ANÁLISIS QUINCENAL: Transparency and Extractives Update from Latin America

By Carlos Monge, RWI Latin America Regional Coordinator
With Claudia Viale and León Portocarrero

October 25 – November 8, 2008

Español

 

In some oil importing countries, the fall in international prices has not meant lower fuel prices for final consumers.

Conflicts persist due to a lack of State attention

Ecuador and Venezuela strengthen their bonds through bilateral agreements that could impact extractive industry policies

In some oil importing countries, the fall in international prices has not meant lower fuel prices for final consumers.

After reaching the unprecedented level of US$ 147 per barrel, oil prices collapsed and have fluctuated around US$ 70 in recent weeks. This dramatic fall could have been positive for consumers in oil importing countries, but in Peru and Colombia, fuel prices have remained fixed, causing discomfort among consumers who have had to face endless increases since early this year.

In Colombia, while international oil prices rose, gas price increases were around 80 to 120 pesos per month. With the current drop, users hoped that gasoline would become cheaper too, but various forces have prevented this from happening.

To determine gas prices, Colombian distributors consider not only international prices but also the exchange rate, and this last variable has shown significant increases due to the improvement in the U.S. dollar. In fact – and despite consumer expectations – if this tendency continues, prices could actually undergo a moderate increase. Another factor keeping prices high is taxes. In Colombia, 48% of the price for a gallon of gasoline goes to cover the global tax, the VAT, a surcharge and a marking fee.

In response to this situation, the Director of Hydrocarbons for the Ministry of Mines, Julio César Vera, affirmed that any relief in gas prices would only begin to be felt in January or February 2009, and only as long as international prices and the exchange rate remain at their current levels. This prediction was qualified as “optimistic,” since distributors are arguing for a price increase during these months given the recent drop in sales.

Peruvian oil prices have been forecast to fall between 0.80 and 1.03 soles. However, this decrease did not take place, even though the Ministries of Economy and Finance and of Energy and Mines say they approved measures to allow prices to fall. The president of the Service Station Association pointed out that the state refinery PetroPeru had reduced its prices and that he expected Repsol YPF’s refinery La Pampilla to do the same. But this announcement had no apparent effect on prices. Hydrocarbon specialists such as Aurelio Ochoa warned that, according to the dynamics of the Peruvian market it was unlikely that distributors were still selling stocks they bought at higher prices, but this also did not seem to affect prices. On November 5th, the Vice Minister of Economy, Eduardo Morón, urged refineries and distributors to pass price reductions to final consumers, but these establishments have not yet responded with the long-awaited price adjustment.

The lack of response from distribution firms shows the weakness of the government when it comes to consumer protection. The new global context demands corrective action that prevents firms from charging outdated prices.

It remains to be seen how this situation is affecting countries that are net energy consumers, such as Argentina and Chile, who have also suffered recent increases in the cost of imported gas and diesel fuel.

back to top

---

Conflicts persist due to a lack of State attention.

Extractive activity has generated conflicts between industry and the populations in areas of operations, as a result of factors such as environmental pollution, labor disputes, or discrepancies in the distribution and use of the fiscal resources created. Recent struggles in Ecuador and Peru demonstrate that without concrete action, huge political crises can arise.

In Peru, the State had left unresolved a conflict between the southern departments of Moquegua and Tacna, caused by the allocation of canon resources from  Southern Peru Copper Corporation, which operates in both locations.

Since June 2007, authorities in Moquegua have protested a reduction in annual resource allocation as compared with the allocation to the neighboring region of Tacna. After a year of inaction by the State an intense protest exploded in June 2008. It included the kidnapping of a high-ranking officer and dozens of policemen. Only when faced with this extreme situation did the State commit to presenting a legal allocation proposal within 30 days, a deadline which was not met. In early October a peaceful protest took place, but the State did not respond and on October 29th a second “Moqueguazo” started, which included the blockade of the bridge, and left one person dead and more than 60 wounded.

