• TABLE OF CONTENTS
HIDE
 Title Page
 Acknowledgement
 Table of Contents
 List of Tables
 Abstract
 Introduction
 History of oil production in ecuador...
 Policy response
 Factors leading to policy changes...
 Summary and conclusions
 Bibliography
 Biographical sketch
 Copyright














Title: Ecuadorian oil policy in the era of sustainable development
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Table of Contents
    Title Page
        Page i
    Acknowledgement
        Page ii
    Table of Contents
        Page iii
        Page iv
    List of Tables
        Page v
    Abstract
        Page vi
        Page vii
    Introduction
        Page 1
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
        Page 8
        Page 9
        Page 10
        Page 11
        Page 12
        Page 13
    History of oil production in ecuador and its environmental consequences
        Page 14
        Page 15
        Page 16
        Page 17
        Page 18
        Page 19
        Page 20
        Page 21
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        Page 27
        Page 28
        Page 29
        Page 30
        Page 31
        Page 32
        Page 33
    Policy response
        Page 34
        Page 35
        Page 36
        Page 37
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        Page 57
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    Factors leading to policy changes and efforts against oil contamination
        Page 59
        Page 60
        Page 61
        Page 62
        Page 63
        Page 64
        Page 65
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    Summary and conclusions
        Page 96
        Page 97
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        Page 100
        Page 101
        Page 102
        Page 103
        Page 104
        Page 105
        Page 106
    Bibliography
        Page 107
        Page 108
        Page 109
        Page 110
        Page 111
        Page 112
    Biographical sketch
        Page 113
        Page 114
    Copyright
        Copyright
Full Text












ECUADORIAN OIL POLICY IN THE ERA OF
SUSTAINABLE DEVELOPMENT










By

MARCOS G. AVELLAN JR.


A THESIS PRESENTED TO THE GRADUATE SCHOOL
OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT
OF THE REQUIREMENTS FOR THE DEGREE OF
MASTER OF ARTS

UNIVERSITY OF FLORIDA


1998














ACKNOWLEDGEMENTS

I wish to express my deepest gratitude to Drs. Terry McCoy, Mark Thurner, and

Philip Williams for providing me with invaluable support, knowledge and understanding

throughout my academic career at the University of Florida. I would especially like to

thank Dr. McCoy for allowing me to work as his assistant, for helping me with the

completion of this thesis and for his guidance.

I would also like to thank my wife, Sylvia, who has made tremendous changes in

her life to be by my side. I hope that someday I can grant her the support and

understanding she needs for attaining any goals she sets for herself.

I cannot express the gratitude I have for my parents. They have made great

sacrifices to provide me with all I needed for success in life. It is because of their efforts

that I can look forward to a life full of opportunity for myself and my family.















TABLE OF CONTENTS

gage

ACKNOW LEDGEMENTS ............................................................................ .......... ii

LIST OF TABLES............................................ ............. ........................................ v

ABSTRACT..................................................................................................... ........... vi

CHAPTERS

1 INTRODUCTION................................................................................................... 1

B background .............................................................................. ................ .............. 2
Central Problem ..................................................................................................... 6
Significance and Literature Review........................................................................... 6
Objectives and Research Approach... ........................... ................................... 9

2 HISTORY OF OIL PRODUCTION IN ECUADOR AND ITS
ENVIRONMENTAL CONSEQUENCES.......................................... ................. 14

History of Ecuadorian Oil.............................................................. .................... 14
The Texaco-Gulf Era.................... ......................................................... 17
Steps in Producing Oil........................................................................................... 25
The Controversy over Contamination...................................................................... 27

3 POLICY RESPONSE.................................... .................................................... 34

Overview................................................................................................................ 34
Executive Decree No. 1802...................................................................................... 37
Executive Decree No. 2982................................................................................... 41
The Committee of Environmental Advisement..................................... 50








iii








4 FACTORS LEADING TO POLICY CHANGES AND
EFFORTS AGAINST OIL CONTAMINATION... ........................................... 59

Analytical Framework ................................................................ ........... ...... 59
The Hemispheric Sustainable Development Regime............................................. 61
M ultilateral Lending Institutions............................................. ........................... 65
Transnational Organizations............................................................................. 67
Legal Action and International Agreements....................................................... 70
A ctors....................................................................................................... ....... 71
M obilizations A against Polluters........................................................................... ..... 75
The Texaco Law suit......................................................................................... 75
The Maxus Controversy................................................................................... 84
C onclusions........................................ ...... ..................................................... ......... 94

5 SUMMARY AND CONCLUSIONS.................................................................. 96

Sum m ary ........................................... ....................... . .................. ....................... 96
The Future of the Environment and Oil in Ecuador.............................................. 102
C onclusions....................................... ...... ....................... ....................................... 104
Recommendations for Future Research...................................... ......... ................. 105

BIBLIO GRAPH Y ......................................... ..................................................... 107

BIO GRAPH ICAL SKETCH .................................................................................... 113














LIST OF TABLES


Table p

2-1 Ecuador: M ajor Oil Concessions 1878-1972.................................................... 16

3-1 Ecuador: Government Oil Revenue and Total Revenue 1991-1995.................. 35

4-1 Major Oil Companies in Ecuador 1997-1999 ................... ........................ 75














Abstract of Thesis Presented to the Graduate School
of the University of Florida in Partial Fulfillment of the
Requirements for the Degree of Master of Arts

ECUADORIAN OIL POLICY IN THE ERA OF SUSTAINABLE DEVELOPMENT

By

Marcos G. Avellan Jr.

May 1998

Chairman: Dr. Terry L. McCoy
Major Department: Latin American Studies

Oil contamination of Ecuador's Amazon Basin by corporations public and private

has been pervasive. Companies such as Texaco and Maxus have been accused of

contaminating water, deforestation, pollution and hurting indigenous groups.

Contamination reached such level of severity that in 1993, Ecuadorian citizens presented a

lawsuit in White Plains, New York, against Texaco. They accused Texaco of harming

their health as a result of the company's contamination. In the aftermath of the Texaco suit

and due to international and domestic pressure, the Ecuadorian state has enacted

legislation to protect the environment from oil production. This legislation appeared in

1994 and has been fortified by subsequent and improved regulatory codes. These

regulatory codes mark a clear departure from the past, especially since there were no

regulations concerning the environment specifically dealing with the oil industry.








Moreover, compliance with such regulations is being monitored not only by the state, but

by private nongovernmental organizations.

The purpose of this thesis is to provide an overview of recent changes in

Ecuadorian oil policy concerning the environment and to explain the factors that have led

to change. This thesis argues that an international regime for environmental protection in

the Americas is forming and that this has led to domestic policy changes in Ecuador.

Hence, this thesis further argues that a combination of large international nongovernmental

organizations joined with smaller Ecuadorian NGOs, international agreements,

international institutions, and grassroots groups has been instrumental in creating an

international normative context unfavorable to contamination. The result of this research,

relying mainly on government documents, interviews, and press accounts, is that there

have been changes in Ecuadorian policy and corporate behavior due primarily to the

impact of international pressure.














CHAPTER 1
INTRODUCTION



Oil exploration and production in Ecuador has led to widespread environmental

damage in its Amazon Basin. In recent years, a response to this contamination has

surfaced from a variety of international and domestic groups--including environmentalists

and advocates of indigenous rights--seeking to stop it. Although the Ecuadorian state has

resisted calls to develop a stronger regulatory framework, and policy makers have been

apprehensive about scaring away foreign investment, Ecuador has adopted environmental

legislation and established a Ministerio de Medio Ambiente.

Pro-environment groups rely on the changing normative international context,

which has become far more favorable to environmental protection, to gain support and

focus international and an individual country's public opinion on specific issue areas. The

discourse on environmental protection has shifted to the confines of the sustainable

development framework and has granted greater legitimacy to those seeking enhanced

regulation. This shift is evident in a series of international agreements--primarily the Rio

Declaration on Environment and Development or Agenda 21. In the Americas, an Inter-

American system on sustainable development is forming and seeks to establish some kind

of enforcement mechanism. What is emerging is what is known in international relations








theory as a regime. This thesis will explain what the regime consists of, and how the

environmental behavior it promotes has led to changes in Ecuadorian oil policy.



Background

Ecuadorian oil production began in 1972 under the military administration of Gen.

Rodriguez Lara. Oil exploration and production were located partly in the Golfo de

Guayaquil but mostly in the Amazon basin. Production ended nearly 150 years of reliance

on commodities such as cocoa, bananas, and marine products for economic growth.

Because of the oil boom, Ecuadorian GDP growth averaged 9% a year during the 1970s

and resulted in expansion of the public sector. The funds generated by oil paid for

infrastructure programs, financed an expansion of social programs, established state

owned corporations, and promoted ISI manufacturing. However, the declining

profitability of oil production as a result of price reductions after the 1t and 2"d oil shocks

had a disastrous effect on Ecuador. The result was an absolute decline of oil production

from 208,000 barrels per day in 1973 to 201,000 in 1978 and new debt obligations

contracted by the military based on the expectation of higher oil prices.' By the early 80s,

Ecuador was US$ 8 billion in debt and oil prices would fall to below $20 a barrel during

the mid 1980s. Oil production went from being an engine for economic growth to

becoming the critical source for debt repayment. Today Ecuador is US$ 13 billion (1998)

in debt with a high debt/GDP ratio of 66%.2 Roughly a third of government revenue


1 Jose Vicente Zevallos. El Estado Ecuatoriano y las Transnacionales Petroleras. (Quito: Pontificia
Universidad Catolica del Ecuador. 1981) 16.

2 The debt to GDP ratio is the standard measure used by economists to monitor the overall foreign
indebtedness of a country. This ratio has declined dramatically throughout the region, with Chile seeing a








comes from oil sales, is the source of most of its hard currency, and 40% of Ecuador's

central budget goes to service debt both foreign and domestic.' By all of these measures,

the Ecuadorian state is highly dependent on oil production and oil exports.

