Post on 10-Apr-2018
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History
Du Ponts oil subsidiary Acquired by Du Pont in 1981 37% of Du Pont's $40 bn revenues & 40% of after-
tax operating income Rank 12th (Revenue) & 8th (Net Income) Far outpacing Du Ponts more traditional chemical,
fibers and polymer divisions (Exhibit 1) Substantial presence in USA, Europe, Africa & Far
East Diversify sources of oil supply towards
environmentally sensitive regions of the world(Exhibit 2)
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Ecuadors Oil Industry
1970s & 1980s Highly dependent on Oil industry
Early 1990s Discovered over 2 bn barrels
0.1% of worlds total oil reserves & 0.4% of world
production
But, contribution of 13% to countrys GNP, 47% ofgovt. revenues & 43% of exports
Exploration initially led by Texaco/Gulf consortium(Light High quality Crude oil)
1972 Corporacion Estatal Petrolera Ecuatoriana(CEPE), state-owned oil company (Petroecuador)
1974 Petroecuador replaced Gulf in the consortium
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Ecuadors Oil Industry (Contd.)
1991 Texaco/Petroecuador JV wasproducing 220,000 barrels a day 75% ofEcuadors total production
Output to reserves levels 2nd highest in OPECafter Gabon
Less focus on oil exploration
Govt. undertakes 7 Risk Service Contracts
including Conoco
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Conocos Stakes in Ecuador
Jan 1986 Risk Service contract signed with aConoco-led consortium
$44 mn investment over 4 yrs to drill 6 exploratory
wells on Block 16 Conoco - 35% stake in the consortium
Contract Rules
y Foreign oil companies bear the initial explorationcosts, recoverable only if oil were found
yAfter exploration, site development is permittedwith govt. permission
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Conocos Stakes in Ecuador (Contd.)
y Petroecuador would receive 80% of profits,other investing companies receive theremaining 20%
y
Reimbursement of Capital investmentsbefore profit sharing
y Recovery period of Exploration investment 5 yrs
y Recovery period of Development Costs 10yrs
$200 mn investment by Conoco out of $600mn of total project cost
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Benefits to Conoco/Ecuador
Block 16 Oil found in 5 out of 6 wells(well abovethe companys avg success rate of 25%)
200 mn of heavy crude oil reserves 1st majorheavy crude find in Ecuador
Increase in total revenues by 4%
Ecuador Significant source, surpassed onlyby USA, UK and Norway
Option of negotiating for rights of exploration in
Block 22 Increase of 20% in both Ecuadors oil reserves
and production levels
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Negative Implications of
Conocos Project Operational Issues
Environmental Implications
y Deforestationy Damage to Biodiversity
Concerns of Indigenous people
Social and Economic disruption Contractual Problems
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Operational Issues
No previous experience about heavycrude oil
Additional refinery capability, pumpingstations and pipelines required to mixlight crude with heavy crude
Special agreements needed for
negotiation of supply and price issues
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Environmental Implications
Block 16 located in Rain forest
Main functions of rain forests
y Influence weather patters
yAbsorb CO2, slowing Global warming
y Offer unique biological diversity
Deforestation
y Ecuador lost an avg of 2.3% of forestsevery year
y Foreign currency requirement fulfilled bytimber exports
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Environmental Implications
(Contd.)y Increasing need of fuel wood and land for
agricultural purposes and livestock grazing
y Oil development landless people move to areas
made suitable by oil company roadsy Ecuadorean govt. granted land rights to encourage
colonization
Damage to Biodiversity
y Block 16 some part located within boundaries ofYasuni National park.
y Oil developments damaging the natural biodiversityof the park (designated a UN biosphere)
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Concerns ofIndigenous people
Rain forest contained about 10,000 nativeIndians
Tenuous Livelihoods & culture change
Colonization policy Intense pressure onland & animal populations source of foodfor these people
Introduction of new diseases to which
these people have no natural immunity Huaorani tribe belief of having the forest as
their property by birthright
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Social andEconomicdisruption
Activists opposing Conocos projects
Strikes and Demonstrations
Panic of Petroterrorists as in Colombia Fear of Damage to oil pipelines and
other assets
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Contractual Problems
Both govt. & Conoco were concernedover prices at which the heavy and lightcrudes should be brought and sold
Fear of political repercussions reasonbehind Petroecuadors hesitations infinalizing the deal
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Conocos Environmental Program
Incur additional cost of 5% to 10% of$600 mn (proposed investment every year)
Roundtable talks with a wide range of
people and organisationsy James Yost, US anthropologist (Lived with
Huaorani)
y Fundacion Natura (Largest environmental
organisation in Ecuador)y Nature Conservancy & World Wildlife Fund
(Leading US conservation groups)
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Conocos Environmental Program
(Contd.) Environmentaly Wells clustered together to minimize road
construction between sites
Reduce the risk of colonization & minimize directforest clearing
y Discourage colonists by using a ferry instead of abridge to cross the Rio Napo
y Stationing of guard posts along the access roads toprevent forest intrusions
y Use of plastic in place of local hard woods formaking access roads
y Herbal medicine research to be conducted
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Conocos Environmental Program
(Contd.) Waste Management
y Separation of salt water from oil and then pumping thesalt water back to the source.
y Recycling of water and minor emissions from separationunit.
y Compost of oil contaminated soils or hydrocarbonwastes for use in local revegetation projects
yHazardous materials to be confined within oil and waterpipelines.
y Storage of drilled muds in steel containers and reuse inmaking wells to minimize waste production.