The Ombudsman’s Office had already shown concern over the situation and urged that measures be taken, it was only in the context of this disorder and violence that Congress modified the Canon Law in late October. The new norm establishes that the allocation of resources be determined by the sales value of the extracted concentrate and not – as before – by the quantity of land removed during extraction. However, since the solution approved is more beneficial to Moquegua, a strong protest began in Tacna, where the Armed Forces eventually had to intervene. Tacna’s grievances also included the use of water reserves by mining companies, and demanded revocation of current licenses in favor of new pacts with local mining companies.

Another conflict broke out in late October at the Casapalca Mine in the Lima highlands , this time generated by complaints about the labor regime. The Mining and Metal Workers Union announced a strike over unfulfilled agreements signed in June with the former Vice Minister of Labor. Provisions included a call for job inspections. The protest, which also prompted a violent strike in June 2007, is focused on wages, the reliance on outsourcing for 90% of workers, profit distribution, and deficient working conditions. Neither the State nor the company has taken actions to meet workers' demands.

In Ecuador, the a 15-year legal battle between Chevron Texaco and the indigenous peoples in the Amazon area continues. At issue is the local impact of oil extraction from 1964 and 1992. The indigenous groups are accusing the company of serious environmental pollution through crude oil burning, the construction of open waste pools, and multiple oil spills.

Because the environmental effects from the extraction period are still being felt, the local citizens have insisted on pursuing the action and are currently awaiting the verdict. This legal actions shows an alternative approach for gaining attention to a conflict, but also demonstrates how drawn out the search for solutions can be.

The open opposition of indigenous peoples and environmental organizations to the large scale mining projects promoted by the new Constitution of Ecuador could unleash a new wave of conflicts similar to those in northern Peru.

As these cases show, extractive activity can spark different types of conflicts. If they are ignored, the affected groups will use whatever means of protest are available to them, and some of these can be very intense and have serious political and social consequences.

back to top

---

Ecuador and Venezuela strengthen their bonds through bilateral agreements that could impact extractive industry policies

On October 28th the presidents of Ecuador and Venezuela, Rafael Correa and Hugo Chávez, met in the city of Puyo, Ecuador, to discuss and sign various cooperation agreements. These countries share a high economic dependence on non-renewable natural resources, as well as similarities in their politics. In fact, both have greatly affirmed the role of the State in the oil sector, renegotiating contracts and even expropriating companies to expand the role of state-owned firms. State firms are taking an increasingly active role in hydrocarbon upstream and downstream activities.

The meeting resulted in the signing of 10 bilateral agreements, most of them cooperation arrangements in the oil sector. Among these there are large scale joint projects such as oil exploration and exploitation of the Sacha field in Ecuador (to be taken on by a mixed firm), the exploration of Block 4 in the Gulf of Guayaquil and the exploitation of the Ayacucho 5 field in Venezuela, where the state owned firm Petroecuador will participate. The chiefs of state also continued with plans to build the Refinery of the Pacific, for which significant progress has been made in seismic studies, and with work to install infrastructure expected to start in December 2008.

Besides oil extraction projects, the leaders discussed common strategies to face the fall in oil prices. Chávez argued that if prices continued to fall, he would support an additional production cut and recommended that Ecuador propose the establishment of a fixed price range for crude oil prices in the next OPEP meeting. It was specified that Ecuador and Venezuela agree that the price of an oil barrel should stay between US$ 70 and US$ 80. Chávez even offered to send fuel to Ecuador if lacked sufficient natural gas reserves.

The agreements signed have implications not only for these two countries but for the global community Given the importance of both countries to world oil production, these steps could affect international oil prices in the upcoming months. Furthermore, they continue the regional trend of oil and gas projects conducted through alliances between the state-owned companies of Latin American countries. Now it remains to be seen if the new context of international oil prices will delay these projects, a concern expressed by the Ecuador President Rafael Correa.

back to top

---

Sources: El País, Perú 21, La Republica, Correo, La Primera, El Comercio Peru, Elcomercio.com, El Universal

PREVIOUS ISSUES

• October 9 - October 24
• September 24 - October 8