The result of large-scale oil production has been extensive contamination, primarily

in the Amazon Basin's--or Oriente--hydrological system, and deforestation of the

rainforest due to oil infrastructure projects (such as roads). Pollution and deforestation

have been the result of oil spills from both production and transport as well as residue

chemicals contaminating waterways and aquifers. Three companies have been accused of

being primarily responsible for the contamination: Texaco of White Plains, N.Y., Dallas

based Maxus, and Petroecuador, the state oil company.4 Maxus has been accused of

deforesting 29,000 hectares of primary rainforest while Texaco is estimated to have

released 16.8 million gallons of crude oil in the Oriente up to 1992, when its 20 year

presence in Ecuador ended.5 By comparison, the Exxon Valdez disaster dumped 11

million gallons off the coast of Alaska. As a result of contamination, fish and drinking

water have apparently been seriously affected. Moreover, many allege that water




reduction from approximately 120% in the early 1980s to 25% by 1997. Brazil's ratio is approximately
35% (1998). Faster economic growth has allowed Latin American countries to increase their absolute
level of indebtedness while simultaneously reducing its debt burden. The debt to GDP ratio does not
include domestic government borrowing.

3 Economist Intelligence Unit, Country Report 3rd Quarter 1996 (London: EIU, 1996).

4 Maxus is now known as YPF Ecuador S.A. due to its recent acquisition by Argentina's Yacimientos
Petroliferos Fiscales. Only in Ecuador was Maxus' name changed to YPF. Maxus continues to be known
as such in its other operations worldwide.

z According to Acci6n Ecologica and Amazonia por la Vida. Also see Judith Kimerling. "Oil.
Lawlessness. and Indigenous Struggles in Ecuador's Oriente," in Green Guerrillas. ed. Helen Collinson
(London: Latin America Bureau. 1994) 65.








contamination has resulted in a series of serious health problems for settlers and,

especially, indigenous peoples in the production and exploration region.

The contamination reflects a weak regulatory environment, but recent legislation

has sought to strengthen environmental protection Most oil companies, in fact, have

developed drilling and exploration practices that today surpass the standards set by the

state. These companies have gone to great lengths to distance themselves from the

controversy and some have now chosen to use the most environmentally sound technology

available. The initial reluctance on the part of the state to implement and enforce a

stronger regulatory environment stems from fear that added costs to oil exploration will

deter potential foreign investment in the oil sector.6 Although Petroecuador (which

assumed control of Texaco's operations in 1992) produces more than 66% of Ecuador's

oil, foreign investment fills a critical investment and technological gap. Moreover, Ecuador

reimburses those costs to the companies; this provides the state an incentive to keep a

regulatory environment as friendly as possible for exploration as far as costs are

concerned.

Contamination reached such a severe level that a lawsuit was filed in District Court

in 1994 in White Plains, N.Y., by Ecuadorian citizens with the support of environmental

and indigenous rights groups both Ecuadorian and foreign, with assistance from the Sierra

Legal Defense Fund. The suit, Maria Aguinda. et al. v. Texaco, accused Texaco of

negligence in its oil activities in Ecuador which created serious health problems for the

area's residents. The suit was filed in New York because it was alleged that the events that


6 See amicus brief presented by the Duran-Ballen administration in Maria Aguinda et al. and other
plaintiffs v. Texaco Inc.. defendant. U.S. District Court for the Southern District of New York. 93 Civ
7527 850 F. Supp. 282. X.








occurred in Ecuador originated in Texaco's headquarters and that Ecuadorian courts

could not handle the matter appropriately due to Texaco's influence in the country.

However, the court dismissed the suit for two main reasons: first, because the events

transpired in Ecuador, Ecuadorian courts had jurisdiction over the matter and second,

foreigners (residing abroad) could only sue (tort) a United States based defendant in the

U.S. if the action involved a breach of international law or a treaty to which the U.S. is

signatory which the plaintiffs failed to show. Despite this outcome, the case is important in

that it:

* Involved a mobilization of a wide range of national and transnational actors

converging for and against Texaco.

* Explicitly revealed the position of an Ecuadorian administration on environmental

regulations, an opinion which ran counter to a variety of principles, norms, and rules

on the environment agreed to by Ecuador.

* Constituted a vital juncture for grassroots movements because it was the first time that

environmental and indigenous groups in Ecuador were able to place their grievances

so high on the national agenda.

* Presented as evidence international agreements on the environment--such as the 1992

Rio Declaration on Environment and Development--to which Ecuador had agreed to.








Central Problem

The main purpose of this thesis is to study how Ecuadorian environmental oil

policy towards the Oriente has evolved in this decade, especially in light of the

hemispheric push for sustainable development and the 1994 Texaco lawsuit. The suit

constitutes a critical instance of anti-pollution mobilization primarily because after the suit,

the state took the issue of oil contamination far more seriously than it had previously.

Indeed, since the suit Ecuador has adopted a flurry of environmental legislation, a

Ministerio de Medio Ambiente has been created, and adopted oil contracts with clauses

that specifically address the issue of contamination. This does not necessarily mean that

the letter or even the spirit of this regulatory framework has been adhered to but it is clear

that prior to the Rio Declaration and the Texaco suit far less attention was paid to the

issue in terms of legislation and media attention. Moreover, the changes in policy and their

text admit that contamination has in fact occurred. In the past, the problem of

contamination has been denied. Environmental groups have received new legitimacy now

that the state acknowledges the existence of contamination, and by recognizing the

problem a solution might be found. In other words, the terms of the debate have been

recast in such a way that it has made it difficult for the state to ignore the problem and

maintain the prior regulatory framework.



Significance and Literature Review

Although there is little material in terms of academic analyses of Ecuadorian oil

policy in the Amazon Basin specifically, a significant body of scholarly work addresses

state acquiescence to the establishment of stronger international or domestic








environmental regulation--with a sizable number relying heavily on regime theory. Andrew

Hurrell, in his analysis of Brazilian policy towards Amazonia from the 1980s onward,

points out to the emergence of critical international public opinion, the success of

international pro-environment groups in complicating the procedure for financing of

Brazilian development projects, and the emergence of deforestation as an issue in many

areas of Brazil's dealings in the international arena as the main factors propelling a change

away from environmental nationalism.7 Indeed, in Hurrell's analysis it is the changing

international normative context--not domestic pressure--which was pivotal in the

reevaluation by President Collor de Mello of the country's Amazonia policy. For his

analysis, Hurrell constructs an environmental deforestation regime without giving much

detail.8 Martin List goes into much more detail in describing an environmental regime,

specifically a regime for the protection of the marine environment of the Baltic Sea. In this

case, the major statement of principles is the 1974 Helsinki Convention.9 List argues that

the convergence around the principles and norms of the issue area (Baltic Sea pollution)

was strong enough to transcend the enormous differences among them, specifically, the

nature of their political systems (communist states as opposed to liberal or social

democratic democracies). This thesis follows this line of academic work using regime

theory to explain the evolution of Ecuadorian oil policy in recent years.


Andrew Hurell. "Brazil and the International Politics of Amazonian Deforestation." in The International
Politics of the Environment. eds. Hurrell and Kingsbury (New York: Oxford University Press. 1992) 427-
429.

8 See Andrew Hurell. The International Politics of the Environment. eds. Hurrell and Kingsbury (New
York: Oxford University Press. 1992).

9 Martin List. "The Baltic Sea: a Case of International Environmental Management." in International
Regimes in East-West Politics. ed. Volker Rittberger (London: Pinter Publishers. 1990) 94.








There is a substantial amount of literature available to detail the changes in oil

policy and the factors leading to these changes. This includes position papers by NGOs

and corporations, media coverage, Ecuadorian government documents, and court

documents. Given the enormous importance of oil for Ecuador's economy, the lack of

work on the topic by Ecuadorian scholars was surprising. As far as the University of

Florida Latin American collection is concerned, there were several volumes that were

useful, most of which published only recently. There were few works that directly dealt

with the relationship between the Ecuadorian state and oil development. Jose Zevallos

from the Universidad Catolica de Quito wrote a volume that mainly deals with the

relationship between the 1972-1979 Rodriguez Lara military administration and foreign oil

companies at a time when foreign, corporate development of natural resources was highly

controversial. Another volume by Douglas Southgate, a professor of Agricultural

Economics at Ohio State University describes the extent of pollution in the region, anti-oil

campaigns, and the economics of oil production. His main conclusions were: water

pollution as a result of oil exploration and production is severe; that anti-oil campaigns are

a consideration; and finally, because oil exploration requires a minimum amount of direct

infrastructure investment, imposing certain environmental regulations with their

concomitant increase in costs may act to discourage oil production in Ecuador.'o

There is a wealth of primary data in periodical publications with economic

statistics, reports in petroleum trade journals, NGO documents, public documents from

government sources, and documents from international organizations on sustainable

development--of which the OAS and UN positions stand out. Moreover, many of these


10 Douglas Southgate. Petroleum Development in Tropical Rainforests (Quito: Idea. 1992) 20.








items were available on the Internet where they were easily retrievable. Also of interest

was Native Web. This web site featured statements, press releases, position papers and

media reports from a multitude of indigenous groups and NGOs on various topics-

including the controversy over Ecuadorian oil development.



Objectives and Research Approach

Regime theory provides a conceptual framework for understanding why the

Ecuadorian state has chosen to address the issue of oil contamination. Regime theory

seeks to explain restrained state behavior in the absence of international law or hegemonic

dominance by an external actor. This approach is valid in the Ecuadorian case since many

of the actors are foreign--oil companies, for example--possess transnational links and

allies, and it involves a controversy which Ecuador's state has deemed an important

concern for its foreign relations apparatus. Moreover, epistemic communities address

deforestation and oil contamination as problems that transcend borders. All this has led to

an increased formalization of the concept of sustainable development in the hemisphere's

diplomatic discourse and heightened acceptance of the concept and what it entails. Hence,

this thesis argues that a hemispheric sustainable development regime is emerging and that

it has led Ecuador's state to change its policy concerning oil exploration and production in

the Amazon basin.

