressure on Correa. According to some sources the recent Ecuadorian-Venezuelan proposal to build a major refinery on the Ecuadorian coast at Manta also depends on the availability of the oil from the ITT fields, although the original, and still viable, plan was to reducing Ecuador’s major petrol and diesel deficit to bring in Venezuelan crude to be refined in Manta. For the moment however, the oil companies are on the back foot, and presuming that Rafael Correa now stands fully behind the negotiations, the goal is to bring in ‘at least’ half the value of the fields, estimated at US$7,000 million.

The figure is in fact fairly arbitrary: the exact amount of money involved cannot be known with any real certainty. The price of oil is a genuine unknown and could easily be higher than the US$60 a barrel used in the initial calculations; a local oil analyst has even estimated the fields to be worth more like US$ 40 billion, although it is unclear how he arrived at his estimate(10). Other options include the suggestion of economist Joseph Vogel that cost recovery should be linked to the amount of infrastructure investment needed to exploit the fields, an estimated at US$5 billion(11). The major unknown is, of course, the outcome of future climate negotiations that will in turn depend on the uncertain, and perhaps catastrophic, performance of the climate within the lifetime of the ITT fields(12). Leaving aside the value of the oil itself, the avoided CO2 emissions alone (some 407 million tons at $20 a ton) would be worth around US$ 8,014 million. In the short term there is no doubt that others will fill the gap left by the ITT oil, but the crux of the issue, as Vogel points out, is that sooner rather than later Climate Change will allow little room for manoeuvre: leaving oil in the ground will be a necessity.

No matter how the price is calculated, one could be excused for asking why Ecuador, a country where sixty percent of the population is unemployed or sub-employed(13), should be financing the emission reductions of developed nations by paying half the cost of leaving oil in the ground. In all probability the fifty percent figure corresponds to an imbalance in bargaining power more than anything else; to be fair it would make sense to find another way to calculate the amount of shared responsibility that falls on Ecuador. One option might be to use GDP per capita as a way to distribute financial responsibility. As the Ecuador’s GDP per capita is roughly one fifth of that of Germany or the UK, its contribution should be approximately 20 percent(14).

Ecuador has an interest in protecting Yasuní and it has been suggested that this accounts for the fifty -fifty share scheme. But this is not an economic interest: Eco Tourism will never replace the financial benefits of oil. The preservation of Yasuní is a recognition of its importance to mankind and to the peoples who live there in isolation(15), a recognition that financial principles are not the only values in play. Whatever the case, and whatever the initial figures used, the $3,500 million figure cited should be considered as a minimum; the major polluters should pay more than half the cost.

Regrettably, should is not a word that fits easily into state budgets or financial planning. National interests are at stake; countries go to war over oil; armies run on their petrol tanks; the military budgets of the nations that consume the most oil and produce the most carbon dioxide are also the biggest in the world.

Plan ‘C’

Alberto Acosta is pressing for the new negotiating structure to be given the three years remaining until the next presidential elections to raise the money. But even if the money is not raised, debate over Yasuní and the ITT fields will be far from over. Exploiting the oil will not be easy. The Constitution does allow the President to permit extractive industries to operate in Protected Areas in cases of national priority. But drilling in Yasuní is bound to generate conflict. Apart from the environmental considerations and possible impacts on voluntarily isolated indigenous groups, local populations will have to be consulted and many indigenous organisations are far from happy with the President and his style. Environmental groups can also be counted on to rally international opinion in favour of preservation. For Acosta, Plan C involves Ecuador taking the initiative and unilaterally deciding to leave the oil in the ground. This, he states, could be a major international boost for Ecuador, the only country to propose something really concrete about Climate Change, and act on it, alone if necessary.

Ethically speaking, the Ecuadorian government should protect Yasuní and, for reasons of global safety, refuse to exploit further oil fields. Taking this to its logical, and ideal, conclusion, the country (pl us Peru, Colombia, Brazil and Bolivia) should shut down all Amazon oil fields as a demonstration of commitment to protecting planet, and the big polluters – the EU, Japan, the United States and Canada – should pay it (them) to do so, while making drastic cuts in their fossil fuel use and beginning the journey towards a post oil economy. Unfortunately for all of us this appears to be an unlikely scenario, at least until the Greenland ice sheet slips into the sea.

Footnotes/References:

1. Ecuador Yasuní ITT Trust Fund: Terms of reference. Final Revised Draft, 11 December 2009

2. A Trust Fund is deemed necessary for two reasons. The first aim is to ensure that any future Ecuadorian government cannot reject the agreement and begin to exploit the oil without returning any funds received. The second is to ensure that any money provided is spent according to the agreed conditions. This is type of clause is generally understood as a way to ensure that irresponsible governments do not waste or even steal the money. The Correa government not unsurprisingly saw this second condition as offensive.

3. The possibility of using carbon emission bonds to finance the initiative has been floated. According to Carlos Larrea, the Yasuní Bonds would not, strictly speaking, be carbon emission bonds and for the plan to work would have to be accepted as such. They would also depend on a market that does not yet exist in the Americas. According to Larrea, a voluntary market approach could also be used, by which individuals or institutions would support the initiative through voluntary surcharges on products, air travel etc. in a type of carbon footprint reduction scheme.

4. Also significant, is that Fernando Carrion will once again form part of the team, although his role will be limited solely to liaison with the UNDP.

5. Interview with Ivonne Baki, Diario HOY, Quito, 08 February, 2010.

6. New Economics Foundation, ‘Growth Isn’t Possible’, London UK January 2010.

7. Vanguardia Magazine, Quito, 25 – 31 Jan, 2010.

8. The General Manager of Petroamazonas, has stated that the state owned company plans to invest US $550 million over the next three years for a maximum production of 35,000 barrels per day. The fields are expected to start producing in two and a half years. Diario El Comercio P6, ´Petroamazonas incorpora el Bloque 31 a su plan de este año´. Quito 26 January 2010.

9. According to Petroecuador the Pañacocha field is expected to produce 25,000 barrels a day by Jan 2011 and will be financed by Social Security funds. IESS financiará la explotación de Pañacocha, Diario El Telégrafo, Guayaquil, 2 February 2010, P8.

10. Augusto Tandazo ´Expertos analizan situación de la iniciativa Yasuní ITT´ ANDES/AR 24 Ene 2010.

11. Vogel Joseph Henry, The Economics of the Yasuní Initiative: Climate Change as if Thermodynamics Mattered. Anthem Press, London, 2009.

12. Calculated at between ten and fifteen years after production begins, which would itself take five years from the time of any decision to exploit. If a decision were made today, the ITT fields would be nearing the end of their life sometime around 2030.

13. At the end of 2009 the figures were unemployment of 7.9 % and sub employment of 50.5% (of the economically active population). Instituto Nacional de Estadísticas y Censos (INEC).

14. According to the CIA World Factbook, the estimated 2009 GDP per capita of the three countries (based on Purchasing Power Parity) is Germany US$34,200, UK US$35,400, Ecuador US$7,300.

15. The Tagaeri – Taromenani, closely related to another larger and more integrated group, the Huaorani, live in voluntary isolation in the Intangible Zone of the Park, whose northern limit is close to the Ishpingo field