ANÁLISIS QUINCENAL: Transparency and Extractives Update from Latin America
By Carlos Monge, RWI Latin America Regional Coordinator
With Claudia Viale and León Portocarrero
September 24 - October 8, 2008 |
Español |
Corruption Scandal in Oil Block Concession Rocks Peru.
On Sunday, October 5th, a corruption scandal exploded in Peru with the public release of recorded conversations between a lobbyist who is an ex-minister from President Garcia’s first government, and a board member from PeruPetro, the entity in charge of awarding blocks for hydrocarbon exploration and exploitation. Concessions for five blocks had been awarded in concession to the Norwegian firm Discover Petroleum, which is associated with the state company PetroPerú. PetroPerú is in charge of oil refining and domestic distribution of gasoline to a section of the national market, but it is now interested in returning to exploration and exploitation activities, from which it was withdrawn during the privatization framework of the early ‘90s.
From the audio recordings originally released and others disseminated in the following days, it appears that both speakers had sought, successfully, to favor Discover Petroleum in exchange for monthly payments and an eventual bonus for a successful contract. It also appears that the Ministry of Energy and Mining had knowledge of these facts and had even advised those involved on how to proceed through front men. It was further insinuated that the Prime Minister may have been involved.
As a consequence of the scandal, both the Minister of Energy and Mining and the President of the Board of PetroPerú resigned. Afterwards, the Prime Minister and the entire Cabinet resigned as well. All contracts with Discover Petroleum were suspended. The company – though protesting its innocence – announced its definitive withdrawal from Peru. Elsewhere, the President of the Republic appointed a new Prime Minister known for his integrity and the government announced that the struggle against corruption would be a central issue in the political agenda from then on.
Beyond the political crises resulting from the scandal, we are interested in a few issues now on the political agenda for the extractive sector due to these events.
The first has to do with transparency within the block concession process for exploration and exploitation. What criteria are applied to rate interested firms? What criteria are used to award blocks? Who makes these decisions? Concerning this, civil society involved in the Extractive Industries Transparency Initiative (EITI) has raised the need to include this issue in the EITI Peru agenda, which until now has focused on tax and non-tax payments by extractive firms and the use of these resources by central and sub-national authorities.
Some voices have also emerged calling for an audit of all bidding processes conducted in recent years, arguing that the current scandal is most likely not the first or only case of corruption in this area. Many opponents to this proposal have emerged, arguing that the audits would bring insecurity to investments in the country. In fact, Lourdes Flores, leader of the right wing party Unidad Nacional, stated that this proposal is an expression of “craziness and pointless extremism.” The Peruvian Foreign Trade Society has made similar statements. PeruPetro and PetroPeru – which deny the existence of any irregularities in the concession decision process – alluded to business interests that are trying to delegitimize these institutions. In particular, Daniel Saba, President of the Board of PeruPetro, stated that the recordings could have been disseminated by “a firm whose administration has been forced to pay millions of dollars, and which could be connected to the media that launched the story,” making an unambiguous reference to the North American firm PeruTech Peruana. Since 1993, PeruTech has been in charge of block Z-2-B in Talara, in the northern region of Piura. In January 2008, they were forced to pay US$ 15.1 million in tax debts from 2002 to 2006, under the threat of losing their contract. In June 2008, PeruPetro imposed a new payment – this time for debts from 2007, for US$ 6.3 million.
On the other hand, Cesar Gutierrez, resigning President of the Board of PetroPerú, has pointed out that this could be part of a campaign carried out by those who are opposed to PetroPerú re-engaging in hydrocarbon exploration and exploitation activities, arguing that the state should keep out of these activities, which should only be in the hands of the private sector.
Finally, some questions were raised concerning the change of the Minister of Energy and Mining and whether this would mean a change in the policies of this sector. This does not seem to be the case, since the newly appointed Minister, engineer Pedro Sanchez, had a major role in the energy privatization carried out in the ‘90s and leans towards keeping the current policies for promoting large private investments in the sector.
Alliances and conflicts in the relationship between state-owned companies in the hydrocarbon sector.
In the past, we have highlighted the leadership of Latin American state-owned companies in the region’s investment projects. However, the harsh negotiations between Ecuador and Brazil over the contract between Ecuador and Petrobras demonstrate the possibilities for conflict and disagreement.
The state-owned company Petrobras was awarded the concession of block 18, from which it obtained 32,000 crude oil barrels a day. Nevertheless, in October 2007, President Rafael Correa began re-negotiating contracts with all the foreign firms in the sector to obtain higher benefits from hydrocarbon extraction, a move which raised the option of changing the current concession model to a service model.
The contract re-negotiation implies that the state would keep all the petroleum extracted in exchange for a payment that covers production expenses and a utility margin for the transnational companies that operate in the country, such as the Spanish firm Repsol YPF, the French firm Perenco, and the Chinese firm Andes Petroleum. The prior agreement established that the firms would take 71% of oil production as compensation for their investments, while the remainder would go to the state.
Petrobras’s delay in accepting the re-negotiated contract motivated President Correa to issue a severe warning on his radio program on Saturday October 4th, where he stated, “Don’t try to dodge the government. Be careful. If you take too long [to sign the new contract], I will nationalize the field and you will leave the country.”