The main hypothesis guiding this research is that the Ecuadorian state has

addressed the issue of oil contamination since the Texaco lawsuit although the state was

most reluctant to change. The main questions to be answered are the following:

In what ways has oil policy in Ecuador changed since 1994?









* What factors have shaped these changes?

To answer these questions, regime theory is a useful tool in explaining the changes in

Ecuador's oil policy.

Building on the definition of Stephen Krasner, List and Rittberger define regimes

as a form of collective action by states, based on shared principles, norms, rules, and

decision-making procedures which constrain the behavior of states in specific issues areas

and that possess a minimum of effectiveness." The issue area is sustainable development

in Ecuador's Oriente. Principles are defined as beliefs of fact, causation or rectitude;

norms are standards of behavior in terms of rights and obligations; rules are prescriptions

or proscriptions for action; and procedures are practices for making and implementing

collective decisions.12 As McCoy points out, these elements are all present in the

hemisphere's regime.13

The objective of the hemisphere's regime is to encourage sustainable development,

or economic growth that preserves natural resources for both future use and the planet's

bio-diversity. The founding document outlining the characteristics of the regime--or the

"normative nucleus" as List would say--is the Rio Declaration on Environment and

Development or Agenda 21.14 This was adopted in August, 1992, after the United Nations


11 Martin List and Volker Rittberger. "Regime Theory and International Environmental Management." in
The International Politics of the Environment. eds. Hurrell and Kingsbury (New York: Oxford University
Press, 1992) 86-89.

12 Terry L. McCoy, "Sustaining Sustainable Development." Hemisphere V.8 No.1 1997: 16-18.

13 Terry L. McCoy, "Sustaining Sustainable Development." Hemisphere V.8 No.1 1997: 16-18.

4 Martin List and Volker Rittberger, "Regime Theory and International Environmental Management." in
The International Politics of the Environment, eds. Hurrell and Kingsbury (New York: Oxford University
Press. 1992).








Conference on Environment and Development or "Rio Summit." The spirit and letter of

this declaration can be found in most documents pertaining to the environment. In the

Americas, the Inter-American Program of Action for Environmental Protection of 1991,

the 1994 Summit of the Americas, and the Declaration of Santa Cruz de la Sierra of 1996

reaffirm the commitment to the stipulations of the Rio Declaration by signatory

countries--including Ecuador.

The categories of actors relevant in this research are environmental NGOs, the

Ecuadorian state, indigenous movements, and energy corporations. Environmental NGOs

of relevance are both foreign and domestic organizations. The two Ecuadorian

environmental NGOs most involved in the issue of oil contamination are Fundacion

Natura and Accion Ecologica. The main foreign NGOs are the Sierra Club, the Nature

Conservancy, the World Wildlife Fund, and the Rainforest Action Network. A variety of

multinational energy corporations operate in Ecuador: Royal Dutch Shell (Anglo-Dutch),

Arco (U.S.), City Investing (Canada), Petrobras (Brasil), Perez Companc (Argentina), and

YPF Ecuador (Argentine owned unit) are the major players.

Studying changes in the state's policy required a two pronged approach.'5 One

relied on key informant interviews with officials, environmental groups, and oil experts.

Interviews with present and especially former officials that have been policy makers were

critical in determining the factors leading to a change of course. Second, documents and

regulatory codes were reviewed. To determine if an effort at compliance with the


15 This research was conducted between the fall of 1996 and the spring of 1998. Thanks to the generous
support of the Tinker Foundation. field research in Ecuador was made possible. Field work was conducted
in Quito and Guayaquil between July and August 1997 and consisted mainly of interviews. gathering of
press coverage, institutional bulletins and documents, obtaining literature, and discovering and acquiring
copies of relevant regulations.








principles of the regime has been undertaken, it was necessary to look at current

conditions for bidding on oil development and whether or not environmental

considerations are significant in current contractual obligations with oil companies. Also, a

look at legislation and executive decrees were consulted in order to see if the principles of

the sustainable development regime have been adopted into law as the regime asks

member states to do. An analysis to determine whether or not new policies address the

issues that NGOs have prioritized was required. It was necessary to examine the new

regulatory framework and see if the enforcement mechanisms are adequate.

Discussions with NGO staff were necessary to avoid bias in favor of the state's

position. A review of their literature was performed. These groups' interests are similar in

some areas but not in others. Some NGOs are opposed to any kind of oil development in

the Amazon Basin while others grudgingly approve oil development if

exploration/extraction technologies are ecologically sound. It must be noted, though, that

all the NGOs have two things in common: they oppose contamination and they oppose the

destruction of indigenous cultures that oil production processes undoubtedly bring. And,

within the framework of regime theory, it is the NGOs that provide the enforcement

mechanisms for the regime and they are critical elements in attracting attention to Oriente

deforestation and contamination.

"This thesis has three objectives. First, it intends to determine if NGOs and popular

groups can alter hostile state policy by using the international normative context as a

means of exerting pressure on government--even if the issue area is one of extreme

sensitivity for the state. Second, it documents the extent of a significant environmental

disaster in Ecuador's Amazon Basin as well as according serious effects on the health of








people in the region. This is important because there are many in the industry today whom

refuse to acknowledge the existence of a problem. Third, it shows that state policy

towards oil contamination has changed substantially in recent years as a result of a

changing normative context internationally that has been adopted domestically.

Ultimately, this thesis explains how and why Ecuadorian oil policy has changed in

recent years. It is organized into five chapters. Chapter 2 will provide background on the

oil industry in Ecuador and contamination in Oriente, emphasizing the lawlessness in the

industry. Chapter 3 will enumerate and detail the new regulatory codes in Ecuador and

their significance. Chapter 4 will discuss the factors forcing changes in petroleum

environmental policy and detail incidents in which companies have changed their modes of

operation to an environmentally sound approach. Chapter 5 will develop a set of

conclusions and recommendations for future research.

This thesis is important in that it will help understand policy-making in a poor

country and how international, national, and transnational actors shape that policy.

Because the main source of revenue for the state is affected by these actors--in effect, the

money needed for social spending, among other things--an understanding of the system in

which they operate is crucial.














CHAPTER 2
HISTORY OF OIL PRODUCTION IN ECUADOR AND ITS
ENVIRONMENTAL CONSEQUENCES


History of Ecuadorian Oil

Ecuador's oil industry has a long history marred by controversy from the outset.

We can divide the history of oil production in Ecuador into three stages: the period of

British domination from 1880-1970, the Texaco-Gulf era from 1964-1992, and the

contemporary period from 1992 onward. This long history of oil in Ecuador is often

forgotten since the petroleum "boom" of the 1970s has received the most attention and

overshadowed the previous 100 years of the industry's past.

The earliest references to oil in Ecuadorian literature are attributed to Manuel

Villavicencio in his geography of the country. Ecuador's Congress awarded the first oil

concession to M.G. Mier & Cia. in 1878, granting it the right to produce oil in the Santa

Elena region of Ecuador's coast.'

In 1886, Congress, declared state ownership of mines (underground wealth) much

like other countries in Latin America. The "Mining Code of Ecuador," as it was known,

was reformed in order to allow the renting of mines to individuals or entities. The first

concession under this framework was to Mr. Carlton Dunne of England in 1909. Under


1 Admiral Gustavo Jarrin Ampudia. Personal notes.
The Peninsula de Santa Elena is the land mass between the city of Guayaquil and the resort city of
Salinas. A variety of fossil fuels are believed to exist in the nearby Golfo de Guayaquil.








this arrangement Ecuador was to receive 10% of net earnings, the building of a railroad,

and 70,000 pounds sterling in stock. In addition, an oil company was to be formed in

England in which Ecuador was to have two directors on the board. The first successful

well was developed in 1911 at Santa Elena.2 The Mining code was once more reformed in

1914 by President Leonidas Plaza, this time to explicitly declare the state's ownership of

all fossil fuels.3 Two British companies at this point began to dominate the landscape, the

largest and most powerful being Anglo Ecuadorian Oil Fields Ltd. formed in 1918. Anglo

began oil production in Santa Elena in 1923. Its dominance was so powerful that

"(Anglo)...conducted its operations on a truly colonial scale, paying no taxes at all until it

was forced to adhere to certain fiscal requirements in 1938 at the behest of the

government of General Alberto Enriquez.'" A massive concession was given to another

British producer, The Leonard Exploration Company, for 50 years. This concession

consisted of 25,000 square kilometers in the Oriente--or roughly 10% of Ecuador's

current territory. In 1933 the Direcci6n General de Minas y Petroleos, the forerunner to

the Ministry of Energy, was created. The Direcci6n de Minas was responsible for

concessions and the elaboration of a regulatory framework for the industry. In 1937, the

Direccion de Minas enacted the Petroleum Law which was written by its director, Enrique

Coloma, who was also CEO of Anglo Ecuadorian. A few other large concessions were

given afterwards, notably to Standard Royal (1948) and Minas y Petroleos (1961).





2 Judith Kimerling. Crudo Amaz6nico (Quito: Abya Yala. 1993) 19.

3 Admiral Gustavo Jarrin Ampudia. Personal notes.

4 Osvaldo Hurtado. Political Power in Ecuador (Boulder. CO.: Westview Press. 1985) 83.









Table 2-1
Ecuador: Major Oil Concessions 1878-1972
Year Company Size Location

1878 M.G. Mier v Cia. na Santa Elena
1910 Mr. Carlton Dunne na Santa Elena
1921 The Leonard Exploration 25000 Sq. km. Oriente
1923 Anglo Ecuadorian Oil Fields na Santa Elena
1948 Standard Royal (Esso-Shell) 4000000 hectares Oriente
1961 Minas y Petroleos 4350000 hectares Oriente
1964 Texaco Gulf 1431450 hectares Oriente
1972 CEPE na Nationwide


In order to circumvent legal restrictions that limited the amount of land that the

state could award in concession to a corporation, some companies proceeded to

practically sell their concession to other interested parties. The goal of the Petroleum Law

of 1937 was to limit one company from being overly dominant and it sought to do this by

having the state limit the size of the concession awarded to any individual company.

