Conoco PPT(2)

8/8/2019 Conoco PPT(2)

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History

Du Ponts oil subsidiary Acquired by Du Pont in 1981 37% of Du Pont's $40 bn revenues & 40% of after-

tax operating income Rank 12th (Revenue) & 8th (Net Income) Far outpacing Du Ponts more traditional chemical,

fibers and polymer divisions (Exhibit 1) Substantial presence in USA, Europe, Africa & Far

East Diversify sources of oil supply towards

environmentally sensitive regions of the world(Exhibit 2)


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Ecuadors Oil Industry

1970s & 1980s Highly dependent on Oil industry

Early 1990s Discovered over 2 bn barrels

0.1% of worlds total oil reserves & 0.4% of world

production

But, contribution of 13% to countrys GNP, 47% ofgovt. revenues & 43% of exports

Exploration initially led by Texaco/Gulf consortium(Light High quality Crude oil)

1972 Corporacion Estatal Petrolera Ecuatoriana(CEPE), state-owned oil company (Petroecuador)

1974 Petroecuador replaced Gulf in the consortium


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Ecuadors Oil Industry (Contd.)

1991 Texaco/Petroecuador JV wasproducing 220,000 barrels a day 75% ofEcuadors total production

Output to reserves levels 2nd highest in OPECafter Gabon

Less focus on oil exploration

Govt. undertakes 7 Risk Service Contracts

including Conoco


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Conocos Stakes in Ecuador

Jan 1986 Risk Service contract signed with aConoco-led consortium

$44 mn investment over 4 yrs to drill 6 exploratory

wells on Block 16 Conoco - 35% stake in the consortium

Contract Rules

y Foreign oil companies bear the initial explorationcosts, recoverable only if oil were found

yAfter exploration, site development is permittedwith govt. permission


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Conocos Stakes in Ecuador (Contd.)

y Petroecuador would receive 80% of profits,other investing companies receive theremaining 20%

y

Reimbursement of Capital investmentsbefore profit sharing

y Recovery period of Exploration investment 5 yrs

y Recovery period of Development Costs 10yrs

$200 mn investment by Conoco out of $600mn of total project cost


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Benefits to Conoco/Ecuador

Block 16 Oil found in 5 out of 6 wells(well abovethe companys avg success rate of 25%)

200 mn of heavy crude oil reserves 1st majorheavy crude find in Ecuador

Increase in total revenues by 4%

Ecuador Significant source, surpassed onlyby USA, UK and Norway

Option of negotiating for rights of exploration in

Block 22 Increase of 20% in both Ecuadors oil reserves

and production levels


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Negative Implications of

Conocos Project Operational Issues

Environmental Implications

y Deforestationy Damage to Biodiversity

Concerns of Indigenous people

Social and Economic disruption Contractual Problems


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Operational Issues

No previous experience about heavycrude oil

Additional refinery capability, pumpingstations and pipelines required to mixlight crude with heavy crude

Special agreements needed for

negotiation of supply and price issues


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Block 16 located in Rain forest

Main functions of rain forests

y Influence weather patters

yAbsorb CO2, slowing Global warming

y Offer unique biological diversity

Deforestation

y Ecuador lost an avg of 2.3% of forestsevery year

y Foreign currency requirement fulfilled bytimber exports


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(Contd.)y Increasing need of fuel wood and land for

agricultural purposes and livestock grazing

y Oil development landless people move to areas

made suitable by oil company roadsy Ecuadorean govt. granted land rights to encourage

colonization

Damage to Biodiversity

y Block 16 some part located within boundaries ofYasuni National park.

y Oil developments damaging the natural biodiversityof the park (designated a UN biosphere)


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Concerns ofIndigenous people

Rain forest contained about 10,000 nativeIndians

Tenuous Livelihoods & culture change

Colonization policy Intense pressure onland & animal populations source of foodfor these people

Introduction of new diseases to which

these people have no natural immunity Huaorani tribe belief of having the forest as

their property by birthright


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Social andEconomicdisruption

Activists opposing Conocos projects

Strikes and Demonstrations

Panic of Petroterrorists as in Colombia Fear of Damage to oil pipelines and

other assets


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Contractual Problems

Both govt. & Conoco were concernedover prices at which the heavy and lightcrudes should be brought and sold

Fear of political repercussions reasonbehind Petroecuadors hesitations infinalizing the deal


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Conocos Environmental Program

Incur additional cost of 5% to 10% of$600 mn (proposed investment every year)

Roundtable talks with a wide range of

people and organisationsy James Yost, US anthropologist (Lived with

Huaorani)

y Fundacion Natura (Largest environmental

organisation in Ecuador)y Nature Conservancy & World Wildlife Fund

(Leading US conservation groups)


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(Contd.) Environmentaly Wells clustered together to minimize road

construction between sites

Reduce the risk of colonization & minimize directforest clearing

y Discourage colonists by using a ferry instead of abridge to cross the Rio Napo

y Stationing of guard posts along the access roads toprevent forest intrusions

y Use of plastic in place of local hard woods formaking access roads

y Herbal medicine research to be conducted


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(Contd.) Waste Management

y Separation of salt water from oil and then pumping thesalt water back to the source.

y Recycling of water and minor emissions from separationunit.

y Compost of oil contaminated soils or hydrocarbonwastes for use in local revegetation projects

yHazardous materials to be confined within oil and waterpipelines.

y Storage of drilled muds in steel containers and reuse inmaking wells to minimize waste production.


