A Lose-Lose Proposition: Ivanhoe Energy in Ecuador's Block 20 | Amazon Watch
Amazon Watch

A Lose-Lose Proposition

Ivanhoe Energy In Ecuador's Block 20

May 2011 | Campaign Update

Canada’s Ivanhoe Energy (NASDAQ:IVAN/TSX:IE/www.ivanhoeenergy.com) is in the exploration phase of a new heavy oil drilling project in Ecuador, a country that has seen some of the ugliest consequences of extractive industry and, as a reaction to that, some of the most tenacious grassroots resistance to it anywhere in the world. The environmental devastation caused in the northern Ecuadorian Amazon by Texaco beginning in the 1960s1 was the catalyst of an indigenous movement that in the past decade has successfully used nonviolent protest to prevent oil extraction by such companies as ARCO and Burlington Resources2. In 2011, indigenous people from throughout the Ecuadorian Amazon, including the Kichwa community in which Ivanhoe plans to drill, have organized to oppose not only Ivanhoe’s plans but the Ecuador government’s impending auction of drilling rights to six million acres of pristine rainforest.3

Rather than learn from this history of destruction and conflict, Ivanhoe has pushed forward in Ecuador’s Pungarayacu heavy oil field in Block 20, to which Ivanhoe has a 30-year exclusive contract signed in 2008. Ivanhoe is an international heavy-oil development and production company, with core operations in Canada, Ecuador, China and Mongolia4. In Block 20, Ivanhoe hopes to pioneer commercial use of its patented HTL (Heavy-to-Light) oil upgrading technology.

This threatens to cause environmental damage to a sensitive and highly biodiverse region, has already caused ongoing conflicts with local communities, and is exposing Ivanhoe’s shareholders to significant financial and reputational risk. The Pungarayacu project is a textbook example of the dangers that come with opening the floodgates to extractive industry in an ecologically and culturally rich and unique area such as the Amazon Basin.

Environmental Impacts

Block 20 is located in the Napo province, where the mist-shrouded slopes of Ecuador’s Andean foothills give way to dense jungle lowlands of the Amazon rainforest. As an ecological transition zone, the area is highly biodiverse. The block overlaps with the Sumaco Biosphere Reserve and with titled indigenous lands including the Kichwa community of Rukullacta. It also contains the city of Tena, an internationally known hub for whitewater rafting. The area’s tourism industry and the livelihoods of its indigenous people are both dependent on a healthy natural environment.

The environmental impacts of the project are highly uncertain. Ivanhoe’s HTL technology has not been applied commercially or tested in an environment anything like the Amazon. Ivanhoe’s demonstration facility is small and is in San Antonio, Texas, which has a far less humid climate.5 In addition to the risk of spills and leakages that accompanies all oil extraction, the particular extraction process used by Ivanhoe for heavy oil (called SAGD, or steam-assisted gravity drainage) requires the injection of vast amounts of steam into the well. Depletion of surface water and contamination of groundwater are documented issues with existing heavy oil production.6 However, Ivanhoe’s Environmental Impact Assessment for its test wells does not address these issues.7 With regard to deforestation and noise impacts from seismic testing, the Ivanhoe EIA asserts without evidence that fauna driven away will return to areas once the seismic phase is concluded.8 This is of major concern to indigenous communities which frequently engage in hunting and fishing.

Uncertain Results and Financial Risk

The Pungarayacu project represents a significant financial risk for Ivanhoe, as it requires substantial investment capital that the company has admitted its current cash flows are insufficient to provide.9 Two test wells have so far produced mixed results; Ivanhoe reported in 2010 that one well produced oil in October, while the other “encountered cementing and completion problems… and testing at the well was suspended without recovering oil.”10 It is unclear whether Ivanhoe has the resources to expand exploration in Block 20 if initial results are not favorable.

