Conservation or oil extraction in Yasun National Park A transcendental challenge

1

• Conservation or oil extraction in Yasuní National
  Park? A transcendental challenge

Carlos Larrea Universidad Andina Simón
Bolívar Colaboration Rosario Fraga, Lucía
Gallardo, Ana Isabel Larrea, Roque Sevilla, Ma.
Cristina Vallejo, David Villamar
2
Natural endowment in Ecuador

• Biological and cultural diversity in Ecuador
• Biodiversity
• Ecuador has the largest amount of vertebrates per
  square Km in the word.
• When taking into account endemic species, Ecuador
  is the second most diverse country in the world.
• Ecuador ranks in the first ten most abundant
  countries in absolute number of amphibians, birds
  and butterflies.
• The equator, the Andean mountains and the
  Galapagos islands contribute to a rich and
  diverse environment.

3
Culture and history in Ecuador

• Cultural diversity
• 12 indigenous cultures Tsachila, Chachi. Awa,
  Épera (Coast), Quichua (Highlands), Shuar,
  Achuar, Quichua,
• Huaorani, Siona, Cofán, Shiwiar, Zápara (Amazon).
• Afro-descendent cultures.
• Mestizo culture.
• Pre-incasic, incasic and colonial heritage.
• Rich natural endowment water, soils and minerals.

4
Oil, economy and society

• Current situation
• Record oil production 529.000 b/d.
• Soaring oil prices 94 (WTI).
• Lasting economic crisis growth in per capita
  income 1981-2006 0.5 per year.
• Poverty 47 , Urban unemployment 10 .
• At least a million Ecuadorians have emigrated
  abroad since 1998.
• Did we sow oil?
• Contrast with the oil boom (1972-82)

5
Income per capita in Ecuador 1965-2006
6
Poverty 1995-2006
7
Original natural formations in Ecuador
8
Remaining natural formationsEcological footprint
9
Oil and deforestation in the Amazon
10
The Yasuní dilemma in the current context

• Current oil reserves will allow for no more than
  30 years of production, even assuming new
  discoveries.
• Ecuadors future must be based on a sustainable
  use of resources.
• Ecuador can lead alternative proposals to
  mitigate global warming, given the limited
  effects of current mechanisms based on the Kyoto
  protocol.

11
Oil prospects in Ecuador
12
Alternatives towards sustainability eco-tourism
13
The ITT-Yasuní dilemma
14
Yasuní National Parks uniqueness

• One of the most diverse areas in the world.
• One hectare in the park contains as many tree
  species as the United States and Canada together.
  
• It was a biodiversity refuge during the
  Pleistocene period, when most of the Amazon
  rainforest became grasslands due to glaciations.
• Home of two voluntarily isolated and not
  contacted indigenous nations the Tagaeri and the
  Taromenane who belong to the Waorani ethnic
  group.

15
Yasuní National Parks Biodiversity
16
The ITT Oilfield

• The unexploited ITT block is currently
  administrated by Petroecuador. The state will
  exploit this block in alliance with other state
  corporations such as SINOPEC (China), Petrobras,
  Enap or PDVSA.
• It contains 412 million barrels of heavy crude
  reserves (14.7 API), that can reach 920 million
  including probable reserves.
• The high density of the crude will raise the
  price of extraction and may force the
  construction of a powerful thermoelectric plant
  (320 Mw) as well as an oil conversion plant to
  produce light oil and facilitate transportation.
• Oil exploration in ITT can only start in 5 years
  and will last approximately 13 years producing
  107.000 barrels a day. From that point on,
  extraction will decline for 12 more years (Beicip
  Franlab, 2004).

17
Quantitative Model

• Objectives
• Estimate future profits (total revenue total
  cost) from oil in ITT, and the State
  participation rate.
• Evaluate the present value of profits for the
  Ecuadorian State.
• Estimate, at least partially, the externalities
  (environmental impact) caused by oil extraction.
• Evaluate the amount required for international
  compensation, in a way which covers 50 of the
  potential State profits had the block been
  exploited.

18
Basic Definitions

• Exogenous Variables Variables which are
  determined outside the mathematical model.
• Present Value The current value of an amount of
  money which is to be paid in the future,
  considering that people values money in the
  present more than in the future and that the
  future is discounted at a given rate.
• Discount Rate The rate at which we discount the
  future value of any quantity. If the discount
  rate is high, we value the future poorly and
  discount a future quantity by a lot. If the
  discount rate is low we value the future highly
  and discount a future quantity just slightly.
• Externalities The positive or negative effects
  of a transaction which are not accounted into its
  costs by the market.

