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

Carlos Larrea

Universidad Andina Simón BolívarColaboration: Rosario Fraga, Lucía Gallardo, Ana Isabel Larrea, Roque Sevilla,

Ma. Cristina Vallejo, David Villamar

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.

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.

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)

Income per capita in Ecuador: 1965-2006

Poverty: 1995-2006

Original natural formations in Ecuador

Remaining natural formations:Ecological footprint

Oil and deforestation in the Amazon

The Yasuní dilemma in the current context

Current oil reserves will allow for no more than 30 years of production, even assuming new discoveries.

Ecuador’s 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.

Oil prospects in Ecuador

Alternatives towards sustainability: eco-tourism

The ITT-Yasuní dilemma

Yasuní National Park’s uniqueness

One of the most diverse areas in the world.One of the most diverse areas in the world. One hectare in the park contains as many tree species One hectare in the park contains as many tree species

as the United States and Canada together. as the United States and Canada together. It was a biodiversity refuge during the Pleistocene It was a biodiversity refuge during the Pleistocene

period, when most of the Amazon rainforest became period, when most of the Amazon rainforest became grasslands due to glaciations.grasslands due to glaciations.

Home of two voluntarily isolated and not contacted Home of two voluntarily isolated and not contacted indigenous nations: the Tagaeri and the Taromenane; indigenous nations: the Tagaeri and the Taromenane; who belong to the Waorani ethnic groupwho belong to the Waorani ethnic group..

Yasuní National Park’s Biodiversity

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).

Quantitative ModelObjectives: 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.

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.

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.

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.

1. Oil Reserves

Projected Oil Production

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

3. State Participation

This percentage can reach 81.5%. (Ministry of Energy)

Range of values: 50% to 81.5%.

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 %.

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.

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).

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 Park’s area, after 50 years.

The smoothly declining social discount rate fluctuates between 5% and 2%.

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

Loss of Yasuní´s 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.

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.

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 country’s

conservation opportunity cost (future growth based on biodiversity conservation).

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

State Participation: 50% Sate Participation: 81.5%

Present Value of the State profits of ITT: First Scenario

50% of profits for the StateWith $21.1 in profits the present value changes from $3526 million up to $616 million depending on the discount rate

(6% - 20%)

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%)

Present Value, First Scenario: State Participation 50%

Present Value of the state profits from ITT, accounting for externalities (millions of dollars)

State Participation: 50% Sate Participation: 81.5%

Present Value, First Scenario: State Participation 81.5%

Present value of State profits of oil production

81.5% ParticipationThe 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?

Without Externalities Millions of dollars

Profits per barrel

Discount Rate $15.23 $20 $21.1 $30 $30-$40

0.06 4148 5448 5747 8172 9876

0.11 2114 2776 2929 4165 4845

0.123 1794 2356 2486 3534 4078

0.20 725 952 1004 1428 1585

With Externalities Millions of dollars

Profits per barrel

Discount Rate $15.23 $20 $21.1 $30 $30-$40

0.06 2901 4201 4500 6925 8629

0.11 867 1529 1682 2918 3598

0.123 547 1109 1239 2287 2831

0.20 -522 -295 -243 181 338

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.

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.

Compensation Fund for ITT’s Conservation

The State will assume a binding international agreement to keep ITT’s oil indefinitely underground in order to protect the biodiversity, the indigenous cultures, and the world´s 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.

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%.

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.

Ecuador’s 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.

Economic proposal summary, option compatible with official position

Present value: Ecuador’s oil revenues: 5,719 million. Local environmental costs: 1,247 million. Local oil net value: 4,455 million. CO2 emission’s 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.

Ecuador’s 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.