Group 2

Conoco’s “Green Oil” Strategy

OVERVIEW: CONOCO• Acquired by Du Pont in1981• Single largest business segment in the chemical and energy divisions (37% of the total

revenue)• Conoco gave Du Pont a substantial position in the oil industry with operations spanning

the United States, Europe, Africa and the Far East

OVERVIEW: ECUADOR’S OIL INDUSTRY• Highly dependent on its oil industry• By 1990 petroleum industry accounted for over 13% of the country’s GNP, 47% of

revenues and 43% of exports • The industry was of primary national importance

Pre 1972 Initial exploration by Texaco/Gulf

1972 State Owned Oil Company (CEPE)

1974 Petroecuador replaced Gulf in the Texaco Consortium

By 1991 Texaco/Petroecuador JV drilled 50 exploratory wells, finding oil in 37 of them

Early 1980 Government decided to expand its exploration activities and include foreign players

By 1984 Finding new reserves became a matter of urgency

CONTEXT

Eastern Ecuador situated in the midst of pristine rain forest

Many groups were concerned about the impact of oil exploration on the local environment and people

Conoco developed a proactive environmental plan to minimize the impact of its activities on the environment

By September 1991 Conoco started facing opposition environmental groups, local indigenous people etc.

Other options available to Conoco seemed more lucrative as compared to the Ecuador project

Should the company proceed with developing a new oil exploration site in eastern Ecuador ?

Cono

co’s

Stak

es in

Ecu

ador

Risk Service Contracts (RSC) an International Oil Company supplies services and know-how to the state from exploration through production phases for the government in exchange for an agreed-on fixed fee or some other form of compensation. In risk service contracts, the IOC bears all the exploration costs.

Block 16• A $44 mn RSC signed by a Conoco led consortium signed in Jan 1986• By 1989, 5 of the 6 wells had oil• 200 Mn barrel Oil reserve• 120 wells could lift the oil in next 20 years peak producing rate of 45,000 barrels/day• All this translated into 6% of Conoco’s worldwide reserves and 4% of total revenues• Conoco viewed this find as springboard for future expansion

Petroecuador80%

Other Investing Compan-ies

20%

Profits Sharing

Investments Timeline

Capital Before Profit Sharing

Exploration In 5 years

Development In 10 Years

Why was this important for Ecuador?• By 1983, they had only 1 billion barrels of proven reserves• Block 16 would account for 20% expansion

Cost of Development$600 Mn – Drill wells, build production facility, twin pipelines, roadsConoco to bring in $200 Mn of the $500 Mn production budget

“A 200 million barrel field represents a substantial find for Conoco”, Rick Oslo, VP Latin America

Key

bott

lene

cks

and

Envi

ronm

enta

l Im

plic

ation

s Judith Kimerling, Consultant, Natural Resource Defense Council Study of 1989• Previous oil production in rain forests had resulted in degradation of the environment• 17 Mn gallons of oil had been spilled• 4.3 Mn gallons hazardous waste discharged in waterways• Unspecified quantities of toxic drilling mud buried

Block 16: Bottlenecks• Major complex operational and contractual implications• Light crude from Texco’s Shushufindi field to mix with Conoco’s heavier crude, so that the resulting lighter blend could be transported• Additional refining capability at Esmeraldas refinery• No previous experience in such developments• June 1989 terms and conditions were being explored

Environmental Implications• Significant Impact to the rain forests• RAN and other environmental organizations opposed exploration• Yasuni National Park issue – government failure?• Yasuni was know for its bio-diversity

Conoco’s Reaction• Acknowledged the concerns and recognized that they needed to integrate environmental concerns • In 1989, proactive efforts were taken to incorporate constructive ideas of wide range of external interest groups

“Without an iota of a doubt, it is possible to safely develop oil fields in environmentally sensitive areas of the world” – CEO Constantine Nicandros’s

view on environmental concerns

THE RAIN FOREST

SIGNIFICANCE OF RAIN FORESTS

Covers less than 6% of the population but contains over half of the world’s animal and plant species

Extraordinary Biological diversity due to unique climate

Home to over 140 million people, with 1%-2% of them being hunters/gatherers

55000 sq miles of rainforests lost every year due to large scale deforestation

Such Erosion of great concern since they perform important functions like influencing weather patterns, absorbing carbon dioxide and thus slowing global warming.

