TED Case Studies


Ecuador Oil Exports


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          CASE NUMBER:          24 
          CASE MNEMONIC:      ECUADOR
          CASE NAME:          Ecuador Oil Exports


A. IDENTIFICATION 1. The Issue Ecuador produces more oil than it needs for domestic consumption and thus it is one of the country's leading exports. Therefore, any new drilling for oil is not intended to meet local demand but is intended for export overseas, most likely to Japan and the United States. Beneath the surface in eastern Ecuador and within the Amazon rain forest, a relatively undisturbed and biologically rich area, are large amounts of oil. Critics warn that the habitat could suffer either through the direct spilling of product and soil contamination or through the opening of the area to the outside through the building of roads. It is believed that the building of an oil industry would have a severely adverse impact on the environment. Some argue against drilling for oil in Ecuador's Amazon area, particularly since the oil is intended for trade. 2. Description Fifty percent of Ecuador's national budget is funded by oil earnings and continued oil exploration and production is thought to be necessary to ensure the countries' well being. The country plans to increase production and holds auctions to increase foreign investment. Dependence on oil revenue has hindered Ecuador's environmental enforcement, which in turn has caused damaging consequences to indigenous tribes living in the Amazon region and to the environment in the eastern (Oriente) part of the country. Indigenous tribes of Ecuador are fighting for their lands and rights, which have been jeopardized for the past 20 years by oil companies (primarily the U.S. company Texaco and Ecuador's state-run company Petroecuador) drilling in the Oriente. Several Indian tribes, working with American environmental groups and others, are calling for a moratorium, claiming that drilling has caused environmental damage and poses health risks. The tribes claim that the oil drilling, which included the dumping of oil and contaminated water into the Amazon basin, has resulted in the death of thousands of people. Several tribes are currently suing the U.S. oil company, Texaco, for $1.5 billion in damages. Texaco claims that its exploration, carried out from 1972 until 1990, did not violate any laws, as Ecuador lacked specific environmental legislation. The company has offered to contribute to a $13.5 Oriente cleanup fund. Oil earnings fund 50 percent of Ecuador's national budget. While the Amazon region provides the region with the majority of its wealth, it is also the home of indigenous tribes and 300,000 colonists. The Indians of Ecuador, located in the Amazon region of Oriente, have joined forces for the past 20 years to resist oil exploration and demand rights to their ancestral lands. The leaders from twenty tribes, including the Quichua, Cofan, Shuar, Siona, Secoya, Achuar, and Huaorani, have raised national attention to the land claims and the destruction of the Oriente. In June, 1990, the Confederation of Indigenous Nationalities of the Ecuadorean Andes (CONAIE) and the Confederation of Indian Organizations of the Ecuadorean Amazon (CONFENIAE) staged protests to gain title to their lands and have gained the rights to 3 million acres of land in the Amazon basin. However, the government retains rights to minerals, "allowing oil exploration to continue in consultation with the Indian communities in order to control environmental damage."1 In November, 1993, Indian leaders walked into a New York Federal court to sue the U.S. firm Texaco for $1 billion in damages and cleanup costs. The company retaliated a few weeks later by suing the Ecuadorean government for $570 million, claiming a breach of contract. Texaco says that the claims are completely unfounded, stating that it was a minor party working in conjunction with Petroecuador, the state oil corporation and that it followed "accepted industry practices" and Ecuadorean laws. Ecuador lacked specific environmental legislation until 1990, the same year that Texaco transferred its operations over to Petroecuador. Texaco states that it is not responsible for water pollution, especially since it stopped operating in the region four years ago. However, Petroecuador attributes the pollution to Texaco, stating that the U.S. company did operate in the region for 18 years. A report by the Ecuadorean Union of Popular Health Promoters states, "Petroecuador continues to employ the environmentally dangerous equipment and practices inherited from Texaco, including the discharge of toxic wastes directly into the environment."2 Environmental groups hope that this case will set a precedent for future U.S. oil companies operating in Ecuador. Many of the indigenous tribes in the Amazon region that once numbered in the thousands have been reduced to the hundreds as a result of the pollution generated by oil exploration and other assaults. Water contamination has led to increased risks of cancer, abortion, dermatitis, fungal infection, headaches, and nausea. Their drinking, bathing, and fishing water contain toxins much higher than the safety limits set by the U.S. Environmental Protection Agency. Unlined waste pits provide a major source of pollution. They contain a toxic mixture created by the oil production and separation process. Today, environmental regulations require these toxic by-products to be injected deep underground. However, the Ecuadorean Union of Popular Health Promoters has found that Petroecuador does not follow these guidelines and continues to release the toxic wastes directly into the environment. The oil companies that drilled in the rain forest were responsible for "felling thousands of acres of trees, dynamiting the earth, spilling vast amounts of oil, destroying habitats, and fouling rivers."3 This