However, some companies realized that they were not precluded from "ceding" their

rights to another party in exchange for money--in effect rendering useless the size

limitations of concessions. For example Minas y Petroleos "ceded" to the Texaco-Gulf

consortium the rights on part of its concession for millions of dollars while simultaneously

paying the state 4 cents of Sucre per hectare annually. Another, more dramatic incident

involved the granting of 4 million hectares to seven foreign oil companies. This was done

by the granting of concessions to six Ecuadorian nationals who then "ceded" their rights

to the foreign firms. Of the six, one was dead by the date the concession was awarded.5


5 Admiral Gustavo Jarrin Ampudia. Personal notes.







The early phase of the oil industry in Ecuador possessed three central

characteristics. First, there were constant regulatory changes resulting from the

inexperience of policy makers with the peculiarities of the oil industry. This led to frequent

changes in contracts, many of which had to be entirely re-written. Second, a pattern

emerged in which Ecuadorian and international oil companies sought to circumvent laws

by surreptitious manipulation of regulatory codes. Third, at this early stage in the

industry's development, it was foreign oil companies who dominated the scene and they

were able to twist regulation in their favor. It seems that initially, the interests of

multinational companies were able to dominate in negotiations in which the state

increasingly sought to increase its royalties.



The Texaco-Gulf Era

The consortium Texaco-Gulf in 1964 was awarded a 1.413 million hectare

concession in the Oriente.6 The adjudicated territory consisted predominantly tropical

rainforest in an area with a complex hydrological system. The emergence of Texaco-Gulf

is noteworthy for various reasons: these were two of the most advanced oil companies at

the time; they brought with them great technical and financial resources which essentially

"guaranteed" enormous infrastructure development if indeed oil was found; it was

Texaco-Gulfthat first began large scale and widespread oil production in the Oriente; and

finally, they were willing to work with a state that was increasingly hostile and

nationalistic, to the point where the state became a majority partner with Texaco through

the Corporaci6n Estatal Petrolera Ecuatoriana (or CEPE).







After intense efforts, Texaco located the Oriente 's first large scale oil deposits in

the Lago Agrio vicinity in 1967.7 This coincided with the announcement by Anglo that the

deposits at Santa Elena had been depleted.8 Given the decline of the Santa Elena oil fields,

the emergence of the Oriente as a source of oil was of singular importance. Texaco

immediately installed refinement facilities in the region capable of handling 1000 barrels

per day. 9 However, the first Lago Agrio well was soon producing 2640 barrels per day

and it became evident that a massive discovery had taken place.10 Large deposits began to

appear in the Oriente (such as Shushufindi) and other companies began knocking on

Ecuador's door.

The appearance of large oil deposits was a dramatic turn of events that caught

many Ecuadorians--more so those in government--by surprise. Shell had abandoned the

country in 1948 after unsuccessfully prospecting for 11 years in the Oriente, leading then

president Galo Plaza to his famous comment that "the Oriente was a myth."" However,

the reality that Ecuador was at the dawn of a new economic era began to sink in thanks to

the 1967 discoveries and the urgent need for foreign exchange faced by successive

governments.12 The large discoveries and the eagerness with which large multinationals



6 Admiral Gustavo Jarrin Ampudia. Personal notes.

SJudith Kimerling. Crudo Amazonico (Quito: Abya Yala. 1993) 19.
8 Admiral Gustavo Jarrin Ampudia. Personal notes.

9 Judith Kimerling. Crudo Amazdnico (Quito: Abya Yala, 1993) 19.

1o Admiral Gustavo Jarrin Ampudia. Personal notes.

" "Parte Primera:1961-1973." La Gestacidn de una Politica Petrolera 19 October 1978: 352.

" "Parte Primera:1961-1973." La Gestaci6n de una Politica Perrolera 19 October 1978: 352.







approached the state soon made Ecuadorian policy makers aware that they had substantial

leverage in dealing with them. A determination appeared, particularly in the military, not

to allow the prior swindling of the state by foreign corporations (such as the granting of

paltry royalties), the use of subterfuge to obtain larger concessions, low concession rates

for adjudicated land, and limited taxation of corporate earnings to occur again.

This led to a significant change in regulatory codes to bring the operations of

foreign corporations under closer scrutiny. This process began in 1967 under president

Otto Arosemena, followed by president Jose Maria Velasco Ibarra, and continuing into the

military governments of the 1970s.13 Arosemena realized the importance of either

upgrading or replacing the 1937 Petroleum Law as the potential of oil for government

coffers became clear. However, there was little experience in dealing with the oil

multinationals and this hindered the drafting of a new regulatory body until 1972.

Nevertheless, Arosemena was also able to secure much better terms from the oil

companies seeking to obtain or retain their concession rights through the use of "model

contracts." Model contracts were a device used by the Arosemena administration to

impose his new regulatory code for the petroleum industry which had languished in

congress.14 Arosemena included the principles of his proposed regulatory code in the

contracts. The option would have been to allow the oil companies win much more

favorable terms for themselves through the 1937 law: "...bills were sent to Congress...but

none...read or much less studied...Convinced that the legislation would never emerge as a


13 See Judith Kimerling, Crudo Amaz6nico (Quito: Abya Yala. 1993) 19, "Parte Primera:1961-1973." La
Gestaci6n de una Politica Petrolera 19 October 1978: 353. and Admiral Gustavo Jarrin Ampudia.
Personal notes.
14 "Parte Primera:1961-1973." La Gestaci6n de una Politica Petrolera 19 October 1978: 352.








result of eternal discussions in National Congresses...my administration prepared a

contract project known as "Model Contract," through which the conditions would be

imposed on the companies." Among the changes that began to take place in 1967 were:

* The state reclaimed two-thirds of the land granted in concession to Texaco-Gulf.

* The state increased its share of royalties.

* Took a more active role in production processes.

* Instituted a territorial tax on the lands conceded.

* Increased infrastructure development by companies.

* Petroleum was nationalized.

* A national oil company, CEPE, was created.

* Ecuador sought to ally itself with other oil producers.

* Older contracts and concessions were subject to a process of renegotiation.1

In 1972, the new military government finally passed a reformed Law of Hydrocarbons to

replace the 1937 Petroleum Law. It essentially invalidated all prior contracts and led to the

signing of new ones.16 These sought to secure better terms for the state as outlined above.

New contracts, with more favorable terms for the state, were signed with Texaco-Gulf,

Sun Oil, Anglo, Cautivo, Cayman, and OKC. Other contracts were nullified, declared

expired, or were refused by oil firms. By 1972, Texaco-Gulf completed Ecuador's main oil

pipeline, the 500 kilometer long Sistema de Oleoducto Trans-Ecuatoriano or SOTE,




'5 See Admiral Gustavo Jarrin Ampudia. Personal notes and Judith Kimerling. Crudo Ainaz6nico (Quito:
Abya Yala. 1993) 19-21.
16 Admiral Gustavo Jarrin Ampudia. Personal notes.








connecting the fields in Oriente with the port and refinery ofEsmeraldas. Ecuador became

a major oil exporter and joined OPEC in 1972.

A major controversy emerged with the passage of the 1972 law. When the original

law was published in the Registro Oficial in 1971, there were several typographical errors

which warranted the temporary removal of the law from the books in order to correct the

mistakes." When the law was placed back into the Registro, it was missing article 86.

Article 86 stipulated that all the proceeds (in U.S. dollars) from petroleum sales had to be

placed in a Central Bank (Banco Central) account. With this article omitted, such

requirement was terminated. This omission was later reversed, with one adviser resigning

his position.18

During the rest of the 1970s, the state increased its power vis-a-vis foreign

multinationals by strengthening CEPE. This period has been characterized as one of

"independence and sovereignty" for Ecuador's oil industry by one ex-Minister of Energy,

Admiral Gustavo Jarrin Ampudia, key figure between 1972 and 1974 when he negotiated

the contracts with the oil companies and established a clear petroleum policy for

Ecuador.19 The strengthening of the state's role as a player in Ecuador's oil industry was

done by forcing Gulf Oil to withdraw from the Texaco-Gulf consortium and by the

repositioning of the Ecuadorian state as a majority stakeholder in Texaco's operations in





7 The Registro Oficial is Ecuador's national registry of laws approved by the executive. A bill approved
by the president could not become law unless said bill was published in the Registro and remained there.
18 "Parte Primera:1961-1973." La Gestaci6n de una Politica Petrolera 19 October 1978: 355.

19 Admiral Gustavo Jarrin Ampudia. Personal notes.








the country.20 CEPE acquired in 1974 25% of the Texaco-Gulf consortium while Texaco

and Gulf Oil each retained 37.5%; in 1977 Gulf was eliminated from the consortium and

CEPE became the dominant partner with 62.5%, the rest remaining in Texaco's hands.21

Part of the state's success was due to the impact on Ecuadorian public opinion of a 1972

book by Jaime Galarza, Festin del Petr6leo. It was a study of oil policy in Ecuador and

the world that accused the large oil companies as well as the state of corruption and lack

of scruples.22 Galarza was invited to participate in a televised discussion on the issue that

same year with the Texaco spokesperson, Rene Bucaram. The TV audience learned during

the discussion about the Minas y Petroleos' dubious transfer of land to Texaco--in

exchange for 2% royalty and heard Bucaram himself say that the state could still intervene

on the matter.2' Although technically legal, the transfer of land to Texaco was done

through a loophole in the law and clearly violated the spirit of the 1937 Petroleum Law.