In addition to the delay of the new contract, the tension between Petrobras and the State of Ecuador is based on alleged irregularities in the assignment of the oil field. Block 18 includes the wells of Palo Azul and Palo Rojo, awarded to Petrobras in 2002 and determined to be continuous reservoirs, and therefore belonging to the same block. However, preliminary studies carried out by the State of Ecuador suggested that the fields are independent, so Petrobras would have been extracting oil exceeding its concession. To confirm this, the auditing firm Gafrey Cline is producing a report due in early November.
On October 7th, the former Minister of Mines and Petroleum, Galo Chiriboga – who resigned his position October 8th for personal reasons – also spoke to Petrobras, warning them that if delays in signing the new contract persisted, the government would terminate their contract for the exploitation of block 18. Furthermore, he demanded that foreign firms meet their existing commitments, given that crude oil production has decreased in the country.
The possibility of throwing Petrobras out of Ecuador arose in a climate of already-strained relations between Ecuador and Brazil, after Ecuador’s government cancelled operations and ordered an embargo of the assets of another Brazilian firm, Odebrecht. Construction flaws in an Odebrecht-built station had led to a sharp drop in energy production.
In Brazil, Minister of Foreign Relations Celso Amorim agreed that Petrobras could abandon its exploitation activities in Ecuador if they did not reach a deal that was beneficial to both countries. But he argued that the State of Ecuador should also compensate Petrobras for its multi-million dollar investments. Tensions between the governments worsened when Ecuador confirmed its decision to terminate Odebrecht’s local operations. Consequently, the Brazilian chancellery expressed its displeasure with Ecuador’s treatment of Brazilian firms and announced their definitive cancellation of a scheduled mission from Lula Da Silva’s government to Quito.
New Oil Mega Projects Are Announced.
In spite of recent fluctuations, high international oil prices seem to continue driving important exploration and exploitation projects in Latin American countries. Two large-scale oil projects have been announced in Argentina and Brazil.
On September 25th, Petrobras and the Norwegian company Galp announced the conclusion of their joint perforation activities in the Jupiter well, as well as the discovery of a huge light oil and natural gas reserve, located 290 kilometers off the coast of Rio de Janeiro. The reserve reportedly could be over 800 kilometers long and extend to a depth of 5.773 meters below sea level. Petrobras officials said, “The consortium will continue the activities and investments necessary to verify the dimensions of the new deposit, as well as the characteristics of the deposits."
Fernando Leite Siqueira, director of communications of the Petrobras Engineer Association, pointed out that the light oil exploitation project, in the pre-sal area, could have an extremely high profitability and that reserves are expected to reach 90 billion barrels. If confirmed, this expectation, combined with earlier news of massive hydrocarbon deposits on the country’s southern coast, would imply that Brazil holds the fourth-largest petroleum reserve in the world, after Saudi Arabia, Iran and Iraq. In light of this discovery, an inter-ministerial commission is studying possible changes to the oil industry’s legal framework, generating proposals that will be given to President Da Silva.
Elsewhere, in Argentina, President Cristina Kirchner announced the beginning of perforation activities on the first well in the Aurora Project of the state-owned company YPF. This project includes four offshore wells, the first two operated exclusively by YPF in the San Jorge Gulf, and the remaining two in an alliance with the state-owned company Enarsa and the Chilean firm Enap in front of the Strait of Magellan. The development of this project necessitated the use of a platform brought from the U.S., positioned 45 kilometers off the coast of Comodoro Rivaldavia. YPF, Enarsa and Enap invested $150 million for the platform, on top of the $300 million in programmed investment from YPF for this stage of exploration.
Ecuador also showed a boost in oil investment projects, including the October announcement of $1,232 million to be invested by state-owned Petroamazonas from 2008 to 2012 in block 15, located in the Ecuadorian Amazon area. This block was previously explored by the American firm Oxy. Petroamazonas, which obtained ISO 9001:2000 certification on the same day as its announcement, expects to produce 110 thousand barrels a day and to discover 43 million barrels in new reserves through additional explorations.
Sources: Reuters Latin America, President of Columbia, Clarin.com, Correo, Elcomercio.com, La Republica, Pagina/12, Xinhuanet, Folha Online
OTHER ISSUES
U.S. Said to Allow Drilling Without Needed Permits - The New York Times
Australia Gas Deal Renews Tension - Financial Times
Charged With Fraud, Nigeria's Ruling Party Leader Resigns - Reuters
Western Senators Propose Ban on Pacific Drilling - The New York Times
To Limit Corruption around Mining in Africa, Follow the Money - The Globe and Mail
Court Backs Oil Project - The New York Times
Transparency Increases, But There Is Still a Long Way to Go - The Phnom Penh Post
IMF Develops Project to Help Africa Deal with Illicit Trade - African Manager
Three-day Conference on Africa's Natural Resources Starts in Tanzania - Standard Times Press
After Oil Rig Blast, BP Refused to Share Underwater Spill Footage - ABC News
Finger-Pointing, but Few Answers at Hearings on Drilling - The New York Times
Complaints Over U.N. Prize Sponsored by Equatorial Guinea's Obiang - Reuters
Guide: Community-Company Grievance Resolution for Australian Mining Industry - Oxfam Australia (pdf)
Cote D'Ivoire: President for Life, and Then Some - The New York Times
In Midst of Massive Spill, Oil Industry Fighting Transparency and Accountability - Oxfam America
Leaked Oil Contracts in DRC Threaten Resource Wars and $10 Billion Rip-Off by British Company - Carbon Web
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