destruction has limited resources available to the tribes living in the Amazon (see BRAZIL case). Fish have died from water pollution and the game the tribes once hunted have retreated deeper into the jungle as a result of the deforestation. The Rainforest Action Network found that Texaco alone spilled 17 million gallons of crude oil, abandoned hundreds of unlined toxic waste ponds, and constructed oil roads that opened more than 2.5 million acres of the forest to colonization. Ecuador's rain forests are being cut down by oil companies and settlers at a rate of approximately 340,000 hectares a year. The wood is used for construction, roads, fuel, and furniture. Indigenous groups are calling for a 15-year moratorium on oil drilling, which would include repairing the environment, the receipt of 1 percent of the oil profits, and all companies paying an indemnification. However, Ecuador is the second largest producer of oil in Latin America, after Venezuela, and oil revenues form half of its gross national product. Due to Ecuador's dependance on foreign capital, it has exerted little environmental control and has encouraged oil exploration. In January, 1994, the government began a seventh round of bids for 3.2 million hectares in the Amazon region. Ecuador has withdrawn from OPEC, as it plans to increase its national oil production by one third by 1997. It is currently holding auctions to attract foreign investment and to construct a new $600 million pipeline and road that will lead into an unspoiled section of the Amazon in anticipation of the increased production. The Indians have responded with threats to seize oil wells and in their fight took over the Energy and Mines Ministry on January 24, 1994 to pressure the government. They now demand that the new pipeline be built using air transport rather than using a new road. The government claims to be sensitive to their needs, stating they will respect strict environmental standards. However, it claims the oil exploitation is necessary for the country. The Dallas based Maxus Energy Corporation is constructing an underground pipeline that will pass through the territory of the Huaorani and Quichua tribes and the Yasuni Park in the Oriente. The corporation claims it has respected the Indian, their rights, and the environment in its work. It has made agreements with each tribe and has offered them schools and teaching materials. The firm plans to invest $60 million in environmental protection. The members of CONAIE, however, believe an agreement should have been signed with the Indians. They argue Maxus is not contributing enough to the tribes and the environment, in exchange for the deforestation and pollution it creates. The indigenous leaders feel Maxus has divided their people with implicit and explicit bribes of various types. Some have been given food, money, and clothes in exchange for the use of their land. 3. Related Cases COLOMOIL case OGONI case TOBAGO case EXXON case SELLA case SHETLAND case Keyword Clusters (1): Trade Product = OIL (2): Bio-geography = TROPical (3): Environmental Problem = DEFORestation 4. Draft Author: Angela G. Armstrong and Marlon Vallejo B. LEGAL Clusters 5. Discourse and Status: DISagreement and INPROGress The Texaco case has been filed, but has not yet been heard. The $1.5 billion suit, based on common law, was filed under the Alien Tort Victims Act, that allows non-U.S. citizens to file for injuries caused by U.S. entities. Ecuadorean Indians sued Texaco for damages on November 30, 1993, claiming Texaco released more than 3,000 gallons of crude oil into the environment. The OAS Human Rights Commission is currently investigating damage claims. Texaco has also filed a suit against Petroecuador, citing breach of contract. Private groups are involved to the extent they are arranging debt-for-nature swaps to protect the areas. 6. Forum and Scope: ECUADor and UNILATeral Specific Ecuadorean environmental legislation was enacted in 1990. This is the same year Texaco withdrew its operations from the region. 7. Decision Breadth: 1 (Ecuador) 8. Legal Standing: LAW The government agreed to more specific environmental legislation in 1990 and amended its Hydrocarbon Law, putting legislation in place to increase oil exploration. In April 1993, the Ecuadorean government agreed to grant 3 million acres in the Amazon basin to the Indians. The government, however, retains mineral rights in the region. Numerous agreements were made between Indian tribes and oil companies and concessions made in exchange for their use of the land. Lawyers for the Ecuadorean tribes are seeking a ruling that Texaco should have abided by U.S. environmental protection norms and legislation in its Oriente operations. C. GEOGRAPHIC Clusters 9. Geographic Locations a. Geographic Domain : South America [SAMER] b. Geographic Site : AMAZON c. Geographic Impact : ECUADor 10. Sub-National Factors: YES The Ecuadorean Indians are protesting against the country's lenient environmental policies on oil exploration that promote the destruction of their lands. 11. Type of Habitat: TROPical D. TRADE Clusters 12. Type of Measure: Regulatory Standard [REGSTD] Oil companies exploring the Amazon basin are expected to work in accordance with Ecuadorean laws, but the argument has been made that they should also abide by home country rules. 13. Direct vs. Indirect Impacts: INDirect 14. Relation of Measure to Environmental Impact a. Directly Related : YES OIL b. Indirectly Related : YES WOOD c. Not Related : NO d. Process Related : YES HABITat Loss Trade (investment) measures and environmental regulations are related to the process of oil exploration. Roads created to facilitate the exploration process were covered with oil to decrease the amount of dust in the air. This dust had caused respiratory problems for many Indians. However, the oil on the roads also caused them harm. Because most Indians walk barefoot, the oil (which can only be remove, ironically, with gasoline) causes rashes and cancer. 