Following Bucaram's recommendation, the state did intervene in the matter which was

unfortunate for Texaco. Public outrage led to the retroactive application of the 1972 law

limiting the size of concessions. This forced Texaco to return part of the lands ceded to it

by Minas y Petroleos, the company was required to pay higher land use fees, and had to

re-negotiate contracts under the stipulations set forth in the new petroleum law.24 This

reinforced the resolve of the military to exert more control over the oil companies,


20 Judith Kimerling. Crudo Amaz6nico (Quito: Abya Yala, 1993) 21.

21 Unidad de Protecci6n Ambiental de Petroecuador. Analisis de la Operacidn de Texaco y del Plan de
Remediaci6n Ambienntal (Quito: Petroecuador UPA, 1997) 1.

22 "Parte Primera: 1961-1973." La Gestacidn de una Politica Petrolera 19 October 1978: 355.
23 "Parte Primera:1961-1973." La Gestaci6n de una Politica Petrolera 19 October 1978: 357.

24 "Parte Primera:1961-1973." La Gestaci6n de una Politica Petrolera 19 October 1978: 357.








particularly Texaco. Jarrin's policy had the goal of "reconciling the contracts with the

letter of the law" and he accomplished this.25

Jarrin used several factors to squeeze the most he could out of the oil companies

through the contracts, and he obtained the most not only in terms of control but also in

terms of fees and royalties for the state. The contract explicitly notes that Texaco-Gulf had

1.4 million hectares and that the consortium had returned to the state the amount in

excess of the maximum of 496,000 permitted by law.26 The royalties set at 12.5% of gross

revenue of petroleum exports were to be paid on a monthly basis.27 Texaco also had to

pay an initial fee of US$ 2,973,868 which was to be used by the state for the construction

of airports in Esmeraldas and Coca; the urbanization of Aguarico and Coca; and the

upgrading of a major highway in the Oriente, all important to the oil production process.28

The contract was to last for 20 years instead of the usual 40.29 These stipulations were in

addition to standard corporate taxes as required by Ecuador's tax code.' Moreover, a

whole variety of charges were assessed and detailed, contingency plans elaborated, and

investment commitments for infrastructure were secured from Texaco. This was all done

by Jarrin Ampudia under the aegis of the "modernizing" and nationalistic military


25 "Parte Primera: 1961-1973," La Gestacidn de una Politica Petrolera 19 October 1978: 357.

26 Introduction ofDecreto Supremo No. 925 4 August 1973.
Texaco returned to the state a total of 940.104 hectares of the 1.431.459 it had accumulated. The final size
of the Texaco concession was 491,355 hectares.

27 Chapter 8 (29) (1) of Decreto Supremo No. 925 4 August 1973.

28 Chapter 8 (27) (1) (a): (b): (c); (d): (e) ofDecreto Supremo No. 925 4 August 1973.

29 The contract duly expired in 1992. with Texaco's operations and facilities becoming a part of state oil
company Petroecuador.

30 Chapter 8 (33) (1) of Decreto Supremo No. 925 4 August 1973.








government of Gen. Rodriguez Lara, which sought to break with a past. As Jarrin

Ampudia notes:

In this confrontation with different interests that would not admit that
times change, that Ecuador is a sovereign country, owner of its petroleum
and that in the world the remnant forms of imperialist exploitation are
coming to an end, solid steps were taken for the elaboration of the new
contracts.1

The government's hand was strengthened by a favorable international climate including

high oil prices and Ecuador's entry into OPEC in 1973. With the culmination and signing

of the new contracts, the state strengthened its own position vis-i-vis the oil companies,

exert some degree of control over the companies in the country, and boost its revenue.

However, no one realized the ecological disaster that would result from Ecuador's

newfound source of hard currency and the extent to which the one clause in the contract

that deals with the environment would be disregarded--not only by Texaco but by other

corporations in other contracts as well.2

Texaco was able to generate a vast sum of revenue from its large Ecuadorian

operations. According to an audit by HBT-AGRA, Texaco extracted over 1.377 billion

barrels of oil from the Oriente. This amounts to more than $30 billion in an operation that

lasted 18 years from 1972 to 1990, when full operational control was relinquished to the

Ecuadorian state until Texaco's ultimate departure upon the expiration of the contract in

1992. Texaco ultimately had 15 oil fields, 22 production stations, and 325 oil fields (each



31 Declarations of Rear Admiral Gustavo Jarrin Ampudia on the new contracts 6 August 1973.
32 See Chapter 9 (46) (1) ofDecreto Supremo No. 925 4 August 1973 which states:
"The contractor (Texaco) will adopt measures convenient for the protection of the flora, fauna and other
natural resources, as well as avoid the contamination of waters, air. and lands. under the control of the
pertinent government organizations."








accompanied by one or two pools for toxic waste disposal). Approximately 632 toxic

waste pools were constructed.3



Steps in Producing Oil

In order to understand the way in which oil contamination is produced and its

characteristics, a basic understanding of how oil is sought and extracted is necessary.

There are several steps in the oil production process. The first step is exploration in which

oil deposits are discovered. An oil company may either search for oil itself or employ the

services of a contractor for this phase. There are several methods for searching for oil

deposits, but for our purposes the most pertinent method is the seismic exploration

method through the use of explosives.34 This is done by laying wires through the rainforest

connected to explosive charges that are placed in small holes. When the charges are

detonated, this sends shock waves through the ground which travel at different speeds

according to the terrain they encounter. Hence, they move faster through liquid than

through rock and this is presented in visual format through the use of seismic instruments.

The presence of waves moving at high rates of speed and the visual image they form are a

clear indication of possible deposits. During this stage, a variety of environmental

problems may arise: the clearing of paths of rainforests to lay the wire; use of powerful

explosives which kill or scare wildlife; clearing large tracts of rainforests in order to

establish camps and heliports; the clearance of huge tracts of lands to build roads to reach


33 Ivan Narviez. "El Ecuador de Texaco." ECO Poldmica Revista de la Unidad de Proteccidn Ambiental
de Petroecuador August 1997: 14-16.

3 Oil exploration methods vary according to the terrain. Underwater terrains involve the use of acoustic
techniques. whereas in the desert one finds ground level explosions the method of choice.








the camp site, with the subsequent invasion of colonists from other parts of the country; a

social and health issues arising if any contact is made with local indigenous groups; and

the killing of animals in the area if hunters are brought in order to secure the area's wiring

for the protection of workers.

If a deposit is believed to hold enough promise, it may warrant the initiation of

actual test drilling--second phase--to ascertain if indeed the suspected deposit is

petroleum. This step involves moving heavy drills into the area to penetrate the earth and

unleash the deposit's contents in order for the testing of samples in order to determine if

it's commercial grade crude.35 During this process, the main environmental threat is water

contamination since the materials in and around the deposits are toxic for plant and animal

life and may be spilled into the area's hydrological system. Also, this process requires the

use of large amounts of water, which may then be discharged untreated contaminating the

water supply for the forest and animal life.

If a commercial grade well is found, then the next step is the production process in

which wells are built to extract the oil. Besides some of the environmental problems noted

above, air contamination is a possibility due to the presence of gases (methane,

occasionally natural gas) which rise through the well and are burned off at the top of the

oil well.


35 On average, wells penetrate 10.000 feet into the ground.








The Controversy Over Contamination

The emergence of oil exploration and production in the Oriente has led to

dramatic, widespread, and costly contamination and deforestation of the region. Because

Texaco was the single largest producer during the 1972-1992 period when the bulk of

contamination occurred, it appears as the single largest polluter in the history of oil in

Ecuador. However, contamination linked to other companies has stirred their share of

controversy. Nevertheless, Texaco has been accused not only causing the worst damage in

the Oriente, but also of failing to live up to the commitments it made to clean up its areas

of operations. There is considerable debate as to the extent of contamination, and Texaco

continues to deny any wrongdoing alleging it followed all that was required of the

regulatory codes of the time and that it was a minority partner in a state led and approved

oil production process.3 However, there is a large body of knowledge and a growing

group of industry experts that provides ample evidence and knowledge of pervasive

contamination in the Oriente.f7 It is only very recently that a consensus has begun to

emerge around some numbers researched by former New York State Department of

Environmental Protection official Judith Kimerling, environmental audits by HBT-AGRA

and Petroecuador, NGOs, government agencies, and analyses by foreign and domestic



36 See Ricardo R. Veiga. Vice President Texaco Petroleum Company. "To the Editor," The New York
Times 6 February 1998: A22.

37 Miss Lucia Burgos of Fundaci6n Natura, one of the NGO's experts on the oil issue. agreed to speak
independently of Fundaci6n Natura. Her views are hers only and do not necessarily represent those of
Fundaci6n Natura.
Personal interview with Lucia Burgos, Fundaci6n Natura Coordinator for the Provincial Commission for
the Monitoring of Oil Activities in Napo Province. Quito. Ecuador, 11 July 1997; personal interview with
Dr. Rene Ortiz. ex Secretary General of the Organization of Petroleum Exporting Countries (1978-1982),
Quito. Ecuador. 15 July 1997: and personal interview with Oscar Garz6n. Minister of Energy under the
Borja administration. Quito. Ecuador. August 1997.








academics becoming much more accepted."8 Initially, some of the figures presented were

received by hostility from all sectors of the industry.

There are four areas in which oil production and pollution has had a major impact:

water, land, air, and deforestation. A good part of this is due to the fact that, especially in

the past, all chemical byproducts and waters used in the production process were released

into the environment completely untreated.39 In addition, there has been a strongly

negative impact among indigenous communities that live in the Oriente not only in terms

of their health but also in the threat to their culture as contact with the dominant

American-Iberian culture expands due to individuals working in the Oriente.

