1. Conservation or oil extraction in Yasuní National Park? A transcendental challenge Carlos Larrea Universidad Andina Simón Bolívar Colaboration: Rosario Fraga, Lucía Gallardo, Ana Isabel Larrea, Roque Sevilla, Ma. Cristina Vallejo, David Villamar

2. Natural endowment in Ecuador  Biological and cultural diversity in Ecuador  Biodiversity:  Ecuador has the largest amount of vertebrates per square Km in the word.  When taking into account endemic species, Ecuador is the second most diverse country in the world.  Ecuador ranks in the first ten most abundant countries in absolute number of amphibians, birds and butterflies.  The equator, the Andean mountains and the Galapagos islands contribute to a rich and diverse environment.

3. Culture and history in Ecuador:  Cultural diversity:  12 indigenous cultures: Tsachila, Chachi. Awa, Épera (Coast), Quichua (Highlands), Shuar, Achuar, Quichua,  Huaorani, Siona, Cofán, Shiwiar, Zápara (Amazon).  Afro-descendent cultures.  “Mestizo” culture.  Pre-incasic, incasic and colonial heritage.  Rich natural endowment: water, soils and minerals.

4. Oil, economy and society  Current situation:  Record oil production: 529.000 b/d.  Soaring oil prices: $ 94 (WTI).  Lasting economic crisis: growth in per capita income 1981-2006: 0.5 % per year.  Poverty: 47 %, Urban unemployment: 10 %.  At least a million Ecuadorians have emigrated abroad since 1998.  ¿Did we sow oil?  Contrast with the oil “boom” (1972-82)

5. Income per capita in Ecuador: 1965-2006

6. Poverty: 1995-2006

7. Original natural formations in Ecuador

8. Remaining natural formations: Ecological footprint

9. Oil and deforestation in the Amazon

10. The Yasuní dilemma in the current context  Current oil reserves will allow for no more than 30 years of production, even assuming new discoveries.  Ecuador’s future must be based on a sustainable use of resources.  Ecuador can lead alternative proposals to mitigate global warming, given the limited effects of current mechanisms based on the Kyoto protocol.

11. Oil prospects in Ecuador

12. Alternatives towards sustainability: eco- tourism

13. The ITT-Yasuní dilemma

14. Yasuní National Park’s uniqueness  One of the most diverse areas in the world.  One hectare in the park contains as many tree species as the United States and Canada together.  It was a biodiversity refuge during the Pleistocene period, when most of the Amazon rainforest became grasslands due to glaciations.  Home of two voluntarily isolated and not contacted indigenous nations: the Tagaeri and the Taromenane; who belong to the Waorani ethnic group.

15. Yasuní National Park’s Biodiversity

16. The ITT Oilfield  The unexploited ITT block is currently administrated by Petroecuador. The state will exploit this block in alliance with other state corporations such as: SINOPEC (China), Petrobras, Enap or PDVSA.  It contains 412 million barrels of heavy crude reserves (14.7° API), that can reach 920 million including probable reserves.  The high density of the crude will raise the price of extraction and may force the construction of a powerful thermoelectric plant (320 Mw) as well as an oil conversion plant to produce light oil and facilitate transportation.  Oil exploration in ITT can only start in 5 years and will last approximately 13 years producing 107.000 barrels a day. From that point on, extraction will decline for 12 more years (Beicip Franlab, 2004).

17. Quantitative Model Objectives:  Estimate future profits (total revenue – total cost) from oil in ITT, and the State participation rate.  Evaluate the present value of profits for the Ecuadorian State.  Estimate, at least partially, the externalities (environmental impact) caused by oil extraction.  Evaluate the amount required for international compensation, in a way which covers 50% of the potential State profits had the block been exploited.

18. Basic Definitions  Exogenous Variables: Variables which are determined outside the mathematical model.  Present Value: The current value of an amount of money which is to be paid in the future, considering that people values money in the present more than in the future and that the future is discounted at a given rate.  Discount Rate: The rate at which we discount the future value of any quantity. If the discount rate is high, we value the future poorly and discount a future quantity by a lot. If the discount rate is low we value the future highly and discount a future quantity just slightly.  Externalities: The positive or negative effects of a transaction which are not accounted into its costs by the market.

19. Exogenous Variables 1. Oil Reserves: How many barrels are there underground? How many can be extracted? How long will the extraction last in ITT? What estimations already exist? With what certainty can we count on these estimations? 2. Profits:  Price of crude oil: How to predict this price in the future?  Production costs / extraction technology: Alternatives and costs of using cleaner technologies. 3. State Participation: What percentage of profits will the State receive, if associated with a foreign extraction company ? 4. Discount Rate: Can vary depending on the risk of the investment, on the interest rates for different actors and on how nature is valued in the future.

