Growing climate sensitivity and environmental, social and governance (ESG) criteria for investment are emboldening environmental and indigenous land campaigns in commodity-dependent Andean countries. Caught between the need to address fiscal imbalances aggravated by the Covid-19 pandemic and the pressure to accelerate the energy transition, fragile governments in the resource-rich region could swiftly destabilize if they lurch too far in either direction.
Ground zero is Ecuador. President Guillermo Lasso's conservative administration took office in May vowing to double oil output to 1mn b/d. Decree 95, issued in July, created a framework to boost output "in a rational and environmentally sustainable way" with foreign investment, transparency and competition. On 18 October, indigenous groups sued the government for allegedly violating their right to prior consent. Their next target is a mining-promotion decree issued in August.
As the legal battle unfolds, Spain's Repsol — among the last incumbent integrated oil companies — plans to divest as part of a global shift from fossil fuels, leaving more room for Chinese state-owned CNPC and Sinopec, which are already Ecuador's top foreign oil producers, with scant regard for ESG. PetroEcuador just awarded a contract to a Sinopec subsidiary to boost production at Sacha, its leading oil field.
Western independents such as GeoPark, Gran Tierra and New Stratus Energy are marching into Ecuador as well, but their reach could be limited by growing financing constraints.
Amazon crime?
Getting oil to market is another concern for Quito, after environmental groups Amazon Watch and Stand.earth persuaded some EU banks to stop financing oil trade originating in Ecuador's Amazon region. Decrying a selective "boycott", state-owned PetroEcuador now allows buyers to pre-pay cargoes to bypass banks' reluctance to issue letters of credit, a move typically associated with sanctioned countries. In a spot sale tender for fuel oil applying the new terms, Trafigura issued a $0.23/bl discount on its normal offer for advance payment, exposing the cost of circumventing normal trade finance channels. Sinopec's trading arm, Unipec, another regular Ecuadorean oil buyer, won the tender on the traditional terms.
Ecuador's indigenous movement cut its teeth on a legal fight against Texaco — now Chevron — in an environmental case dating back decades. These days, the offensive is spearheaded by powerful indigenous confederation Conaie. In October 2019, the group participated in widespread violent demonstrations triggered by the previous government's plan to end costly fuel subsidies. Former president Lenin Moreno backpedaled, but last year when the pandemic pummelled the international oil market, the administration initiated monthly gasoline and diesel price adjustments tied to WTI. Under threat of renewed turmoil as international prices spiked in recent weeks, Lasso froze the programme on 22 October, squeezing through final upward notches. Conaie is demanding a rollback.
Race to produce
Fiscally strapped, commodity-dependent developing countries such as Ecuador argue that they need to produce as much oil as they can — while the world is still gobbling it up — to underwrite social spending, tackle energy poverty and ultimately decarbonize to combat climate change. This is the mantra of Colombia, an oil and coal exporter that is no stranger to social conflict. But unlike Quito, Bogotá is jumping on the ESG bandwagon. Colombian state-controlled Ecopetrol plans to export a "carbon-compensated" cargo of Castilla Blend crude, offset by tree-planting and renewable energy. For now, the firm is sticking with oil, including planned hydraulic fracturing in partnership with ExxonMobil.
The risk of disregarding ESG is evident in Peru, where a new left-wing government faces a resurgence of indigenous protests that have forced state-owned PetroPeru to repeatedly shut its 100,000 b/d oil pipeline. Peru's indigenous campaign is driven more by demands for basic services such as electricity and water than anti-extractive sentiment, revealing the region's entrenched structural inequities that governments say requires commodity income to remedy. Their spotty records on wealth redistribution — even at the apex of commodity price cycles and the nadir of the pandemic — seem to belie this assertion.
