Rafael Correa’s government launched a global campaign to raise compensation funds in return for leaving oil underground and preserving the fragile and incredibly biologically diverse territory of the Yasuní National Park in the Ecuadorian Amazon. However, in October of 2013, with the contention that “the world has failed us”, Rafael Correa’s government and the National Assembly gave permission for oil drilling in Block 31 and in ITT (Block 43, a territory which is located between the quadrants of oil exploration Ishpingo, Tiputini and Tambococha), both in the heart of Yasuní.
Three years after they estimated that Block 31 would generate an income of $8.29 billion based on reserves of 118.4 million barrels of oil, in reality, the opposite is true; the world was deceived, Block 31 is in economic collapse.
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Is the world to blame?
“The world has failed us.” This is what President Rafael Correa said when faced with what he called the hypocrisy and indifference of the powerful polluters, who did not respond favourably to the “Yasuní ITT Initiative”. This project aimed to finance $3.6 billion in return for leaving 1.6 billion barrels of heavy oil underground in Blocks 31 and 43. Both blocks are found in the heart of the Yasuní National Park (YNP), one of the last biodiverse paradises in the world, ancestral territory of the Waorani Nationality, and refuge of the uncontacted tribes, Tagaeri y Taromenane.
In a message broadcast on radio and television networks on 15 August of 2013, President Correa announced to the world his decision to drop the failed environmental initiative and to go ahead with “Plan B”, permitting oil drilling in the heart of the biosphere reserve.
That day, the Ecuadorian leader signed an Executive Decree for the liquidation of the Yasuní-ITT trust fund (PNUD), and commissioned technical, economic and legal studies to explore the viability of the exploration project, in accordance with Article 407 of the Constitution, which sets out the requirement to obtain authorization from the National Assembly. However, in reality, the plans to extract oil in the area were already well underway since 2007.
As if by magic, seven days later, on 22 August of 2013, lengthy reports were submitted to the Government by the Minister for Natural Resources, Pedro Merizalde; the Minister for Economic Policy Coordination, Patricio Rivera; and the Minister of Justice, Ledy Zuñiga.
That same day, President Rafael Correa and the Legal Secretary of the Presidency, Alexis Mera, sent the aforementioned studies to the National Assembly, as support for the declaration of national interest for the exploitation of hydrocarbons inside the PNY.
In less than two months of discussion, on 3 October of 2013, the National Assembly, with 108 votes in favor, from legislators from the parties Alianza País and Avanza, accepted Rafael Correa’s application, declaring the exploitation of petroleum in Blocks 31 and ITT to be in the national interest.
That day there was a party in Carondelet Palace; the oil drills had won the battle. Although they would emit 400 million tonnes of CO2 into the environment, the beggars would no longer remain sitting on a sack of gold. So they changed tack from environmental frustration to fighting against poverty, now using Indira Gandhi’s slogan: “Poverty is the worst form of contamination.”
The mystery of the oil reserves
In the case of Block 31, the volume of proven, possible and probable reserves have been kept under a cloak of mystery. At the beginning of the project, the state-owned company Petroamazonas cited 45.5 million barrels of proven reserves. In 2013, when the development phase began, an official report referred to the existence of 65 million barrels. Then, in a study Petroamazonas submitted to the National Assembly, they established new additional projects in the Nashiño, Obe and Minta fields in Block 31, where they asserted that an estimated 167 million additional barrels of oil are found, in addition to the reserves from the Apaika and Nenke fields. The study refers to other prospective projects, where around 249 million additional reserves could exist.
Wilson Pastor Morris, current Ambassador of Ecuador to Vienna, former Minister of Natural Resources, and former manager of Petroamazonas, is the originator of the exploitation project in Blocks 31 and 43. He defended the technical and economic viability of the project before the Assembly Commission.
After exhausting days of analysis, with the support of expert parliamentary advisors, on 30 September of 2013, the indigenous legislator, Carlos Viteri Gualinga, president of the Permanent Special Commission on Biodiversity and Natural Resources, passed the report for second reading. The report states that, “the predicted volume of extraction for the exploitation of Blocks 31 and 43, would reach approximately 1.0063 billion barrels, in a time frame which would extend over 23 years, and based on a calculated average price of 70 dollars per barrel, it would generate current net revenues of around 5.00607 billion. If the price per barrel is calculated at 91.7 dollars, oil revenues would rise to $7.18973 billion, which represents a present value of 3.27809 billion.
