ENVIRONMENTAL CONCERNS GAINING IMPORTANCE IN INDUSTRY OPERATIONS

Environmental concerns have leapt to the forefront of industry's concerns in operating in Latin America.

The United Nations Conference on Environment and Development in Rio de Janeiro June 3-14 focused a strong world spotlight on the region's environmental and commercial resources. Protection of the region's rain forests, which accounts for a huge share of the world's total, is emerging as an especially contentious issue.

Ecuador's Oriente region may well prove the litmus test of how or whether oil and gas companies are able to operate in Latin American rain forests. Controversy over industry operations in the Oriente have heated to the point that environmentalist and native groups have routinely picketed company offices in Quito and used mass fundraiser mailings in North America.

"A world class environmental conflict is unfolding in the Amazonian jungles of eastern Ecuador," says Douglas Southgate, associate professor of agricultural economics at Ohio State University. Southgate, working in Quito for the Instituto de Estrategias Agropecuarias under a contract between OSU and the U.S. Agency for International Development, has conducted a study of the economics of pollution control in eastern Ecuador.

Other key industry/environment conflicts are taking shape in Brazil and Peru, while Venezuela's state oil company embarks on the kind of broad scope environmental initiatives usually seen among U.S. and European multinational petroleum companies.

BLOCK 16 CONFLICT

The imbroglio in Ecuador largely focuses on development of heavy oil reserves underlying Block 16 in the Oriente.

A Conoco Inc. group discovered the Block 16 fields in 1987-89 and submitted a $600 million development project in 1990 (OGJ, July 23, 1990, p. 23).

Portions of the block overlap with the Yasuni National Park, a prime rain forest nature reserve, and with lands assigned to the Huaorani natives. That led to the project being targeted by environmentalists. After more than 2 years of preparatory work, studies, negotiations, and permitting efforts, Conoco pulled out of the project, citing better investment opportunities elsewhere. Opponents of Conoco's project hailed the result as a victory. However, project partner Maxus Energy Co., Dallas, since has taken over the project, which finally won approval in June.

The irony was, says Southgate, that Conoco's extensive measures to mitigate environmental effects of the project put the company among the more environmentally responsible oil companies operating in Ecuador. Southgate contends the region's environment had been largely neglected for much of the period leading up to the Conoco group's involvement.

Southgate's criticism echoes conclusions of a report, dubbed "Amazon Crude," by the Natural Resources Defense Council, published in 1990 and based upon a field trip by NRDC to the Oriente.

NRDC had claimed that environmental quality had been sacrificed in the region for the sake of accumulating oil wealth. It charged extensive oil and saline water pollution in the area were linked to health problems and caused by allegedly negligent oil company drilling and production activities. State oil company Petroecuador has heatedly denied the allegations, and other industry sources in Ecuador contend the NRDC's conclusions were inaccurate or exaggerated.

Texaco Inc., which last month ended its 20 year partnership with Petroecuador in the Oriente concession that produces most of the country's oil, has let contract to a U.S. firm to conduct an extensive environmental audit of its concession operations.

However, NRDC's criticism and surrounding publicity over Oriente operations spurred Petroecuador to implement a comprehensive plan for protecting the environment in the Oriente. Accordingly, the development plan Petroecuador approved for the Block 16 heavy oil project took into consideration the earlier criticism and incorporates the key mitigation measures called for in protecting the sensitive rain forest and native population.

CONOCO'S EFFORTS

However, as Southgate notes, Conoco took extra pains to preserve the environment on its service contract block. During exploration, the company helped check the spread of disease among the Huaorani and other tribes by inoculating them and limiting access by outsiders to the block. It also ruled out drilling in the park, minimized the number of drillsites by slant drilling from a pad, treated and reinjected produced formation water, and opted against building a bridge across a river in the block-which helped inhibit outside colonization.

Despite this progress, Southgate says, some environmentalist and native groups oppose all oil and gas development in the Oriente, notably projects sponsored by North American and European companies. The lobbying effort against Conoco was especially intense, Southgate says, but he cites long delays for government approval and Conoco's own investment priorities as reasons to view project opponents' claims of victory with skepticism.

The real significance of the lobbying campaign against Conoco, Southgate contends, is that the difficult situation faced by environmentally responsible companies is being worsened.

Southgate estimates environmental measures will account for about 10% of the projected spending for development in Block 16. Because of the low price for heavy crude on world markets, the added pollution control costs could have undermined an adequate return for the project, he says. Accordingly, the government considered the level of its tax take in allowing development to proceed while preserving the environment. Simply approving development without stringent pollution controls is not viable for most oil companies, says Southgate, who cites statements by Maxus officials prior to approval, that the company will pursue Block 16 development only if a satisfactory return on capital can be earned after making needed pollution control outlays.