19
Exogenous Variables

• 1. Oil Reserves How many barrels are there
  underground? How many can be extracted? How long
  will the extraction last in ITT? What estimations
  already exist? With what certainty can we count
  on these estimations?
• 2. Profits
• Price of crude oil How to predict this price in
  the future?
• Production costs / extraction technology
  Alternatives and costs of using cleaner
  technologies.
• 3. State Participation What percentage of
  profits will the State receive, if associated
  with a foreign extraction company?
• 4. Discount Rate Can vary depending on the risk
  of the investment, on the interest rates for
  different actors and on how nature is valued in
  the future.

20
How to define the value of each exogenous
variable?

• We define a range of probable values, or
  alternative options.
• Uncertain Variables price of oil, recoverable
  reserves, extraction technology.
• Alternative Options discount rate.

21
1. Oil Reserves

• French Exploration (Beicip Franlab, 2004)
• Probable Reserves 920 million barrels.
• Proven Reserves 412 million barrels.
• Recoverable Reserves 846 million barrels
  (depending on technology used now and in the
  future, on real reserves and price)
• Type of Crude very heavy, high sulphur content.
• Probably high water drive Repsol 93.

22
Projected Oil Production
23
2. Profits

• f(price of crude, technology, geology)
• Future projection of oil prices.
• Range of prices 15.23 (Dpto. of energy of USA
  projection), 21.1 (2006 price) and 30.
• Variable Prices as function of time increase
  from 30 to 40 during extraction.
• Production Costs
• Technology (offshore)
• Other alternatives

24
3. State Participation

• This percentage can reach 81.5. (Ministry of
  Energy)
• Range of values 50 to 81.5.

25
4. Discount Rate

• Allows us to calculate the present value of a
  monetary flow (rather than a stock value) in the
  future, such as oil profits and externalities.
• Value for oil profits 6, 11, 12.3, 20.
• 6 Interest rate without risk.
• 11 Medium corporate rate (Dow Jones)
• 12.3 Includes risk free rate, plus oil
  investment risk, and country risk.
• 20 Opportunity cost for oil corporative
  capital.
• For externalities social discount rate, value
  attributed to the existence of biodiversity. 2
  to 5 .

26
Production costs and revenues in a joint-venture
option

• Production cost 11.1
• Foreign company revenue 3.9
• Total state revenue 17.1
• Oil price (in situ) 32.1
• The State will participate in a flexible
  joint-venture enterprise, receiving 81.5 of
  revenues.

27
5. National externalities of oil extraction

• Negative environmental Impacts on
• Deforestation.
• Irreversible loss in biodiversity.
• Deterioration in potential eco-tourismo projects.
• Estimations of externalities are adapted from the
  Cuyabeno National Park model (Azqueta y
  Delacámara, 2003).

28
Local environmental costs (adapted Cuyabeno
Model)

• Non-logging rainforest services 115/Ha. per
  year.
• Eco-tourism 100 loss per tourist (up to 20.000
  tourists per year, limited carrying capacity).
• Biodiversity loss from 7 to 1,600 per
  hectare, increasing costs as a function of
  deforested area.
• Deforestation 10,267/ha. (733 MT of CO2
  emissions, 14/MT).
• Among the available estimates, these costs are
  moderate.
• Deforestation is assumed to be controlled (mainly
  indirect effect) with final impact on 25 of the
  Parks area, after 50 years.
• The smoothly declining social discount rate
  fluctuates between 5 and 2.

29
Assumed local environmental costs

• Present values
• Deforestation (CO2) 909 millions
• Non-logging rainforest services 277
  millions
• Tourism 5 millions
• Biodiversity loss 56 millions
• Total 1,247 millions

30
Loss of Yasunís ecosystem services due to
deforestation Estimations taken from Earth
Economics (Present Value)

• Lowest estimate 5.077 millions de dollars
• Mean estimate 9.886 millions de dollars
• Highest estimate 14.696 millions de
  dollars
• Methodology extrapolation of ecosystem services
  valuation from studies relevant to the Amazon.

31
Global CO2 emission costs

• The ITT reserves (846 million barrels), when
  burnt, will emit 375 million tons of carbon
  dioxide.
• The World Bank has estimated the abatement cost
  for CO2, at 14 to 20 dollars per metric ton.
• The cost for the planet of neutralizing the ITT
  emissions will reach a present value between
  1.684 and 2.405 million dollars.
• Adding deforestation emissions, the cost will
  reach a present value between 2.593 and 3.704
  million.

32
Our model hypotheses (assumptions of the model)

• The model does not include negative effects of
  oil production, such as toxic waste-water, local
  pollution, oil spills, estimated for the Texaco
  case at 630 million dollars(Falconí, 2002).
• Assumes full recovery of proven and probable
  reserves.
• An optimistic revenue of 21 dollars per barrel is
  assumed.
• The State will receive 81.5 of profits.
• The model does not include the countrys
  conservation opportunity cost (future growth
  based on biodiversity conservation).