GROWING CONCERNS

DEFORESTATION

• Ecuador lost an avg of 2.3% forests every year

• Oil development posed a threat

• North West region of Conoco’s Block 16 was 90% deforested

INDIGENOUS PEOPLE’S CONCERNS

• Threat to livelihood and culture of around 100,000 native Indians

• Colonists, Oil workers and tourists brought new diseases

• Huaorani, group of 1600 people whose homelands included both Blocks 16 and 22.

• Ferocious and dangerous• Resentment against Conoco’s

activities in contrast to other groups

• Environmental groups lobbied the Ecuadorean govt behalf of Huaoranis

BIODIVERSITY

• Oil development damaged the biological diversity of forest, north and west of Yasuni National Park

• It was designated as a U.N Biosphere

• Ambivalent attitude of govt to protect such vulnerable areas

CONOCOS PLANS 1989 : Launch initiatives to address these environmental concerns 1990: Detailed EMP( Environmental Management Plan) to minimize potential

ecological damage of operations Conoco’s was ready to incur 5% to 10% of $600million on EMP Project also strong economic and competitive reason

CONOCO’S HIGHLY COOPERATIVE APPROACH

• Local Government • Indigenous Groups• James Yost, Anthropologist• Fundacion Naturs• US conservation Groups

• 1990: Revised draft guidelines• Invited interested parties to a 4

day meeting

Conoco still lacked consensus, though their efforts were appreciated

CONOCO’S ENVIRONMENTAL PROGRAMME

NEGOTIATIONS WITH THE GOVERNMENT: 1990

• Current negotiations with Ecuadorean government were encountering difficulty• Delays were due to contract technicalities• Increasing concerns over environment safety of crude production in Amazon region• Groups protested to Ecuadorean government

Concos had to find a way to accommodate Environmental and Indigenous Concerns, even if government policies were not clear on these issues

NEW CONCERNS REGARDING INDIGENOUS GROUPSRights of Indigenous groups had become an issueRedefined boundaries of Huaorani Indians reserves which bordered Yasuni National Park

GROWING PROTESTSActivist group invaded oil companies head officesGroup claimed companies were destroying nature, killing Indian population hence should stop their activititesIn Ecuador groups had launched national protests and strikes in defence of lands and suspended oil activities.

The RulingLaw of HydrocarbonsCorporation for Defense of LifeCordavi’s petition to the TribunalTribunal’s ruling on Oct 2, 1990

The dilemma

Risk service v/s Concession

Modified plan for Block 16

Future Agreements?

Imprecise Language

ClarificationOn Oct 30, 1990 Tribunal issued a revised decree urging all the oil companies that all future oil activities in protected areas take utmost care to protect the environment

Trib

unal

for C

onsti

tutio

nal G

uara

ntee

sThe TribunalTribunal for Constitutional GuaranteesEngaged to draw a framework for oil exploration in areas created as National Parks

What is NRDC?Leading US environmental groupFounded as “a law firm for the environment”$16 mn budget , 1,50,000 US members

Nat

ural

Res

ourc

es D

efen

se C

ounc

il

Impact on the project•Investigative research on the project•Published a report on Oct 10, 1990•NRDC charged US companies for “incredible destruction”•Blame on Texaco and demand of $50 mn•Du Pont asked to call off Conoco’s plans•“A leader in the campaign against the oil industry’s destruction of the Oriente“

Conoco Ecuador asked for a meeting with NRDC to understand their criticism and share its EMP

NRDC and Cultural Survival• Conoco shared EMP and asked NRDC to partner with it to develop Block 16•NRDC two pronged strategy• Independent oversight for EMP• Share economic benefits with locals

•NRDC’s “negotiated” approach•Involvement of locals and environmental groups•After Feb 5, 1991 meeting NRDC came out in support of Conoco for sustainable development of the region•Various models for setting up a trust fund discussed•Negotiations began on proposed kick in amount for the fund

“We saw rivers that were on fire. Animals had disappeared. There are no fish left. Among the people we found 80% malnutrition, earlier when there was none…….”