Water contamination has been the most severe result of oil production in Oriente

and the best documented. According to an environmental audit of Texaco's operations

(until 1990) by HBT-AGRA, a well known petroleum consulting firm, over 376 million

barrels of water was released "contaminated with heavy metals, oils, chemicals, and other

contaminants, without prior treatment, which caused environmental deterioration of the

ecosystems of the Ecuadorian Amazon, in many cases of an irreversible nature."40

Underground water arising from the drilling process, formation water, is highly toxic,

contaminated with chemicals used in the production or exploration process, and is



38 The independent environmental audit of Texaco's operations by Canadian company HBT-AGRA was
agreed to by both Texaco and Petroecuador. The audit, conducted in the aftermath of Texaco's departure
in 1992, has not been released in its final form pending approval from the government. All references to
information in the audit are from the Unidad de Protecci6n Ambiental de Petroecuador (Environmental
Protection Unit of Petroecuador), which presumably has access to the document. The audit was to be the
basic document on which remediation agreements between Texaco and the state were to revolve.

39 Unidad de Protecci6n Ambiental de Petroecuador. Analisis de la Operaci6n de Texaco y del Plan de
Remediaci6n Ambiental (Quito: Petroecuador UPA, 1997) 2.
40 Unidad de Protecci6n Ambiental de Petroecuador. Analisis de la Operaci6n tde Texaco y del Plan de
Remediaci6n Ambiental (Quito: Petroecuador UPA, 1997) 4.







disbursed into waterways at very high temperatures, usually between 90 and 168 degrees

Farenheit. The toxicity of the water from geologic formation is mainly due to its high level

of salinity, between 70,000 and 110,000 parts per million (p.p.m.) although in can be as

high as 200,000 p.p.m.41 Saltwater normally contains 35,000 p.p.m. and non-contaminated

freshwater rivers in the Oriente does not surpass 6 or 7 p.p.m.42 Subterranean aquifers

have been affected through the leakage of fluids used and resulting from perforation

because of improper handling techniques and the lack of lined pools for waste material.43

Water used in the production process has been found to contain "sulfates, bicarbonates,

hydrogen sulfides, carbon dioxide, cyanide, and heavy metals such as arsenic, cadmium,

chrome, lead, mercury, vanadium, and zinc."44 The result has been the contamination of

fish and death resulting from oxygen deprivation in petroleum laced waters.45

Petroleum itself is another contaminant found in large concentrations in Oriente

waterways. Although it is believed to inflict harm in aquatic organisms in concentrations

as low as 100 parts per billion (ppb), it has been found in concentrations as high as 5,000

parts per million (ppm) with an average of roughly 1,000 ppm according to Fernando

Reyes of the Direccion Nacional del Medio Ambiente (National Directorate of the

Environment), the predecessor of the Ministerio de Medio Ambiente (Ministry of the



41 Judith Kimerling. Crudo Amazdnico (Quito: Abya Yala. 1993) 44.
42 Judith Kimerling. Crudo Amazonico (Quito: Abya Yala. 1993) 74.

43 Unidad de Protecci6n Ambiental de Petroecuador. Analisis de la Operacion de Texaco y del Plan de
Remediacidn Ambienntal (Quito: Petroecuador UPA. 1997) 5.

44 Unidad de Protecci6n Ambiental de Petroecuador. Analisis de la Operaci6n de Texaco y del Plan de
Remediaci6n Ambienntal (Quito: Petroecuador UPA. 1997) 2.

45 Judith Kimerling. Crudo Amazonico (Quito: Abya Yala. 1993) 54.








Environment).46 Such concentrations should come as no surprise considering that over

16.8 million gallons of crude oil have been accidentally spilled mainly in the Amazon Basin

in 30 large mishaps, most of them the result of ruptures during the transportation phase.47

Land--or soil--contamination is mainly a result of contaminated waters being

employed in agricultural processes or oil spills reaching agricultural lands. This has

destroyed crops or reduced their quantity and quality causing significant deprivation and

malnutrition in affected areas. A large oil spill in 1989 of over 294,000 gallons in the Napo

River reportedly caused serious effects on soils in the Comuna de San Carlos, including

the death of crops two weeks after the event. The result was the destruction of crops

belonging to 560 families in 31 communities.48

Air pollution is largely a result of the burning of natural gas at the top of wells.

Gas, found in or around oil deposits, is unleashed when the well enters production.

According to HBT-AGRA, 248.8 million cubic feet of gases were burned although this

resource could have been exploited. The impact of this on the environment has been great,

causing alterations of"local climactic patterns, air contamination, affecting flying insects,


46 Judith Kimerling. Crudo Amazdnico (Quito: Abya Yala. 1993) 29, 44, 74.

4 For a comparison, the Exxon Valdez disaster spilled 10.8 million gallons of crude oil into Prince
William Sound. It should be noted that there is some controversy surrounding these figures. Douglas
Southgate believes that the figures (16.8 million gallons of oil or 400.000 barrels) may be a "little high
since no more than 50.000 barrels were spilled when 25 KM of the pipeline were destroyed in the 1987
earthquake." Nevertheless. the 400.000 figure is widely used today not only by environmentalists but by
the state oil company, government officials, and private individuals in the business.
See Douglas Southgate. Petroleum Development in Tropical Rainforests: the Economics of Pollution
Control in Eastern Ecuador (Quito: Instituto de Estrategias Agropecuarias. 1992) 4-5 and Judith
Kimerling, Crudo Amaz6nico (Quito: Abya Yala. 1993) 1, 50.

8 For a detailed account of the health effects of the Napo River spill on local communities see Doris
Herrera. "Petr6leo. Deterioro Ambiental y Salud." in La Cuenca Amaz6nica de Cara al Nuevo Siglo, ed.
Doris Herrera (Quito: FLACSO Sede Ecuador. 1997) 313-356. Kimerling discusses the impact on the are
in lesser detail. Judith Kimerling. Crudo Amazonico (Quito: Abya Yala. 1993) 52.








soil erosion, affecting the forest and other impacts.""9 Burning emits nitrogen oxide,

sulfur, and carbon as well as heavy metals, hydrocarbons, and carbon particles into the

atmosphere. Acid rain and black rains have contaminated the Oriente with powerful

effects on crops and people in addition to wildlife.

Deforestation is the result of three factors. First, the practice of clearing lands in

order to conduct exploration operations such as the installation of drilling equipment,

heliports seismic lines, and base camps. The use of seismic lines, for example, could

involve the clearing of swaths of land as much as 2-3 meters wide, creating boundaries in

sensitive environments. Second, the building of roads can cause massive amounts of

deforestation when paths are cleared in the rainforest and through the colonization process

which until recently normally accompanied the development of new oil fields. More than

500 kilometers of roads have been built in Oriente by oil companies, and they can vary in

width from 10 to 15 meters; more deforestation is caused when wood from forests

adjacent to the new roads are cut down to be used in their construction.50 This road

building process, the presence of well paid oil workers that in effect constitute a new

market in the area, and the presence of land and government policies that permits their

colonization, leads to large migration to the Oriente. Most colonists tend to come from

the impoverished south-central Andes and are in dire straits.51 Some end up in the informal


49 Unidad de Protecci6n Ambiental de Petroecuador. Analisis de la Operaci6n de Texaco y del Plan de
Remediaci6n Ambienntal (Quito: Petroecuador UPA. 1997) 4-5.

5o Judith Kimerling, Crudo Amaz6nico (Quito: Abya Yala. 1993) 56.

51 This same region is the source of much of the undocumented aliens fleeing oppressive economic
conditions towards the United States. Venezuela. and other Latin American countries.
Amazonia por la Vida. Debate Ecologico Sobre el Problema Petrolero en el Ecuador (Quito: Acci6n
Ecol6gica. 1993) Appendix.







sector and set up small shops or peddle goods in areas where the oil workers live. Others

attempt to establish farms or cattle ranching on lands that they assumed control of and

which the state is incapable of controlling.52 Sewage and garbage disposal alone has

become a significant problem. The result has been over one million hectares of rainforest

lost to colonization.53 A third cause has been the clearing of land for oil pipelines. The

primary pipeline is the Trans-Ecuadorian pipeline which extends 500 kilometers through

Ecuador with a width between 20 and 26 inches. It begins in Lago Agrio (Oriente) and

ends in Balao (Esmeraldas Province), although most of it extends beyond Oriente.54 Such

pipelines involved the clearing of swaths of land approximately 30 meters in length.

Fourth, the spilling of oil has caused the death of vegetation in the Oriente. As mentioned,

this is due to the ill effects of oil and production chemical byproducts.

This entire process of deforestation, contamination, and colonization has led to

health problems, the destruction of indigenous cultures, and overall reduction in the

quality of life of residents of the Oriente. Doris Herrera from FLACSO Quito has studied

the issue of contamination, its health and nutritional effects on the inhabitants of the

Comuna San Carlos, located 25 kilometers from Coca on the Napo River.55 This area has

been periodically affected by oil spills, mostly flowing from the Napo River. Her

interviews of older indigenous group members reveal awareness that something has


2 See Douglas Southgate and Morris Whitaker. Economic Progress and the Environment (New York:
Oxford University Press. 1994) 33-47.

5 Judith Kimerling. Crudo Amazonico (Quito: Abya Yala. 1993) 56.

54 Petroecuador.

55 Coca is the main hub of the petroleum industry in Oriente.
Doris Herrera. "Petroleo. Deterioro Ambiental y Salud." in La Cuenca Amaz6nica de Cara al Nuevo
Siglo. ed. Doris Herrera (Quito: FLACSO Sede Ecuador. 1997) 313.








changed. A frequent complaint has been illness from drinking river water, which in the

past had not occurred.56 Other illnesses or symptoms that have been on the rise are

frequent nausea, diarrhea, stomach aches, skin infections, and malnutrition."7

The goal of this chapter was to highlight a sense of lawlessness in the history of the

industry's operations in Ecuador and conduct a general overview of the environmental

impact that the Oriente has suffered. This is a result of the impunity with which oil

companies operated, aided by the lack of effective oversight. Chapter 3 will seek to

demonstrate that, at least as far as the environment is concerned, there have been very

substantial policy changes in favor of environmental protection in the oil industry and that

these moves directly address many of the problems highlighted in this chapter and others

that have been noted by environmentalists and indigenous groups.





