"If companies with this sort of policy are driven from Ecuador, due to lobbying or the government's unwillingness to adjust taxes, tropical forests and their human inhabitants are sure to suffer," he said.

ORYX'S ECUADORIAN PROJECT

Oryx Energy Co., Dallas, is implementing strong measures to protect the environment in its exploration and development plans for Block 7 in the Oriente basin.

The work focuses on two of the block's six oil fields, Coca-Payamino and Gacela. Plans call for about 40 wells to be drilled in the two fields to double production from about 5,100 b/d.

Oryx incorporated the most advanced pollution control technology in production facilities it installed recently in Coca-Payamino field. The 25,000 b/d capacity production station features an expanded fluid treating capability, advanced skimming technology, and improved automated controls.

Oryx drilled two of four planned horizontal wells in Gacela with a closed mud system to avoid spills and contamination of drillsites. It also has cut the size of drillsites and plans an array of pollution prevention and remediation measures including a revegetation project and environmental awareness training for employees and contractors.

PETROBRAS CONTROVERSIES

Brazil's state oil company Petroleos Brasileiro SA, stung by recent criticism by Brazilian environmentalist groups that it is the country's major polluter, has embarked on a broad program of environmental initiatives.

Feema, Brazil's state engineering foundation for the environment, claims Petrobras is responsible for 65 spills involving oil or refined products since 1983. During the same period, Feema notes, 25 lawsuits have been filed against Petrobras over environmental damages in Sao Paulo.

The volume of spills Feema cites totals only 54,750 bbl. However, Brazilian environmentalists contend Brazil is not capable of dealing with a major oil spill. They cite the recent accidents involving the Greek tanker Theomana in the Campos basin and the Alina P tanker off Sao Sebastiao.

Theomana on Sept. 2, 1991, spilled about 1,100 bbl of crude after a wall in a ballast tank ruptured, causing a 3 m hole in the vessel's hull. The tanker had been loading crude from a monobuoy linked to the Presidente Prudente de Moraes, a tanker Petrobras had converted to a floating storage and offloading facility in supergiant Albacora oil field. After 16 hr of unsuccessful repair attempts, the vessel was towed away and its crude offloaded onto the Katina P tanker. Theomana, owned by Polembros, Greece, was carrying more than 350,000 bbl of crude.

The resulting spill covered 90 sq km but never posed a threat to the coast 150 km away.

The Union of Maritime Officers, Rio de Janeiro, claimed the tanker was too old and poorly maintained. It should not have been used because Brazilian law requires coastal shipping must be done only by Brazilian vessels.

Petrobras countered that the vessel had recently passed Brazilian Port Authority inspection and was certified by the American Bureau of Shipping.

Environmentalists also alleged Petrobras neglected to have oil spill containment booms in place around the tanker, citing the company's 31 fines since 1988 for environmental pollution or inadequate pollution controls at facilities.

The Alina P was ripped by explosions in three of its tanks Dec. 31, 1991, killing one crew member and injuring nine while near the coast. A likely major spill was avoided because the tanker had just offloaded its oil cargo.

Separately, Feema alleged Petrobras is responsible for 21% of the oil and other industrial pollution in Guanabara Bay off Rio de Janeiro. It cites the company's Duque de Caxias refinery as one of the bay's top polluters, accounting for more than 10 b/d of almost 70 b/d of oil discharged into the bay.

PETROBRAS INITIATIVES

Petrobras has budgeted $203-290 million for environmental protection and mitigation measures in 1992, about 7-10% of the company's total capital budget for the year.

The company has implemented a comprehensive, countrywide campaign-targeting environmental protection measures-that was to be complete at the end of May.

Petrobras now considers environmental protection a top priority and a key factor for any industry to be competitive, says Joao Carlos Soares Nunes, coordinator of Petrobras' environmental department. Part of the 1992 program involves a huge monitoring program of the marine ecosystem in the Campos basin off Rio de Janeiro state, site of Brazil's largest producing province. In addition to researching and cataloging all of the region's flora and fauna and studying ocean currents, Petrobras is undertaking a comprehensive study of the effects on the Campos ecosystem of its activities that include producing about 60% of Brazil's total oil production of 670,000 b/d.

In addition, Petrobras now routinely lets contracts for environmental impact studies (EIS) of its new projects, the first big one involving the proposed Rio de Janeiro-Sao Paulo gas pipeline. It didn't give a green light to the project until the EIS was approved.