DISCUSSIONS WITH CONFENIAE• March 1991: NRDC & CS went to Ecuador to meet Confeniae and other local

environmental and indigenous groups• Confeniae requests NRDC to present a proposal to Conoco on its behalf

RAINFOREST ACTION NETWORK (RAN)

• Published a letter to represent Huaorani’s interests opposing all oil developmeny in Block 16

• Sent out second series of “anti-Conoco” fund-raising letters asking its members for donations to support Huaorani’s efforts

DISCUSSIONS WITH INDIGENOUS GROUPS

LEAKED MINUTES• “Minutes” stamped “Confidential” from the meeting of NRDC and CS with

Conoco was made public• Striking a deal on behalf of other groups and discussion of sensitive issues• Suggestions for a new foundation

• Cordavi meet NRDC and demand that they abandon support of Confeniae and reaffirm total opposition to any negotiations by any group with Conoco

• Circulation of “minutes” with memo criticizing NRDC and CS• Accusations of betrayal of cause and colleagues• U.S. press began to report a fundamental split between NRDC, CS and other leading

environmental groups.

THE “CONFIDENTIAL MINUTES”

REACTIONS

• Conoco’s officials responded by saying accusations were “unjust and cynical”• Justice Department declines to investigate and dismisses the case as out of hand. • Focused media attention on the whole issue

ALLEGATIONS

• Cordavi asks the US Justice Department to investigate Conoco’s allegedly “corrupt practices” in influencing the Ecuadorean tribunal to reverse its original ruling

• Violation of Foreign Corrupt Practices Act• Cordavi asks US Sierra Club to join in• Public outrage at the underhanded methods of securing lease rights

1991: ALLEGATIONS OF IMPROPRIETY

NRDC vs OTHERS

• Unalterable opposition to Oil Drilling in Block 16 Environmental

Groups

• Collaborate and Minimize damages with Eco Sensitive ConcoNRDC

•Accused NRDC of “Got in Bed with the Enemy”•Criticized for bypassing Welfare of indigenous people

•Acted as Mediator Between Indigenous people and Conco•Accepted the inevitability of Oil exploration

ENVIRONMENT MANAGEMENT PLAN

Environment Management

Plan

FINANCIAL REVIEW & NOD FROM GOVERNMENT

Need

for Capital

Rationing -

1 Billion

Heavy oil VS

Light Oil

First of its Kind

opportunityLonger term benefits in

future Negotiations

Energy Ministry granted Approval on September 20

One Month for Conco to commit $200 Million Investment

Against For

FINAL DECISION

Conoco Decided to Leave Block 16

Maxus Corporation was awarded the drilling rights

Losses to GovernmentFailed Promises to Huaorani group

Thousands of Acres of Forest DestroyedRivers were polluted

ROLE PLAYED BY ACTIVISTS GROUPS

ACTIVISTS GROUPS Initially Opposed for protection of Flora and Fauna Then for Indigenous people Even after Indigenous group agreed, they did not want to negotiate Petroecuador project in the neighboring block was not mentioned Only motive was to attack the US company

ROBERT KENNEDY, JR. (THEN HEAD OF NRDC’S INTERNATIONAL PROGRAM) “American corporations with rain forest operations present an inviting target for U.S

environmental groups. Attacking them relieves our sense of powerlessness to deal with a tragedy that is largely outside our borders and beyond our control. Such attacks may also help to build solidarity with certain Third World environmental groups, for whom any success against a U.S. corporation is an important source of prestige among their constituents”

CONOCO -TOO SOFT ?

“Do you support the Huaorani or do you support Big Oil?”

Conoco initially plan was technical and it waited for three years to engage Environment and HR agencies

Failed to engage NGOs and other stakeholders from the beginning

Lost opportunity to deal with Ngo with both environment and Economy in Mind and fought with Groups with rejected

any sought of intrusion in this area

In effect, Conoco gave its opponents 3 years to organize, recruit allies, refine messages, and raise money

CONCLUSION

Lost Opportunity

ConocoEnvironmental

ActivistGovernment

Group 2NAME Roll No.

Sudarshan Balasubramaniam C003

Omkar Deshpande C015

Vivek Hariharan C024

Richa Kapoor C029

Apoorva Sharma C051

Anand Tajpuriya C058

Anurag Thakurta C059

THANK YOU!