15. Trade Product Identification: OIL 16. Economic Data Ecuador currently produces 370,000 barrels of oil a day. It plans to increase production to 400,000 barrels a day in 1995. Half of the Ecuadorean gross national product comes from oil exploration. More than 40 percent of Ecuador's exports in 1990 were oil and derivatives. Ecuador produced 14,936 thousand metric tons of oil in 1990 and $1.5 billion came from petroleum exports in 1993. 17. Impact of Measure on Trade Competitiveness: NA The cost of increased environmental protection would severely limit the revenue Ecuador earns from its oil exports, especially with over 30 percent of employment in this sector. 18. Industry Sector: OIL 19. Exporter and Importer: ECUADor and USA Ecuador exports 14,936 thousand metric tons of oil per year (1990), with the United States as the leading importer. Some exports also go to Europe and Asia. E. ENVIRONMENT Clusters 20. Environmental Problem Type: HABITat Destruction The exploration for oil has created numerous environmental problems of all types in the Amazon region. The Amazon basin in Ecuador has the greatest number of plant species of any South American country. The Sierra highlands have been almost completely deforested. Also, the Oriente is a species rich jungle with numerous mammals in danger of extinction. Oil that was placed on roads to cut dust has flowed into rivers. Oil waste in the past was placed in holes in the ground that contaminated the forests and the rivers. "Ecuadorian officials estimate that ruptures to the major pipeline alone have discharged more than 16.8 million gallons of oil into the Amazon over the past eighteen years (compared to the 10.8 million-gallon Exxon Valdez spill). Production pits produce 4.3 million gallons of toxic waste and treatment chemicals." 21. Name, Type, and Diversity of Species Name: Tropical Hardwoods Type: Plant/Angiospermae/Dicots Diversity: 6,421 higher plants per 10,000 km/sq (Ecuador) These are tropical rain forests and therefore the bio- diversity of the area is among the highest of any place in the world. The forests of this area are not as diverse nor do they have as high a degree of endemism as Old World tropical rain forests. Bio-diversity for seed plant species in Brazil is perhaps comparable. The Amazon jungle houses 12,000 species of plants and numerous birds, fish, reptiles, insects, and mammals. The tapir, howler monkey, jaguar, harpy eagle, capybara and other animals are endangered species. 22. Resource Impact and Effect: MEDium and PRODuct Deforestation in the Oriente has threatened the extinction of many plants, and the pollution created by the oil exploration process has led to the deaths of numerous animals and people. Birds important to the forest's biological diversity are fleeing from the road areas and faster growing species of trees are hindering hardwood growth. Full regeneration will not occur for years. Thin topsoil makes it difficult to re-establish plant cover. 23. Urgency and Lifetime: MEDium and 100s of years The rain forest is being destroyed at an annual rate of approximately 2.6 percent. If this destruction rate continues, the "forest cover" will be gone in 40 years. 24. Substitutes: Conservation [CONSV] VI. OTHER Factors 25. Culture: YES The Indians' culture has been jeopardized since the European invasions, when they were forced into slavery on haciendas. Today, their culture is again in jeopardy, as their homeland in the Amazon basin is being threatened by oil exploration. Today, members of CONAIE are fighting the state's claim that Ecuador is one culture. They state that the country is multinational with different cultures on the coast and the Sierra. It is also working to retain all the individual indigenous languages of the Amazon region. The Manta-Huancavilca tribe in the Costa region now speaks Spanish instead of their native tongue. 26. Trans-Border: YES Pollution created in the oil exploration process has entered the Amazon region in other South American countries. 27. Rights: YES Indian federations are fighting for their human rights and their land. Political power has long been held by the white aristocracy from Europe and the mestizos. Indians were not allowed to form groups at community levels until 1973. Indian groups are now demanding constitutional status. In April, 1993, when land was awarded to the indigenous people, the government still retained rights over the minerals of the region. Today, the Indian groups are fighting for their rights by suing Texaco for damages, taking over the Ministry of Mines and Energy, and demanding a moratorium where they would also have a say in the oil exploration of their lands. 28. Relevant Literature Brooke, James. "Pollution of Water Tied to Oil in Ecuador." The New York Times (March 1994): 11. Hidrobo, Jorge A. Power and Industrialization in Ecuador. Boulder: Westview Press, 1992. Holmstrom, David. "Ecuador Indians Fight for Forests." The Christian Science Monitor (June 1993): 9. Holmstrom, David. "Ecuador's Oriente." The Christian Science Monitor (February 1994): 10. Holmstrom, David. "Volatile Mix: Oil and Indians." The Christian Science Monitor (June 1993): 10. Jones, Gregg. "When Worlds Collide; On Delicate Ground Maxus Trying to Reach Oil Without Destroying Rainforest Tribe." The Dallas Morning News (March 1994): 1H. Kennedy, Jr., Robert F. "Amazon Crude." The Amicus Journal (Spring 1991): 24-32. Martz, John D. Politics and Petroleum in Ecuador. New Brunswick: Transaction Books, 1987. References 1. David Holmstrom, "Ecuador Indians Fight for Forests," The Christian Science Monitor (June 16, 1993), 9. 2. James Brooke, "Pollution of Water Tied to Oil in Ecuador," The New York Times (March 22, 1993, 11. 3. Holmstrom, "Volatile Mix," 10.

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1/11/97