56 Doris Herrera. "Petr61eo. Deterioro Ambiental v Salud." in La Cuenca Amaz6nica de Cara al Nuevo
Siglo, ed. Doris Herrera (Quito: FLACSO Sede Ecuador. 1997) 324.

57 Doris Herrera. "Petr6leo. Deterioro Ambiental y Salud." in La Cuenca Amazonica de Cara al Nuevo
Siglo, ed. Doris Herrera (Quito: FLACSO Sede Ecuador, 1997) 325.















CHAPTER 3
POLICY RESPONSE


Overview

The oil industry is economically critical for Ecuador. For a variety of reasons,

Ecuador's economy has grown at a sluggish pace, well below the Latin American average

for most of the 1990s. In 1997, while regional GDP grew by 5.5%, Ecuador grew by a

slow 3%, with a 1998 growth forecast of 2.5%.' Ecuador's poverty rate has been on the

rise and is now estimated to comprise 50% of the population, up from around 40% in the

early 1990s, and bucking the regional trend of stable or slightly declining poverty rates.2

Ecuador depends greatly on oil for the hard currency it needs to service the country's

large foreign debt estimated at $13 billion, is a source of government funds since tax

collection is lax and regressive, it is the single largest export product, and for employment

purposes--a staggering 66% of the country's labor force is in the informal sector.3 The

industry generates approximately $1.8 billion a year for Ecuador in oil and oil product



' See Economist Intelligence Unit. Ecuador Country Report 3rd Quarter 1997 (London: Economist
Intelligence Unit. 1997) 5 and Reuters. "Ecuador Cuts Growth Forecast. Proposes Higher Tax" Finance 4
March 1997.

- Regional poverty rates today vary between 20% in Chile and 73% in Honduras (1994). with Latin
American total poverty rates estimates now at about 35-40%. See Economic Commission for Latin
America and the Caribbean. Social Panorama ofLatin America 1996 (Santiago, Chile: ECLAC, 1996)
193-194.

3 Even by Latin American standards. the size of Ecuador's informal sector is large. Most countries in the
region have between 30% to 50% of their labor force in the informal sector.

34








exports and generated 14% of its output in 1996.4 Within this context of commodity

dependence as both a source of government revenue and hard currency, any changes in

policy that increases the cost of oil production can be detrimental to state coffers and

economic growth.

Table 3-1
Ecuador: Government Oil Revenue and Total Revenue 1991-1995


1991
765.3
1650


01al enue
Total rwrue


3500,
i
3000


020001
215001



O 10001
I


1992
99.1
1970


1993
1079
2250


1994
1067
2570


1995
1189
3125


|03 TcM ral E


1991 1992 1993 1994 1995


Recently enacted legislation concerning oil exploration consists of two main

pieces. The first was President Sixto Duran Ballen's Executive Decree No. 1802 of 1994

which essentially constituted a policy statement concerning sustainable development and




4 Economist Intelligence Unit, Ecuador Country Report 3rd Quarter 1997 (London: Economist
Intelligence Unit 1997) 5.








the state's role.5 The second was Duran Ballen's Executive Decree 2982 of 1995. Decree

2982 is the current and first environmental code specifically aimed at the oil industry.

These decrees are tantamount to the Ecuadorian state's acceptance of the changing

normative international context concerning the environment and they are reflective of

current thinking about how sustainable oil exploration and extraction should be

conducted. Decree 2982 is regarded as very advanced, addressing many of the problematic

issues oil exploration has raised and marking a clear departure from past practice in the

Oriented 6 As Southgate notes, writing in 1992, "neither the state company nor the national

government has developed a detailed set of environmental guidelines for petroleum

exploration and extraction. ...Under these circumstances, foreign companies find it difficult

to convince skeptics that their Ecuadorian operations will indeed be conducted in an

environmentally sound manner."7 The new legislation marks dramatic changes in the

books. Although changes in legal codes without adequate enforcement may fall into

formalism, they are nonetheless valuable in that they grant legitimacy to those who in the

past have voiced their opposition to environmentally unsound oil exploration and

extraction and give juridical instruments through which violators may be conceivably

punished. Furthermore, there is evidence to suggest that corporate behavior is indeed

changing, an issue which will be pursued in Chapter 4.


5 All references to Executive Decrees (Decreto Ejecutivo) are listed in the bibliography with Presidencia
de la Republica del Ecuador as the author.
6 Personal interview with Dr. Rene Ortiz, ex Secretary General of the Organization of Petroleum
Exporting Countries (1978-1982), Quito. Ecuador. 15 July 1997 and personal interview with Lucia
Burgos, Fundaci6n Natura Coordinator for the Provincial Commission for the Monitoring of Oil Activities
in Napo Province. Quito, Ecuador. 11 July 1997.

Douglas Southgate. Petroleum Development in Tropical Rainforests: the Economics of Pollution
Control in Eastern Ecuador (Quito: Instituto de Estrategias Agropecuarias. 1992) 9.










Executive Decree 1802

Executive Decree No. 1802, authored by the Presidencia de la Republica del

Ecuador (the presidency) under President Sixto Duran-Ballen, is an extraordinary

document for several reasons. Most important, however, is the statement which admits

serious damage to Ecuador's Amazon Basin as a result of oil extraction.

Decree 1802 outlines basic policy principles which Ecuador is to follow and which

are to become the basis of other Ecuadorian environmental initiatives such as Decree

2982. These are: Ecuadorian society is to minimize environmental damage and risk

while maintaining socially and economically sustainable development; it is the

responsibility of every citizen and institution to act in a way that is socially just,

economically profitable, and environmentally sustainable; the private and public sector are

called upon to provide policy guidelines and ideas to insure sustained development; all

economic activities are to consider the environment; environmental initiatives are to based

on solidarity, mutual responsibility, cooperation, and coordination--and this also applies to

Ecuador's foreign relations; it is the state's responsibility to elaborate incentives and

regulations to promote sustainable development; the state is to promote environmental

awareness and education; Ecuador's government is to maintain an open attitude with other

states and secure cooperation and develop treaties; special attention is to be placed on

prevention and control of environmental damage resulting from contamination and

degradation; a priority will be the maintenance of equipment and services and efficiency

needs more attention; environmental impact studies and environmental mitigation

programs are required; multinationals are to maintain the highest environmental








technology required in their country of origin; certain problems, industries, and geographic

areas are to receive special attention.8

Executive Decree No. 1802 constitutes a straightforward admission of the state's

failure in protecting the Oriente from oil contamination and the enormous havoc wreaked

on the area's environment. The decree's tone is set at the very beginning of the document

by the title and subtitles: Sustainable Petroleum Development in Ecuador; Rectifying the

Mistakes of the Past.9 The first paragraph begins with the statement:

The grave environmental impacts produced in the Ecuadorian
Amazon Region since 1970 as a consequence of petroleum
operations are due to, in large part, to the system of oil exploitation
which failed to consider the most elemental norms of environmental
protection prevalent at the time and to the carelessness of the state
in their control.'0

This statement is a dramatic departure from prior statements in which the state kept a low

profile while private companies were roundly criticized for their alleged disregard of the

environment's well-being. It admits four key events long noted by environmental groups

but initially denied by corporations and policy makers. The first is the severity of oil

contamination in the region and its environmental impact. Second, it describes Ecuador's

oil industry as a system instead of a decentralized structure in which the private sector

operates in its own sphere independent of the state. It acknowledges that both the state

and the private sector have played major roles in the industry's development and that the

links between the different parts are strong. Third, it admits that even the weak



8 Comision Asesora Ambiental de la Presidencia de la Republica. Plan Ambiental Ecuatoriano. (1996. Pp.
20-21.

9 Executive Decree No. 1802 pg. 1.

10 Executive Decree No. 1802 pg. 1.







environmental codes of the past were completely disregarded." Finally, it admits that the

state shares part of the responsibility for the problem because it failed in the supervision

and enforcement of environmental codes in place at the time.

The decree then goes into more detail and mentions ways how the Oriente

suffered large-scale damage. These broadly fall into two categories, technology and

infrastructure. Technological problems due to obsolete equipment used by oil companies

are pointed to as a major source of environmental damage. Antiquated machinery used

for drilling by Texaco has indeed been noted as a suspect by opponents of the oil industry.

Older helicopters with shorter ranges have been a problem as well since these require the

creation of heliports (land clearing) scattered throughout the Oriente. The infrastructure

problems noted in the document includes roads. The building of roads, according to the

decree, causes problems because the road itself requires the clearing of large tracts of land.

Also, roads facilitate the flow of colonists into the Oriente--which are widely regarded as

the prime cause of deforestation--who end up clearing land for crops. These factors had

been long noticed by environmental activists, but they finally have received recognition

from the state.12

The decree also attempts to offer some solutions of its own to the problem. It

notes efforts to maintain spills under control through the purchase of new equipment and

advanced maintenance of pipelines and other machinery. It provides:





1 The only industry environmental code was the paragraph in the Texaco contracts which stated that the
environment would be respected.

2 Executive Decree No. 1802 pg. 4.








* For the expansion of surveillance of the Oriente.

* Reduction in the number of access points to oil fields.

* Reduction in the size of petroleum installations.

* Boundaries for indigenous peoples' territories and ecologically sensitive zones.

* Reforestation by Petroecuador.

* An effort to remove obsolete equipment from all facets of the oil

production process.

It also notes the process of incorporation of environmental protection in Petroecuador,

focusing attention on the state's own role as a source of environmental degradation in

Oriente. It highlights the creation of the Environmental Protection Unit (UPA--Unidad de

Proteccion Ambiental) within Petroecuador and the UPA's elaboration of the Plan

Integral de Manejo Ambiental de las Actividades Hidrocarburiferas (Integrated Plan for

Environmental Management of Hydrocarbon Activities). It establishes guidelines for the

management socio-economic activities (i.e. impact on indigenous groups and colonists),

stability control, recovery of contaminated areas, waste management monitoring, and

contingency planning."1 These guidelines are to regulate the conduct in environmental

matters not only of Petroecuador but its sub-contractors as well, for which Petroecuador

would share some responsibility for their action when Executive Decree 2982.