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Conocos Environmental Program (Contd.)
Indigenous People Orientation
y Commitment of no land loss, prevention of colonizationand participative decision making
y Huaorani would not be exposed to threats of health, safetyand long term welfare
y Conoco workers were forbidden from hunting and fishingwithin the Huaorani reserves
y Promise of health, education, social and employmentprograms for the Quichua Indians
y Company personnel would receive medical screening toreduce risks of imported diseases
Communications and Outreach
y Environmentalists to be encouraged to visit the site and
invited to participate in the companys auditing procedures
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Role ofGovernment Shortsightedness of the Govt.
Not informing Conoco in advance about the locationof Block 16
Redefined the national park boundaries shifted theblock in Huaorani reserve
Oct 1990 Cordavi, Ecuadorean environmentalgroup, filed a petition to Ecuadors Tribunal forConstitutional Guarantees
Law of Hydrocarbons conflicting with the Forestrylaw
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Role ofGovernment (Contd.)
Confusions regarding the Tribunal decision
Conoco signed a risk service contract, not an oilconcession
Block 16 was formerly located within parkboundaries, now only a 10 mile section ofaccess road would pass through the park
Which is a Future agreement bid award of
Block 22 to Conoco or Conocos developmentalplans for Block 16
Ultimately, oil activities were legalised in thepark area
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Role ofNRDC & CS National Resources Defense Council US based
Litigation and Lobby group 150,000 members
Initial opposition to the project environmental concerns
Model development
y Independent oversight
y Transfer of some of economic benefits to localcommunities
Considered Conoco as the best of the worst options -
oil exploration in rain forest inevitable
Followed a negotiated approach
y NRDC consultant, Martinez found out thatenvironmental groups were mixed in their responses,
local indigenous groups ready for negotiation
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Role ofNRDC & CS (Contd.)
Approved Conocos suggestion of starting afoundation like Charles Darwin foundation inGalapagos Islands
Built up consensus by discussing with various
indigenous groups like Confeniae Leaking of Confidential minutes
y NRDCs account of discussions with otherenvironmental groups
y Suggestions for the new foundation
y Led to conflicts as decision to support Conocosproject was taken without taking otherenvironmental groups in confidence
Sleeping with the enemy
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Opposition from other Parties
Rainforest Action Network (RAN)y Opposed Conocos plans in 1986
y In 1990, published a letter to represent Huaoranisinterests stating that they opposed Conocos plans
y Started asking for donations to help RAN supportHuaoranis efforts and prevent Conocos developmentof Block 16
Cordavi Corporation for Defense for Life
y Filed a petition to Ecuadors Tribunal for ConstitutionalGuarantees stating Law of Hydrocarbons asunconstitutional
y May 1991 Accusation of using corrupt practices byConoco to influence the decision of Tribunal
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Opposition from other Parties
(Contd.)
The Sierra Club Legal Defence Fund(SCLDF)
y 565,000 members, strong reputation for
protcting wilderness, forest, parks andmountainous areas
y Filed a report to UN Commission of HumanRights, accusing Conoco of genocide, later
changed to ethnocide
y Joined Cordavi in the protest againstConoco
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Conocos Problems Significant delay in Ecuador project
Several attractive investments available for funding
Heavy oil deployment fundamentally less attractive than light oil
Prices of heavy crude oil 60% of light crude oil
Heavy oil flowed more slowly, 40 yr time horizon for projectcompletion
Contract only covered the first 20 years
Ecuador project also involved start-up costs, being the firstpotential investment in the country
Environmental costs increases the project cost by 5-10%
US newspaper reports indicated RAN planning a series ofprotests at both Conoco and Du Pont facilities
Service contract with the govt. provided Conoco only one month
to make the final call
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Decision Paths for Conoco
The Go optionsy Develop all of Block 16, & later Block 22, as
planned, given the governments approvaly Develop Block 16 only outside of Yasuni
National Park boundariesy Extend the government deadline & broaden the
governance process to include many moregroups, including indigenous people, even moredirectly (position Block 16 as a pilotenvironmental scheme)
The No-Go optionsy Pull out of Block 16, but consider mounting
another proactive environmental oil programlater under more favorable circumstances
y Withdraw completely from Block 16 & similarcollaborative initiatives
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Amalesh Bandopadhyay(6)
Manuja Chaudhary(10)
Swati Gupta(26)Anirban Mazumdar(40)
Pravesh Singh()
Abhishek Prasad()