20. How to define the value of each exogenous variable? We define a range of probable values, or alternative options.  Uncertain Variables: price of oil, recoverable reserves, extraction technology.  Alternative Options: discount rate.

21. 1. Oil Reserves  French Exploration (Beicip Franlab, 2004) :  Probable Reserves: 920 million barrels.  Proven Reserves: 412 million barrels.  Recoverable Reserves: 846 million barrels (depending on technology used now and in the future, on real reserves and price)  Type of Crude: very heavy, high sulphur content.  Probably high “water drive”: Repsol: 93%.

22. Projected Oil Production

23. 2. Profits f(price of crude, technology, geology)  Future projection of oil prices.  Range of prices: $15.23 (Dpto. of energy of USA projection), $21.1 (2006 price) and $30.  Variable Prices as function of time: increase from $30 to $40 during extraction. Production Costs:  Technology (offshore)  Other alternatives

24. 3. State Participation  This percentage can reach 81.5%. (Ministry of Energy)  Range of values: 50% to 81.5%.

25. 4. Discount Rate  Allows us to calculate the present value of a monetary flow (rather than a stock value) in the future, such as oil profits and externalities.  Value for oil profits: 6%, 11%, 12.3%, 20%.  6%: Interest rate without risk.  11%: Medium corporate rate (Dow Jones)  12.3%: Includes risk free rate, plus oil investment risk, and country risk.  20%: Opportunity cost for oil corporative capital.  For externalities : social discount rate, value attributed to the existence of biodiversity. 2 % to 5 %.

26. Production costs and revenues in a joint- venture option  Production cost $ 11.1  Foreign company revenue$ 3.9  Total state revenue$ 17.1  Oil price (in situ)$ 32.1 The State will participate in a flexible joint- venture enterprise, receiving 81.5 % of revenues.

27. 5. National externalities of oil extraction  Negative environmental Impacts on:  Deforestation.  Irreversible loss in biodiversity.  Deterioration in potential eco-tourismo projects.  Estimations of externalities are adapted from the Cuyabeno National Park model ( Azqueta y Delacámara, 2003).

28. Local environmental costs (adapted Cuyabeno Model)  Non-logging rainforest services: $ 115/Ha. per year.  Eco-tourism: $100 loss per tourist (up to 20.000 tourists per year, limited carrying capacity).  Biodiversity loss: from $ 7 to $ 1,600 per hectare, increasing costs as a function of deforested area.  Deforestation: $ 10,267/ha. ( 733 MT of CO 2 emissions, $14/MT).  Among the available estimates, these costs are moderate.  Deforestation is assumed to be controlled (mainly indirect effect) with final impact on 25 % of the Park’s area, after 50 years.  The smoothly declining social discount rate fluctuates between 5% and 2%.

29. Assumed local environmental costs  Present values:  Deforestation (CO 2 )$ 909 millions  Non-logging rainforest services $ 277 millions  Tourism$ 5 millions  Biodiversity loss$ 56 millions  Total$ 1,247 millions

30. Loss of Yasuní´s ecosystem services due to deforestation : Estimations taken from Earth Economics (Present Value)  Lowest estimate: 5.077 millions de dollars  Mean estimate: 9.886 millions de dollars  Highest estimate: 14.696 millions de dollars  Methodology: extrapolation of ecosystem services valuation from studies relevant to the Amazon.

31. Global CO 2 emission costs  The ITT reserves (846 million barrels), when burnt, will emit 375 million tons of carbon dioxide.  The World Bank has estimated the abatement cost for CO 2, at $14 to $20 dollars per metric ton.  The cost for the planet of neutralizing the ITT emissions will reach a present value between $1.684 and $2.405 million dollars.  Adding deforestation emissions, the cost will reach a present value between $2.593 and $3.704 million.

32. Our model hypotheses (assumptions of the model)  The model does not include negative effects of oil production, such as toxic waste-water, local pollution, oil spills, estimated for the Texaco case at 630 million dollars(Falconí, 2002).  Assumes full recovery of proven and probable reserves.  An optimistic revenue of 21 dollars per barrel is assumed.  The State will receive 81.5 % of profits.  The model does not include the country’s conservation opportunity cost (future growth based on biodiversity conservation).