According to the Commission, the current net revenue from Block 31 during the 23 years will be 8.2906 billion, with an oil price of $70 per barrel, while in the best-case scenario, with an oil price of $91.7 per barrel, the country would obtain $11.9512 billion. Under no circumstances was a hypothetical situation considered where the international price of oil would fall to the current level of an average of 40 dollars for Oriente crude oil, which would leave the oil from block 31, with an API (American Petroleum Institute) gravity of 17 degrees, at a much lower price.
The economic model approved by the Assembly, which guaranteed revenues of $8.2906 billion, at a price of $70 per barrel, or of $11.951 billion at a price of $91.7 per barrel implies, in the first case, the existence of proven reserves at a volume of 118.4 million barrels, and in the second instance, reserves of 130.33 million barrels (the reserve volumes were obtained by dividing the possible revenues by the estimated price of oil). How do the members of the Assembly explain that the volume of reserves can vary depending on the price of oil? This is the first outstanding debt of the 108 legislators who approved the resolution.
Taking into consideration a similar volume of reserves, the manager of Petroamazonas, Osvaldo Madrid, loved to talk about oil. In 2013, he offered to produce 18,000 barrels per day. In 2014, he said that the extraction rate would rise to 25,000 barrels, and even assured that if the reserves from the new projects in the south were incorporated, the extraction rate could reach 73,000 barrels per day.
The reality is radically different. In 2013, they extracted 2,000 barrels a day, 16,000 less than what they had projected. In 2014, 4,500 barrels were produced, 20,500 barrels less than what was approved (25,000 barrels) and in 2015, the daily average is 7,000 barrels.
In 2016, peak production will reach 8,000 barrels a day, and from 2017 onwards will be a steady decline to 4,000 barrels per day, taking into consideration a decline rate of 12%. Also, a surprising water cut of 70% has been recorded, which will quickly rise to 90%. This means that out of every 100 barrels of fluid, 90 are formation water and only 10 are petroleum, a reality that impacts the economy of the block, since formation water should be treated before being reinjected.
The actual reserves are 17 million barrels
If we project an average production of 7000 barrels per day over 23 years, taking into consideration a water cut of 90% and an annual decline rate of 12%, we obtain an actual volume of proven reserves of approximately 17 million barrels. Therefore, there is a large difference between what the Assembly approved, in the first instance of 101.44 million barrels with regard to the 118.4 million barrels, and of the 113.33 million barrels with respect to the 130.33 million barrels. It is a mistake that smacks of deceit.
Focus [an online magazine]had exclusive access to a study of the reserves in Block 31, which was commissioned by Petroamazonas with the international firm Ryder Scott Company Petroleum Consultants, which was presented on 30 September of 2013, the same day that the Assembly’s Commission approved the report for second reading. This study established proven reserves from Block 31 at 33.1 million barrels, probable reserves of 20.2 million and possible reserves of 23.4 million barrels.
This study was never taken into consideration, not in Petroamazonas’ reports, let alone in the National Assembly. If we take this study on reserves into consideration, it only makes us conclude that the Assembly’s declaration of national interest was a web of deceit and was based on misleading information. Can an error of this magnitude be justified on a technical basis?
There is an intrinsic relationship between the volume of proven reserves, investments and production. Also, the very concept of proven reserves involves the indisputable condition of its profitability. In simple terms, this means that the production cost cannot be greater than the sale price.
The collapsed economy of Block 31
The approved model provided for an investment of $600 million for the development phase. Between the years 2012 and 2015, Petroamazonas has invested $480 million. However, the total investment made in Block 31 up til the first semester of 2015 was $715.2 million, which includes the $263 million invested by Petrobras in the exploration phase up to 2007. Based on this reality, producing one barrel of petroleum in Block 31 currently costs the country $58.77 per barrel, one of the highest costs in the world.