Contract Irregularities and Lawsuit

Ivanhoe has been dogged by accusations that it did not participate in a competitive bidding process. Denver-based oil and gas investor Jack Grynberg has sued Ivanhoe claiming that Grynberg’s company Cotundo Minerals had previously secured extraction rights to the block and sought to bring in Ivanhoe as a partner, and accusing Ivanhoe of bribing President Rafael Correa’s brother, Fabricio Correa, to gain favor and an exclusive bidding option.11 The lawsuit was dismissed in Colorado District Court on jurisdictional grounds, but is under appeal. As a political issue, this could cast an ongoing shadow on Ivanhoe’s investment in Ecuador, as reports of corruption implicating Fabricio Correa have gained traction in Ecuadorian media.12

Failure To Obtain Local Communities’ Consent

The Kichwa Community of Rukullacta, an umbrella organization representing 17 communities in Ivanhoe’s concession area, has declared its opposition to the company’s presence.13 Community leaders report that Ivanhoe engaged in a manipulative consultation process. At one point, what community members thought was merely a sign-in sheet for a meeting with Ivanhoe representatives was cited by the company as indication of community consent to its plans. In November 2010, a community president was stripped of his title after accepting a salary to become community relations personnel for Ivanhoe. Rukullacta has filed a petition with the Inter-American Commission on Human Rights (IACHR) of the Organization of American States to demand that Ecuador halt the project and revoke Ivanhoe’s contract. The petition holds that Rukullacta’s territorial rights and rights to prior consent under Ecuador’s constitution and international agreements have been violated.14

An Unacceptable Risk

In Ecuador, Ivanhoe faces a triple threat of reputational, political and financial risk that should cause it to reevaluate moving forward with its Pungarayacu project. The company plans to apply unproven technology to a project without a reliable and sufficient source of financing. Ecuador’s indigenous movement and the Rukullacta community have been firm in their opposition. Ivanhoe’s contract is under legal challenge and is regarded with popular suspicion in Ecuador. The reputational fallout from any major legal or political conflict over Ivanhoe’s plans in Block 20 could hinder the company’s ability to secure the legal right and social license to operate in other parts of the world. Continuing with the Pungarayacu project under these circumstances would be a lose-lose proposition for Ivanhoe and its shareholders, and for the people of Rukullacta and Block 20.

 

Notes:

  1. See http://chevrontoxico.com/
  2. Amazon Watch, “The History of Block 24,” https://amazonwatch.org/work/block-24
  3. Amazon Watch, “A Battle Brews Over Ecuador’s New Drilling Plans,” https://amazonwatch.org/news/2011/0423-a-battle-brews-over-ecuadors-new-drilling-plans
  4. www.ivanhoeenergy.com
  5. Ivanhoe Energy, “HTL Heavy Oil Upgrading” , http://www.ivanhoeenergy.com/i/pdf/2011_WHOC.pdf
  6. U.S. Department of Energy, “Water Issues Associated With Heavy Oil Production,” http://www.ipd.anl.gov/anlpubs/2008/11/62916.pdf
  7. http://www.thechocolatelife.com/group/tenadiaries/forum/topics/how-does-sagd-affect-local . See also Ivanhoe, Environmental Impact Study (EIA) and Environmental Management Plan (EMP) for the Appraisal Drilling and Production Tests in Block 20 for the Wells IP-13, IP-16, IP-5A and IP-5B , http://www.ivanhoe-energy.com/i/pdf/ecuador/en/chapter04.pdf
  8. Ivanhoe Energy, Environmental Impact Assessment for Geophysical Prospecting Phase for Block 20, http://www.ivanhoeenergy.com/i/pdf/2010-08_eia/en/2010-08_EIA_EN_C06.pdf
  9. Ivanhoe Energy Form 10-K, 2010, p. 15
  10. Ivanhoe Energy Form 10-K, 2010, p. 7
  11. Jack J. Grynberg et. al v. Ivanhoe Energy et. al
  12. See, for example, El Universo 12/12/08, http://www.eluniverso.com/2008/12/12/1/1356/C80FF2E4983A49718F65884A06E01D63.html
  13. Rukullacta Declaration, July 16, 2009. Copy available from Amazon Watch.
  14. Rukullacta Petition to IACHR. Copy available from Amazon Watch.

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