33
Present Value of the state profits from ITT, not
accounting for externalities (millions of dollars)

• State Participation 50

• Sate Participation 81.5

34
Present Value of the State profits of ITT First
Scenario

• 50 of profits for the State
• With 21.1 in profits the present value changes
  from 3526 million up to 616 million depending
  on the discount rate
• (6 - 20)

35
Present Value of the State profits of ITT Second
Scenario

• 81.5 of profits for the State
• With 21.1 in profits the present value changes
  from 5747 million up to 1004 million depending
  on the discount rate
• (6 - 20)

36
Present Value, First Scenario State
Participation 50
37
Present Value of the state profits from ITT,
accounting for externalities (millions of dollars)

• State Participation 50

• Sate Participation 81.5

38
Present Value, First Scenario State
Participation 81.5
39
Present value of State profits of oil production

• 81.5 Participation
• The range of possible values starts with the most
  favourable 9876 million and ends with the
  least favourable 952 million depending on the
  profits (oil price and production costs) as well
  as the discount rate.
• Which scenario is the most academically
  justifiable?
• Which scenario does that State adopt as official?

40
Oil production and its externalities present
value

• Oil production (optimal conditions)
  5,719 million.
• Local negative externalities
  1,247 million.
• CO2 emissions between 1.684 y 2.406
  million.
• Net national benefit 4.472
  million.
• World's net benefit B/w 2.788 and 2.066
  million.

41
Oil and its externalities assumed present value

• Oil production
  5,719 million.
• Local externalities
  1,247 million.
• CO2 emissions 1,684 million (1
  national).
• Net national revenue
  4,455 million.
• If the additional risks of oil activity are
  calculated, the present net national value could
  be lower.

42
Compensation Fund for ITTs Conservation

• The State will assume a binding international
  agreement to keep ITTs oil indefinitely
  underground in order to protect the biodiversity,
  the indigenous cultures, and the worlds climate.
  
• An international compensation fund will be
  created to pay the Ecuadorian government for the
  non-received revenues from oil production. The
  fund will be administered by an international
  trust.
• The fund should reach at least 50 of the net
  profits the State would have received had it
  chosen to extract oil from ITT.
• The revenues from the fund will be exclusively
  spent on social development, alternative energy
  sources and conservation projects with social
  accountability.

43
Required compensation endowment

• Under favorable conditions for oil extraction,
  the present value of revenues will reach 4,455
  million dollars (after discounting local
  externalities).
• A compensation fund of 2,000 million dollars can
  generate a current value of 2,659 million, with
  an indefinite annual flow of 140 million.
• A discount rate of 5 has been assumed, with an
  average return on capital of 7.

44
Capital sources for the compensation fund

• At least 25 of the fund can come from foreign
  debt renegotiation, by promoting debt for
  conservation swaps. Global warming generates
  shared interests at a worldwide scale.
• Ecuadors current foreign debt balance 10.373
  million.
• Paris Club 20 of the current balance of
  882.44 million 176.5 million.
• Bilateral Debt 10 of the current value of
  872.52 million 87.3 million.
• Multilateral Organisms (IDB, World Bank) 10 of
  the current balance of 2.529.86 million 253
  million.
• Subtotal 516.8 millions.
• Plus the contributions
• From government to government.
• From Non-governmental Organizations and
  International Organisms.
• From citizens around the world who will
  symbolically buy barrels of repressed oil.

45
Economic proposal summary, option compatible with
official positionPresent value

• Ecuadors oil revenues
  5,719 million.
• Local environmental costs
  1,247 million.
• Local oil net value
  4,455 million.
• CO2 emissions cost
  1,684 million.
• Compensation profits
  2,659 million.
• Compensation capital 2,000 million.
• Debt swaps
  517 million.
• Donations (governments, NGOs and citizens) 1,483
  million.

46
Ecuadors Yasuní project, an innovative proposal
to mitigate global climate change

• The project would avoid 547 million metric tons
  of CO2 emissions (Oil 375 million,
  deforestation 172 million).
• Current mechanisms of CO2 emission control
  (carbon trading under the Kyoto Protocol) are
  insufficient.
• CO2 emissions are still growing at 2 per year,
  while a 50 reduction is needed (Stern Report).
• Ecuador proposes an innovative alternative to cut
  CO2 emissions, avoiding fossil fuel extraction in
  sensitive areas.
• The proposal will help the world to preserve
  biodiversity.
• Indigenous cultures will be preserved as well.

47
(No Transcript)
48
(No Transcript)
49
(No Transcript)
50
(No Transcript)
51
(No Transcript)
52
(No Transcript)