ANÁLISIS QUINCENAL: Transparency and Extractives Update from Latin America

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

March 6th – 20th, 2009

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Colombia's Ecopetrol carries on with its ambitious investment plan and shows remarkable results.

Ecuadorian government withdraws Acción Ecológica’s operating permit.

Peruvian government considers helping Doe Run to stave off insolvency, despite the compan's persistent failure to comply with Environmental Adequacy Program.

Colombia's Ecopetrol carries on with its ambitious investment plan and shows remarkable results.

The state-owned oil company Ecopetrol of Colombia reportedly increased its profits 125% from 2007 to 2008, in spite of the large drop in international hydrocarbon prices, and news has continued to emerge in recent works about their new purchases, exploration, exploitation and transport projects, both in Colombia and abroad. This expansion is in contrast to the suspension of many large-scale projects across Latin America and the fall in profits for most companies in the extractive sector.

On March 9th, Ecopetrol representatives announced it would distribute US$ 8.9 billion in dividends, a 91.3% increase from 2007, while the other the companies in Colombia reduced their distributions by about 40% or eliminated dividends completely. There were also several investment announcements. For example, Ecopetrol joined with Petrobras to exploit two oil concessions in Peru, with a 50% stake in one and a 25% stake in another. It acquired the U.S. Company PetroTech for US$ 900 million in a joint venture with the state-owned Korean oil company KNOC and also acquired 26 oil concessions in the Gulf of Mexico with an aggregate bid of US$ 20.5 million.

Inside Colombia, Ecopetrol ensured its involvement in the exploration and the transport of hydrocarbons. It bought stock in the Canadian firm Embridge Inc., which had 24.7% ownership of the Central Oil Pipeline (Ocensa), for US$ 417.8 million, thus obtaining a 60% share of the pipeline. It also bought the firm Hocol, formerly owned by Maurel & Prom, for US$ 580 million, gaining control over several exploration blocks and participation in the Alto Magdalena and Colombia pipelines.

One of the factors been behind the huge profits registered by Ecopetrol is the increase in output due to new discoveries in the Meta department, where oil production went from 30,000 to 96,000 barrels a day in 2008, sustaining profits despite the fall in international prices. Javier Rodriguez, the head of Ecopetrol, said that investment plans are based on projected prices between US$ 30 and US$ 40 a barrel, similar to current market prices, so that their planned investments would not be at risk. "Companies determine their budgets on lower price levels. Therefore, price fluctuations are not as sudden or as evident to us."

Similarly, Gutierrez stated that the company would be willing to use various sources of funding to maintain its investment plan of US$ 6.2 billion for 2009. The company would thus be prioritizing an increase in production and participation in fuel transport in order to maintain their profits.

The sustained growth of Ecopetrol and its astonishing increase in investments could be threatened if the international crisis intensifies and causes a greater drop in prices or in credit restrictions. However, the positive results up until now may indicate that Ecopetrol could maintain above average performance this year, especially with their projections based on very low estimated prices and a profit assured from all along the oil value chain.

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Ecuadorian government withdraws Acción Ecológica's operating permit.

The Ecuadorian government announced on March 2nd that it would withdraw the legal permit for operation from environmental organization Acción Ecológica, a measure executed by the Ministry of Health, where the organization has been registered. State representatives claim that the organization had "breached the purpose for which it was created," that is, that they did not engage in health issues. AE pointed out that it was registered in the Ministry of Health because when it was created no Ministry of the Environment yet existed and that, furthermore, its actions in the environmental field have always been linked to public health.

But the context in which these formal actions took place, including open opposition by the organization to government mining policies, combined with the suddenness of the action, have generated distrust and suspicion that this was an act of censorship.

Representatives from Acción Ecológica maintain that they have had a legal permit since 1989 and that their objectives and activities have been the same since that time. They therefore consider the withdrawal of their permit to be an "illegal and illegitimate" action. They also were not given a chance to respond to the alleged irregularities.

This latest action comes in the midst of a confrontation with the Ecuadorian State, where Congress recently approved the new Mining Law and Acción Ecológica denounced the bill citing environmental risks and bias toward private foreign investment. Esperanza Martinez, one of the organization's founders stated that: "it is clear that there have been a series of disqualifications and contradictions due to environmental issues in relation to some projects we have criticized, such as the initiative to declare Ecuador an open pit mining country." The former president of the National Constituent Assembly, Alberto Acosta, mentioned that, oddly enough, this organization had been very close to president Correa's government prior to introduction and approval of the Mining Law.

The Minister of Health, Caroline Chang, said that the Ministry of the Environment would give the organization back their permit: "There’s no interest in harming any organization and least of all Acción Ecológica. That's why all their documentation as an NGO has already been sent to the Ministry of the Environment so it can grant them the permit to operate." However, there have been no further reports of AE's progress in this regard. Latin Americans will remain vigilant about this case and the actions of the State against other civil society organizations.

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Peruvian government considers helping Doe Run to stave off insolvency, despite the company's persistent failure to comply with Environmental Adequacy Program.

The mining company Doe Run has operated in Peru since 1997 in province of La Oroya in the Junín department, carrying out the smelting and refining of minerals. Despite the high price environment for minerals in 2008, Doe Run recently announced that it was facing a crisis and was on the brink of shutting down, due to the fall in prices and the withdrawal of a revolving credit line totaling US$ 75 million from a consortium of banks. These resources were to be used to purchase zinc, copper and lead concentrates to refine in La Oroya Metallurgical Complex.

Doe Run's closure would mean the dismissal of over 3,500 workers, which led the state to announce it was considering intervening to rescue the company. This decision caused outrage in the country since it would use taxpayer's money to protect a private company. To make matters worse, this particular company has caused enormous environmental damage, which it still has not corrected. Indeed, Doe Run has yet to comply with its Environmental Management and Adequacy Program (PAMA), which originally expired in 2006, but received a 39 month extension. Meanwhile, gas emissions have generated high levels of lead in the blood of local residents. La Oroya is considered one of the 10 most polluted places in the world by the Blacksmith Institute.

The Peruvian government's initial response to the situation was to rescue Doe Run, through a proposed loan from the Development Finance Corporation (Cofide), an entity in charge of financial intermediation with State resources.

The announcement of the possible rescue prompted a range of questions and concerns. The first was that the Peruvian government was about to give financial aid to a private company without assessing the reasons why banks withdrew their own loans, making it clear that the state was not interested in whether the company had handled their resources incorrectly or irresponsibly. The second is that the company was not required at any point in the proceedings to publish their financial statements in order to substantiate their supposed crisis. Doe Run is not currently required to publish its financial statements since it is not listed on the stock exchange, but despite the fact that the company was requesting the country's help, the government continued to protect its financial secrecy.

Moreover, the question arises: Why doesn't the Peruvian government buy the company's stock instead of giving them money directly? Another option would be to conduct a public-private partnership. However, these alternatives were not considered and two weeks of discussion proceeded on a government grant providing them with a US$ 175 million loan.

Ultimately the government did not go through with the loan, because a group of 15 mining companies that work with Doe Run in refining and smelting offered to lend them the necessary cash. Still, government representatives announced that they would give the company an extra three months to meet the environmental requirements, even though Doe Run had already received more than three additional years.

In short, the solution to Doe Run's financial crisis came from the private sphere, but at the cost of still further delays to its compliance with the PAMA. Unfortunately, in this case with financing in order, public health ceases to be important.

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Sources: La Republica.com.co, Folha Online, El País, El Comercio (Peru), El Mercurio, Acción Ecológica, Elcomercio.com (Ecuador), Hoy.com.ec, El Tiempo, La República (Peru)

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