In the current situation, with an oil price of $40 per barrel, taking into consideration the proven reserves of 17 million barrels, Ecuador will lose $319 million over the 23 years; with the price at $70 per barrel, the revenue would only reach $190.9 million, which works out at $8.3 million per year, which signifies a loss of $8.0997 billion compared to the amount set out in the studies.
Calculation Error: 97%
In short, the Government and the National Assembly miscalculated by 97%. With these figures, they would not even be able to recover the investment; the project has collapsed economically. Although the social, cultural and environmental cost is another story.
Even without taking into consideration the repayment of the investment for exploration made by Petrobras of $263 million, the project is unsustainable. With the price of oil at $70 per barrel, the revenue would be $534.6 million, in other words, $7.756 billion less, making the error in this situation 94%.
The underhanded history of Block 31
The exploitation of Block 31 has had a history full of deceit. It all started in 1995, during the government of Sixto Durán Ballén, with the seventh oil round, which was under the supervision of Wilson Pastor Morris. This oil round resulted in several concession blocks being granted in the Yasuní National Park.
As part of this tender, Block 31 was awarded to the Argentinian company Pérez Companc. However, three years later, in April of 1998, due to pressure from environmental organizations, the Minister for Energy temporally excluded Block 31 from the extractive projects, as 80% of the map was inside the YNP. Also, the block borders the buffer zone of the Intangible Zone Tagaeri, Taromenane (ZITT).
In May of 2006, the Inter-American Commission of Human Rights (IACHR), granted precautionary measures to protect the life and integrity of the Tagaeri and Taromenane indigenous people, which resulted in the requirement to modify Block 31’s oil map. In January of 2007, the president, Alfredo Palacio, declared the area an intangible zone.
However, just five months after Rafael Correa took office, on 22 June of 2007, the Ministry of the Environment granted an intersection certificate for Block 31 in the Yasuní National Park, claiming that it is not located in the intangible zone. On 18 October of 2007, Ana Albán, the Minister of the Environment, granted an environmental license to Petrobras.
Due to the constant questioning about exploitation within a protected area, the company Petrobras decided to abandon the area and gave it back to the State. Petroecuador and Petrobras signed an agreement to this effect on 19 September of 2008.
Supposedly in this agreement, Ecuador would not indemnify nor repay the Brazilian company the investment they made. However, Rafael Correa’s government signed an agreement to use the Heavy Crude Oil Pipeline (OCP) which belongs to Petrobras to transport state oil. By means of this agreement, during the 10 years that it remains in force, the country will pay Petrobras approximately 240 million dollars.
In effect, Petrobras was indemnified for abandoning Block 31. In response to this, President Rafael Correa described the reversion of the block as “good news”, claiming that this would ensure the protection of the biological and cultural wealth of the Yasuní Park; although, the “good news” was short-lived. Weeks later, the exploitation project was resumed with great vigor under the control of the state-owned company Petroamazonas.
In October of 2008, the new Constitution came into force which, for the first time, recognized the rights of nature. These rights are established in articles 57 and 407, which prohibit the exploitation of natural resources and other intrusive activities in indigenous territories and protected areas.
Despite the clear constitutional prohibition, on 26 June of 2009, the Ministry of Environment, under the guidance of Marcela Aguiñaga, ratified an Environmental Licence for the exploitation of Block 31, without the authorization of the National Assembly, which was issued, as mentioned earlier, five years later, in October of 2013.
On the other hand, almost 80% of Ecuadorians support a referendum to determine Yasuní´s fate. Young activists from the group “Yasunidos” collected more than 750,000 signatures, but the government denied them the right to a referendum.
A legislator’s investigation is on the way
The legislator Cynthia Viteri requested information from Petroamazonas regarding the situation in Blocks 31 and 43, like the projects for power generation with gas in the Amazon (OGE), the exploitation of gas in the Gulf and the results of specific service contracts.
Also, Viteri told Focus that she would soon send an investigation request to President Rafael Correa and the Comptroller General, Carlos Pólit, to determine responsibility, out of Petroamazonas’ officials, the Ministry of Economic Policy Coordination, and the 108 members of the National Assembly who deemed the exploitation of oil in the Yasuní National Park in the national interest.