Petroleum Development in the Ecuadorian Amazon: Setting the Record Straight (Part III: Did International Oil Firms Despoil Eastern Ecuador's Environment?)

[Ed. Note: This concludes Douglas Southgate’s review of Ecuador’s claims of “reckless environmental damage” against Chevron, and through them international oil companies (IOCs). Part I challenged the facade that Ecuador’s passive view of its own resources led to exploitation by Big Oil; Part II examined the economic benefits of fossil-fuel development in the country.

This post refutes the charge that environmental damage is the responsibility of foreign firms alone. Indeed, it is the state company, Petroecuador, that was chiefly responsible for environmental despoliation in the Amazon region. These postings are timely in light of a recent article in The New Yorker, [1] a new book about the construction of a trans-Andean pipeline, [2] and other literature in which IOCs’ actions in Ecuador are criticized.

Billions for Government, Nada Environment

Opponents of petroleum development in the Amazonian lowlands (Oriente) of eastern Ecuador maintain that damage to the region’s natural resources has been the result of IOCs’ dominance of the country. But in the first of three postings about the anti-oil campaign, I show that the Ecuadorian government actually exercised considerable power in its dealings with foreign companies. Soon after petroleum was discovered in the Oriente, Ecuadorian authorities obliged IOCs to spend tens of millions of dollars on transportation infrastructure in order to facilitate colonization, in which the firms had no real interest.

And once production and exports began, in 1972, the government raised production royalties and income taxes and began nationalizing the industry.

From 1972 to 1992, the government collected $22.7 billion from the concession originally developed by Texaco and Gulf, yet it rarely used its clout during this period to institute or strengthen environmental safeguards. As late as 1990, when operational responsibilities in the Petroecuador-Texaco concession passed from the IOC to its state-owned partner, the annual budget for environmental protection in the energy and mining sector was a paltry $10,000 plus salaries.

The State Company’s Track Record

Petroecuador’s environmental attitudes and policies were unsatisfactory once the state company was solely responsible for the concession, which undercuts the claim that environmental controls were weak in Ecuador due to multinational pressure and influence.

For example, in February 1993, the state firm established three exploration camps in the Cuyabeno Reserve, a protected area in the Oriente with small indigenous settlements. It did this without notifying park officials, whose prior approval for the camps was required by law, or the indigenous communities.

After a television report in late April, a public meeting was convened by the national parks director. He levied the maximum fine of just $315 on the state firm. Of greater importance was that Petroecuador, which never before had been penalized for environmental damage, was ordered to close its camps. This order remained in effect for barely three months. In September, the parks director was informed that exploratory drilling would proceed in the Cuyabeno Reserve. [3]

Further evidence of environmental neglect by the state oil company was provided during the next few years. Following a government-supervised audit, responsibilities for remediation were apportioned in 1995 between Petroecuador and Texaco in the concession they formerly shared. Petroecuador has yet to fulfill its responsibilities. In contrast, Texaco did so in just three years, spending $40 million to close waste pits and on related remediation. In 1998, after this work had been completed, the government granted Texaco a full and complete release from any environmental liability associated with its operations in Ecuador. [4]

Although individual production agreements contained environmental guidelines, a specific regulatory code, to be applied uniformly to the entire petroleum industry, did not exist for more than two decades after the discovery of oil near Nueva Loja. The first such code was promulgated in 1992. [5] It was in turn superseded by a more comprehensive set of regulations in 1995,[6] three years after Petroecuador became sole owner and operator of the concession that Texaco and Gulf began developing in the late 1960s.

Rescuing the Historical Record

As noted in the first of my three postings, a fallacious narrative surrounds the campaign against petroleum development in eastern Ecuador—a narrative about unchecked exploitation of natural resources and despoliation of the environment by IOCs.

An alternative account emerges when the true history of this development is examined. The starting point of this account is agency on the part of the Ecuadorian government, including the state oil company. National authorities responded to the discovery of oil first by safeguarding international borders (largely by promoting migration and deforestation), next by trimming back the prerogatives of foreign firms and nationalizing the oil industry, and, finally, by capturing petrodollars.

Historical accuracy also demands recognition of the socioeconomic progress that Ecuador has achieved since the 1970s. Material standards of living, infant survival, life expectancy at birth, and other measures of human well-being have all reached levels beyond what was thought possible four decades ago. Indeed, Ecuador’s progress compares favorably with what has been accomplished in the surrounding region, thanks to oil wealth not in spite of it.

The final element of the historical record relates to environmental management by the national government—the final authority on the matter, not IOCs. The Ecuadorian state waited decades to codify a set of environmental regulations for the oil industry, collecting billions of dollars in dividends, taxes, and other benefits before specific regulations were promulgated.

Based as it is on the misrepresentation of history, the anti-corporate campaign against petroleum development in eastern Ecuador is having far-reaching consequences. Some of these are unmistakable—in particular, the disincentives to invest in Ecuador if a company can face billions of dollars in legal claims long after its operations were heavily taxed and ultimately nationalized. But whether or not the campaign will actually benefit Ecuador, generally, and its Amazonian territories, specifically, will be decided by events that are still unfolding.

Will Petroecuador and its new foreign partners (from countries such as China and Venezuela) truly protect the environment better than U.S. companies have done? Will these new partners apply better technology for finding and extracting fossil fuels, thereby increasing output and lowering costs? Will they be more accommodating of financial burdens imposed by the Ecuadorian government? During the next few years, issues such as these will be resolved, quite possibly to Ecuador’s detriment.