Risk Profile: Investing in the Amazon

RISK PROFILE: Oil Concessions in the Peruvian Amazon February 6, 2008 Perupetro Overview This year the Perupetro will attempt to auction the 6 remaining oil and gas concessions in the Amazon region, all of which they were not able auction last January. All of these blocks in the Amazon overlap indigenous reserves, legally titled indigenous lands, naturally protected areas, or lands that have special status. The Peruvian government has consistently failed to consult indigenous communities prior to establishing concessions, as required by Peruvian and International Law. Indigenous communities throughout Peru are calling for a suspension of the current concessioning round and vow to oppose new oil projects. To demonstrate concern, some have shutdown oil operations, such as the recent two-week shutdown of Pluspetrol’s operations in the northern Peruvian Amazon. Oil majors like Occidental Petroleum recently announced withdrawal from Peru after thirty years – citing indigenous opposition as one reason. Unstable institutional framework for investment Recent controversies between key state institutions regarding the entire process of defining oil and gas blocks suggest that the institutional and constitutional framework of the entire process is unclear. For example, the National Ombudsman Office issued a report questioning the government’s oil and gas development policy and highlighting the controversy surrounding the legal framework that regulates the exploration and exploitation of oil and gas in naturally protected areas. The report also spells out how investors might be awarded blocks that are located in legally protected areas, complicating operational procedures for years to come. Financing Risks Many projects have difficulty breaking ground, given a growing number of private and public sector lenders have adopted strong policies (e.g. Equator Principles adopted by Banks making up over 90 percent of the project finance market) to finance controversial concessions. It may be far more difficult for project sponsors to attract co-sponsors or to secure financing for new projects that are opposed by their host communities or that are located in ecologically sensitive regions. Investors and financiers may delay their involvement, require more lucrative terms as mitigation for the additional risk or may simply decline to participate at all. For example, in 2005 Manhattan Minerals was forced to abandon its plans for a mine in Tambogrande, Peru after intense community opposition prevented the company from bringing a major partner to the venture. Operational Risks Determined, local communities often have the power to slow down projects and, in some cases, even shut them down. Through blockades, protests, work stoppages and litigation, community opposition can raise production costs and impede the projects ability to bring product to market. Similarly, complying with national and international safeguards for operating in ecologically sensitive areas of the Amazon involve a series of logistical and engineering challenges that if not met, can result in a variety of collateral risks. For example, the Camisea gas pipeline had five ruptures in the first 18 months of operation, resulting in negative public opinion. Community Opposition The case for heeding community opposition is compelling. Gaining community consent for a project involves the internationally-accepted principle of free, prior, informed consent (FPIC). Peruvian law and international conventions mandate that communities be consulted, prior to the creation of oil concessions as well as during the Environmental Impact Assessment process. Yet mere engagement or consultation will not always be sufficient to fully address risks. Consultations that do not resolve a community’s reasons for opposition nor achieve consent will provide little assurance against potentially costly and disruptive conflict. Increasingly, major institutional investors, such as the New York City and New York State pension funs and the California Public Employees’ Retirement System, are voicing grave concerns about the financial risks and poor returns from projects that move ahead on indigenous lands without their prior consent. Recent examples of community opposition include: o In June of 2007, indigenous communities categorically rejected the entrance of the Colombian Oil company Hocol to carryout exploration and exploitation activities in block 116, even offering their lives: “ the Wampis People express our opposition to fight with our lives to defend our territories and natural resources which are mediums of life to present and future generations…..”. It is worth noting that while a contract was signed almost two years ago, operations have yet to proceed. • October 2006 Achuar two-week blockade of Pluspetrol’s installations – resulting in a multi-million dollar agreement and costing $2.4 million/day of lost revenue. • January 2005 Machiguenga protest of the Camisea gas project – resulting in a four-month delay and an 18-month delay in the InterAmerican Development Bank’s loan disbursement to the project. Before investing in the Amazon, consider these downside risks due to community opposition: • Increased costs and delays in project construction and operation; • Difficulty in securing favorable financing or long term contracts; • Increased costs in mitigating environmental and social impacts. Civil Society Opposition Opposition to oil development in Peru is not limited to indigenous communities as many civil society organizations have also publicly denounced the Garcia administration’s policies. In January of 2007, for example, 40 civil society organizations signed a public statement that expressed concern over government policy regarding the process of awarding of contracts for oil and gas exploration and exploitation specifically on those blocks that overlap territorial reserves for indigenous people in isolation and naturally protected areas. These organizations will continue to support the campaign to prevent oil development in these areas. Isolated or “Uncontacted” Indigenous Peoples These impacts include: threat of contact between isolated peoples and oil workers – which could include forced contact (as was the case with Peru’s Camisea gas project) or even violent confrontations (as has been the case in Ecuador’s Yasuni Park); threat to the life and health of isolated peoples because, for example, they lack the immune defenses to confront illnesses introduced by outsiders – leading to possible death; and impacts to the fragile rainforest environment on which they depend. Prepared by: Amazon Alliance, Amazon Watch and Save America’s Forests For more information, email [email protected]