Eye on the Amazon

A Tough Sell Indeed

A Tough Sell Indeed

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Analytica Investments released a report titled A Tough Sell about the Ecuadorian government's attempt to auction off its southeastern Amazon to oil companies. It highlights the environmental, financial, and legal risks associated with the oil auction.

Environmental Risk

Analytica warns that the oil round would threaten "a biodiversity every bit as varied as that of the fabled Yasuní National Park to the North" where one hectare holds more tree species than exist in all of North America.

Ecuador's government is attempting to secure the funds to preserve Yasuní from oil drilling. At the same time, it is in the midst of a campaign to sell off a swath of primary forest over three times that size. The report says that this contradiction has made donors hesitant to fund Yasuní's preservation.

Analytica cites a study by the Universidad Andina, which finds that if oil companies operate as they did in the Northern Ecuadorian Amazon – an area that is still heavily contaminated from decades of oil exploration – they would deforest 185,000 hectares (over 450,000 acres) of the Amazon.

Financial Risk

Even the Ecuadorian government has labeled the blocks "high risk," noting that only one in three exploratory wells is likely to find any oil. Carlos Larrea, one of the authors of the Universidad Andina study, says that the government's estimates are overly ambitious. He notes that reserves on the Peruvian side of the border were "much lower" than the government hoped and that as a result the North Peruvian pipeline transports just a third of the oil it was designed for.

The report says that "even with scaled-down expectations the success of the round faces significant hurdles." These include "the government's attempts to cap returns, limiting the possible upside on government investments" and unusually high government royalties.

Legal Risk

The report notes the landmark ruling for the Kichwa of Sarayaku at the Inter-American Court of Human Rights. The ruling ordered the Ecuadorian government to pay $1.34 million in damages for allowing oil company CGC to explore for oil without proper consultation from the Sarayaku and for placing tons of explosives on their land. The report accuses the Ecuadorian government of "downplaying the damage the explosive charges of the indispensible seismic work [in the XI Round] would inflict."

It also mentions that an Ecuadorian court ordered Chevron to pay $19 billion in damages and cites industry executives who say that "the risk of unrest and legal challenges hampers the outlook for a successful tender," which could make the oil auction "Ecuador's second in a row to fail."

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