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Conocos Environmental Program (Contd.)

Indigenous People Orientation

y Commitment of no land loss, prevention of colonizationand participative decision making

y Huaorani would not be exposed to threats of health, safetyand long term welfare

y Conoco workers were forbidden from hunting and fishingwithin the Huaorani reserves

y Promise of health, education, social and employmentprograms for the Quichua Indians

y Company personnel would receive medical screening toreduce risks of imported diseases

Communications and Outreach

y Environmentalists to be encouraged to visit the site and

invited to participate in the companys auditing procedures


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Role ofGovernment Shortsightedness of the Govt.

Not informing Conoco in advance about the locationof Block 16

Redefined the national park boundaries shifted theblock in Huaorani reserve

Oct 1990 Cordavi, Ecuadorean environmentalgroup, filed a petition to Ecuadors Tribunal forConstitutional Guarantees

Law of Hydrocarbons conflicting with the Forestrylaw


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Role ofGovernment (Contd.)

Confusions regarding the Tribunal decision

Conoco signed a risk service contract, not an oilconcession

Block 16 was formerly located within parkboundaries, now only a 10 mile section ofaccess road would pass through the park

Which is a Future agreement bid award of

Block 22 to Conoco or Conocos developmentalplans for Block 16

Ultimately, oil activities were legalised in thepark area


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Role ofNRDC & CS National Resources Defense Council US based

Litigation and Lobby group 150,000 members

Initial opposition to the project environmental concerns

Model development

y Independent oversight

y Transfer of some of economic benefits to localcommunities

Considered Conoco as the best of the worst options -

oil exploration in rain forest inevitable

Followed a negotiated approach

y NRDC consultant, Martinez found out thatenvironmental groups were mixed in their responses,

local indigenous groups ready for negotiation


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Role ofNRDC & CS (Contd.)

Approved Conocos suggestion of starting afoundation like Charles Darwin foundation inGalapagos Islands

Built up consensus by discussing with various

indigenous groups like Confeniae Leaking of Confidential minutes

y NRDCs account of discussions with otherenvironmental groups

y Suggestions for the new foundation

y Led to conflicts as decision to support Conocosproject was taken without taking otherenvironmental groups in confidence

Sleeping with the enemy


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Opposition from other Parties

Rainforest Action Network (RAN)y Opposed Conocos plans in 1986

y In 1990, published a letter to represent Huaoranisinterests stating that they opposed Conocos plans

y Started asking for donations to help RAN supportHuaoranis efforts and prevent Conocos developmentof Block 16

Cordavi Corporation for Defense for Life

y Filed a petition to Ecuadors Tribunal for ConstitutionalGuarantees stating Law of Hydrocarbons asunconstitutional

y May 1991 Accusation of using corrupt practices byConoco to influence the decision of Tribunal


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Opposition from other Parties

(Contd.)

The Sierra Club Legal Defence Fund(SCLDF)

y 565,000 members, strong reputation for

protcting wilderness, forest, parks andmountainous areas

y Filed a report to UN Commission of HumanRights, accusing Conoco of genocide, later

changed to ethnocide

y Joined Cordavi in the protest againstConoco


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Conocos Problems Significant delay in Ecuador project

Several attractive investments available for funding

Heavy oil deployment fundamentally less attractive than light oil

Prices of heavy crude oil 60% of light crude oil

Heavy oil flowed more slowly, 40 yr time horizon for projectcompletion

Contract only covered the first 20 years

Ecuador project also involved start-up costs, being the firstpotential investment in the country

Environmental costs increases the project cost by 5-10%

US newspaper reports indicated RAN planning a series ofprotests at both Conoco and Du Pont facilities

Service contract with the govt. provided Conoco only one month

to make the final call


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Decision Paths for Conoco

The Go optionsy Develop all of Block 16, & later Block 22, as

planned, given the governments approvaly Develop Block 16 only outside of Yasuni

National Park boundariesy Extend the government deadline & broaden the

governance process to include many moregroups, including indigenous people, even moredirectly (position Block 16 as a pilotenvironmental scheme)

The No-Go optionsy Pull out of Block 16, but consider mounting

another proactive environmental oil programlater under more favorable circumstances

y Withdraw completely from Block 16 & similarcollaborative initiatives


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Amalesh Bandopadhyay(6)

Manuja Chaudhary(10)

Swati Gupta(26)Anirban Mazumdar(40)

Pravesh Singh()

Abhishek Prasad()

Conoco PPT(2)

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