33. Present Value of the state profits from ITT, not accounting for externalities (millions of dollars) State Participation: 50%Sate Participation: 81.5%

34. Present Value of the State profits of ITT: First Scenario 50% of profits for the State With $21.1 in profits the present value changes from $3526 million up to $616 million depending on the discount rate (6% - 20%)

35. Present Value of the State profits of ITT: Second Scenario 81.5% of profits for the State With $21.1 in profits the present value changes from $5747 million up to $1004 million depending on the discount rate (6% - 20%)

36. Present Value, First Scenario: State Participation 50%

37. Present Value of the state profits from ITT, accounting for externalities (millions of dollars) State Participation: 50%Sate Participation: 81.5%

38. Present Value, First Scenario: State Participation 81.5%

39. Present value of State profits of oil production 81.5% Participation The range of possible values starts with the most favourable : $9876 million and ends with the least favourable : $952 million depending on the profits (oil price and production costs) as well as the discount rate. Which scenario is the most academically justifiable? Which scenario does that State adopt as official? Without Externalities Millions of dollars Profits per barrel Discount Rate$15.23$20$21.1$30$30-$40 0.0641485448574781729876 0.1121142776292941654845 0.12317942356248635344078 0.20725952100414281585 With Externalities Millions of dollars Profits per barrel Discount Rate$15.23$20$21.1$30$30-$40 0.0629014201450069258629 0.118671529168229183598 0.1235471109123922872831 0.20-522-295-243181338

40. Oil production and its externalities: present value  Oil production (optimal conditions): 5,719 million.  Local negative externalities: 1,247 million.  CO 2 emissions: between 1.684 y 2.406 million.  Net national benefit: 4.472 million.  World's net benefit: B/w 2.788 and 2.066 million.

41. Oil and its externalities: assumed present value  Oil production: 5,719 million.  Local externalities: 1,247 million.  CO 2 emissions: 1,684 million (1 % national).  Net national revenue: 4,455 million.  If the additional risks of oil activity are calculated, the present net national value could be lower.

42. Compensation Fund for ITT’s Conservation  The State will assume a binding international agreement to keep ITT’s oil indefinitely underground in order to protect the biodiversity, the indigenous cultures, and the world´s climate.  An international compensation fund will be created to pay the Ecuadorian government for the non-received revenues from oil production. The fund will be administered by an international trust.  The fund should reach at least 50% of the net profits the State would have received had it chosen to extract oil from ITT.  The revenues from the fund will be exclusively spent on social development, alternative energy sources and conservation projects with social accountability.

43. Required compensation endowment  Under favorable conditions for oil extraction, the present value of revenues will reach 4,455 million dollars (after discounting local externalities).  A compensation fund of 2,000 million dollars can generate a current value of 2,659 million, with an indefinite annual flow of 140 million.  A discount rate of 5% has been assumed, with an average return on capital of 7%.

44. Capital sources for the compensation fund  At least 25 % of the fund can come from foreign debt renegotiation, by promoting debt for conservation swaps. Global warming generates shared interests at a worldwide scale.  Ecuador’s current foreign debt balance: 10.373 million.  Paris Club: 20 % of the current balance of 882.44 million: 176.5 million.  Bilateral Debt: 10 % of the current value of 872.52 million: 87.3 million.  Multilateral Organisms (IDB, World Bank): 10 % of the current balance of 2.529.86 million: 253 million.  Subtotal: 516.8 millions.  Plus the contributions:  From government to government.  From Non-governmental Organizations and International Organisms.  From citizens around the world who will symbolically buy barrels of repressed oil.

45. Economic proposal summary, option compatible with official position Present value:  Ecuador’s oil revenues: 5,719 million.  Local environmental costs: 1,247 million.  Local oil net value: 4,455 million.  CO 2 emission’s cost : 1,684 million.  Compensation profits: 2,659 million. Compensation capital: 2,000 million. Debt swaps: 517 million. Donations (governments, NGOs and citizens): 1,483 million.

46. Ecuador’s Yasuní project, an innovative proposal to mitigate global climate change  The project would avoid 547 million metric tons of CO 2 emissions (Oil: 375 million, deforestation: 172 million).  Current mechanisms of CO 2 emission control (carbon trading under the Kyoto Protocol) are insufficient.  CO 2 emissions are still growing at 2 % per year, while a 50 % reduction is needed (Stern Report).  Ecuador proposes an innovative alternative to cut CO 2 emissions, avoiding fossil fuel extraction in sensitive areas.  The proposal will help the world to preserve biodiversity.  Indigenous cultures will be preserved as well.