Petrobras also has budgeted $20 million through 1997 for environmental protection measures at the Duque de Caxias refinery. Of that total, Petrobras win spend $2.6 million to upgrade the refinery's water treating system.

Ronaldo Chaves Torres, head of the refinery's environment department, says the plant has reduced the volume of oil discharged into the bay by 50% since 1988.

Restoration of natural resources affected by Petrobras' operations plays an increasingly important role in the company's environmental campaign. The company has reforested about 700,000 sq m near Sao Mateus do Sul, Parana state, where it has started commercial operations at an oil shale project. The project, which started up in May 1992, involves mining the shale and processing it into 3,870 b/d of shale oil, 140 metric tons/day of fuel gas, 50 tons/day of liquefied petroleum gas, and 100 tons/day of sulfur.

After processing, a mine is refilled with spent shale as well as soil and subsoil that had been removed. Petrobras then recontours the terrain and replants native vegetation.

Petrobras also is restoring areas cleared in the Amazon for exploration through agreements with the Amazonas State Federal University and the Amazon Research Institute. The two agencies are researching and cataloging flora and fauna in the rain forest where Petrobras is exploring for oil and gas, notably the Urucu region.

Because it handles as much as 1.3 million b/d of crude and products, Petrobras has accelerated measures to improve hazardous waste handling from processing operations. One approach calls for expanded use of bioremediation landfarming of waste from crude processing that contains traces of oil, grease, ammonia, and heavy metals. The other entails recycling oil waste as fuel in the manufacture of bricks in several Sao Paulo cities. Factories burning the recycled waste report reduced maintenance and energy costs and thus are able to boost production 30-80%.

PERUVIAN CONFLICTS

Foreign oil companies have more to be concerned about in Peruvian exploration and development than deadly attacks by the feared Sendero Luminos guerrilla movement-which disrupted Mobil Corp.'s operations in the Huallaga basin in December 1990.

Texas Crude Exploration Inc. in late August 1991 decided not to sign a contract it had been negotiating with state-owned Petroleos del Peru for the 2.4 million acre Block 61 in Peru's northern jungle after it received more than 1,000 letters from environmentalists and its Houston offices were picketed. Environmentalists oppose oil and gas exploration on the block because of its location within part of Pacaya-Samiria national wilderness reserve.

The issue was further complicated by native groups that claimed land rights to some of the area.

Petroperu contends Peruvian law allows companies to explore in protected areas if the contract provides for reimbursement of jungle restoration costs.

TCI, which began negotiating the contract in early 1990, had spent $500,000 for exploration data on the Maranon basin prospect.

Occidental Petroleum Corp., which accounts for half of Peru's crude oil production, in 1990 rejected Petroperu's offer to explore for oil in Block 43 in Peru's south central jungle. Oxy had asked for authorization to shift its exploration campaign to Block 43 from Block 36 in the central jungle. Block 43 adjoins undeveloped Camisea gas field. However, once Oxy learned the block overlapped Manu National Park, it opted out of the venture.

PDVSA INITIATIVES

Venezuela's state-owned Petroleos de Venezuela SA has undertaken a two pronged approach to increased environmental concerns as part of its overall business strategy.

One is a commitment of substantial resources to producing more environmentally benign products for consumption in countries such as the U.S. where environmental strictures are tightening. Most notably, that involves meeting new specifications for gasoline and other refined products called for under tighter air emissions standards.

The company has implemented five basic policies at the corporate level governing environmental concerns:

Creating a strong environmental affairs group within the company.
Assigning primary responsibility for environmental protection to operations managers and supervisors.
Observing all national and international environmental laws and regulations.
Providing resources needed to implement the best demonstrated control technologies wherever reasonably cost-effective.
Cooperating with Venezuela's government in development and establishment of new environmental laws and regulations.

Pdvsa also conducts environmental research through its Intevep R&D affiliate as part of a program to monitor environmental effects of its operations.

Separately, Pdvsa in May hired Manning, Selvage & Lee, New York, to handle public relations in case of an oil spill. The contract is part of an emergency oil spill contingency response plan its marine affiliate PDV Marina developed in case of an accident involving tankers from Venezuela's fleet.

As more companies are attracted to Latin America's sensitive offshore and rain forest regions, and environmentalist groups in North America expand their efforts in the region in conjunction with local environmental and native groups, companies face the prospect of still more conflicts on environmental issues-even in spite of their own best efforts to protect the environment, according to Southgate.

"Environmentalists present themselves as advocates of the rain forest and its human inhabitants," he noted. "Unfortunately, some of them seem more concerned about scoring points against large companies than safeguarding their clients' long term interests. The strategy they are following could cause them to win the battle but lose the war."