Executive Decree 1802 is clearly a public relations response to the highly

publicized Texaco lawsuit and the perception of government incompetence in enforcing

environmental regulations in Ecuador. Its publication in English as well as Spanish


13 Executive Decree No. 1802 pg. 12.








indicates the importance Ecuador's government placed on responding to foreign critiques

of oil exploration in Oriente.14 Moreover, Ecuadorian executive decrees are pieces of law

and regulation. Decree 1802 is clearly different: it is actually a direct response--in the form

of a policy statement--to criticism of oil exploration and makes those interested aware of

the steps that the government is taking to address the issues stirring the controversy. It

admits past shortcomings in terms of environmental protection of oil production processes

in Oriente, the lackluster role of the state in enforcing environmental regulations, and

hence leaves a feeling that the regulatory codes prevailing at the time were inadequate at

the very least.



Executive Decree No. 2982

Executive Decree No. 2982 is the legal embodiment of the principles outlined in

1802. Decree 2982 clearly spells out all the minimum requirements for sustainable oil

production and even addresses some of its socio-economic aspects. Most important,

however, is the high degree of expertise in environmental matters shown by its drafters. It

explicitly deals with the causes of contamination and deforestation.

Decree 2982 clearly stipulates the right of Ecuadorians to live in an environment

free of contamination and the constitutional role of the state as the main protector of that

right." Its goal is to regulate all oil production activities in Ecuador which have an

environmental impact regardless of the source of the activity, i.e. it regulates the public




14 The material published in the Registro Oficial is rarely translated into English.

15 Executive Decree 2982 pg. 1.







sector as well as the private sector.16 The provisions are: first, all new activity in the

industry is to be preceded by an environmental impact study approved by the Ministry of

the Environment (formerly the Subsecretariat for the Environment of the Ministry of

Energy and Mines); second, Petroecuador is responsible for any environmental damages

caused by the activities of its subcontractors or affiliates--without exonerating any

individual subcontractor from violations of the law. This is applicable to all facets of the of

the production process regardless of whether it is seismic exploration or actual drilling.

Decree 2982 specifically addresses controversial issues, including helicopter use,

roads, and water contamination. Road construction and water contamination in particular

pose significant problems.

Helicopter use has been controversial because the construction of heliports has led

to significant deforestation, and the use of short range aircraft has created a need for a

large number of heliports big enough to provide them with fuel and support. They are also

a source of noise pollution. Decree 2982 barred the construction of heliports in many

areas--areas where wildlife feeds and reproduces, areas with sensitive flora, archaeological

sites, areas with human inhabitants, rivers, lakes, mangroves, and estuaries.

Heliports in protected areas are to be built in accordance with guidelines set forth in the

attached appendix." During their construction, advanced crews are to cut the minimum

amount possible of vegetation for paths and camps. For the heliports, they are prohibited

from eliminating ground vegetation and only "environmentally safe" helicopters are to be

flown. Oil wells are, in fact, limited to 5000 square meters in size--inclusive of the


16 Executive Decree 2982 pg. 2-3.

'' Executive Decree 2982 pg. 5.







heliport--by the decree. Helicopters are to transport most cargo through "long-sling"

techniques which allow them to withhold landing for deliveries. To avoid the need for

roads, helicopters are to be used for the transportation of most items. For example, during

the oil exploration stage they are to be used for moving most equipment. This prevents

roads, which can be used by colonists or squatters to move in and destroy forests. This

encourages the use of longer range helicopters as sites are limited for the construction of

heliports. This is of particular importance today since many new oil fields are being

developed.

Another issue that is addressed by Decree 2982 is deforestation by road and

pipeline construction, especially in biologically diverse and sensitive areas. Roads and

pipelines are a tremendous source of deforestation for several reasons. Most relevant are

those pertaining to the size of the road and their ability to attract people. If one builds a

straight 50 km. long road with a width of 8 ms. and clearing a swath of 15 ms., the result

is 750,000 sq. ms. of deforestation. Pipelines usually require clearing swaths of forest 30

ms. wide, becoming a huge source of deforestation. Another reason is colonization.

Ecuador is poor and construction attracts migrants to any part of the country where

opportunities for economic improvement are perceived as better. Acci6n Ecologica

considers the south-central Andes region of Ecuador as the primary source of Oriente

colonists--the same region is also the source of millions of illegal/undocumented aliens in

the United States. The construction of roads opens access to relatively wealthy petroleum

workers for vendors to tap as a market. Also, roadside real-estate is considered premium

in rural Ecuador since it provides access to markets and easy transportation. Colonists are

widely considered to be the primary source of Oriente deforestations, although they do not







seem to be considered substantial polluters. Hence, NGOs consider a slowdown in road

construction positive because of the resulting reduction in new colonists.

Article 17 explicitly prohibits road construction in the area during the exploratory

phase--unless absolutely necessary. If an exception is sought, it must be approved by the

Ministry of the Environment and INEFAN after considering technical and economic

justifications for approval."8 In any case, access roads must not exceed 5 ms. in width and

exploratory drilling camps may not exceed 1.5 hectares. Anything larger has to be

approved by the Ministry of the Environment and previously stipulated in the company's

environmental impact study. If exploratory drilling is unsuccessful and the well is dry, then

the site has to be restored and access roads have to be lifted. Organic waste has to be

processed in environmentally sound ways according to an environmental management

plan. Inorganic waste has to recycled or buried. If buried, it has to be done in impermeable

pits.19

Decree 2982 sets clear guidelines for the manner in which production waste has to

be dealt with. Exploratory wells are required to have sewage systems to capture any water

or leaks from the site. All wastewater has to be treated prior to discharge. Guidelines are

set in the legislation as to what maximum level of contaminants will be allowed before

discharge into the environment. Wastewater is then injected into impermeable bedrock so

as to reduce the threat of surface contamination. Government approval of an injection site

depends on the location into which waste is pumped. This is because groundwater may be

contaminated if wastewater is injected into the wrong kind of bedrock. To be avoided :


18 Executive Decree 2982 pg. 9.

19 Executive Decree 2982 pg. 11.







freshwater formations which are used for human consumption or irrigation. The goal is to

prevent the kind of water contamination which has caused much health damage through

the years.

Many wells in the Oriente have been abandoned with complete disregard for the

damage their presence has caused or will cause because of continued leakage from old

fields. Now companies must go through a process before operation of a well can go off

line. Their waste must be classified. All sites must have their drainage pipes restored or

bought new. Also, the party responsible for the deforestation has to re-forest the land as

well as remove the contaminants. Once cleaned up and the waste is removed the well must

be capped with a concrete plug. Responsibility for the supervision of this process falls with

Petroecuador's Unidad de Proteccion Ambiental and with the Ministry of the

Environment.20

For the management and storage of fuel, a series of regulations were established.

Their intention is to reduce the amount of oil and chemical byproducts that are released

into the environment at all stages of the production process--not only of oil but also of its

derivatives, such as gasoline.

Decree 2982 stresses the need to train workers in the proper handling of petroleum

and petroleum byproducts. They are to handle their output according to industrial safety

norms. Proper labeling and signs are also required.21 Storage tanks are to be built at
ground level; they are to be surrounded by a liquid-proof barrier in which 110% of the

largest tank's capacity can be withheld. Storage tanks for fuels or chemicals must be fitted


20 Executive Decree 2982 pg. 13.

2 Executive Decree 2982 pg. 14.








with oil traps. Article 22 explicitly prohibits the use of obsolete equipment and urges the

use of modern equipment which are "internationally accepted in the oil industry...and

compatible with environmental protection." Special attention is placed on the prohibition

of old, used equipment. The equipment to be used must be listed in the Plan de Manejo

Ambiental. Also prohibited is hunting, fishing, and the collection of different species of

plant and wildlife. Wildlife cannot be held captive and the introduction of species not

native to the area of operations is forbidden--even pets. Drilling and the injection of

contaminants into the ground is guided by the principle that the process or equipment used

cannot contaminate fresh water. Natural drainage patterns are to be protected whenever

installations are built. The drainage system of the sites must flow into special channels that

separate water from oil or in collection pools. All production facilities must have a spill--

control team as part of its' contingency plan. Such facilities or their equivalent must also

possess a treatment system for the fluids resulting from the process. Wells that are

abandoned or no longer productive are to be rehabilitated so that they may be used for the

injection of waste. Again, the discharge of contaminated waters is not allowed--until they

are treated. Gas (not gasoline) resulting from the process is to be a priority since it has

several uses once re-injected and recovery improved. During production testing, the fluids

that appear as a result must be shipped or pumped to a production station where they will

be treated and any oil obtained is to enter the production process.22

Article 30 deals with the rehabilitation of abandoned and badly plugged pools. The

goal is to recover as much oil as possible from them in the hope they can used later on for

either refining or any other process. Anything that is left over can used on roads as a sort


" Executive Decree 2982 pp. 18-20.







of asphalt. Oil that cannot be removed must be treated in the pool or at another site. Once

the recovery process is completed, the pool has to be covered and plugged with dirt and

later on, re-planted. 23

Special provisions for wildlife are contained in article 34. A facility has to be

covered by a fence to prevent animals from wandering into the site. The fence is to be

covered with vegetation as well. Any diesel fuel used in vehicles has to conform to

international norms; diesel produces less contamination than gasoline. Acid rain is a

possibility, another reason for burning diesel. Noise pollution is also considered a threat

and that issue is gaining prominence.

An environmental impact study is required of any new application for oil

exploration and production. It must be presented to the Ministry of the Environment 45

days before any oil related construction begins.24 Chapter 10 of Decree 2982 provides the

methodology to be used in the elaboration of the Environmental Impact Study studioo de

impact ambiental--EIA). Article 52 notes that they are to be elaborated in all stages of

the oil production process and the importance the decree attaches to them:

The Environmental Impact Studies will be required prior to the development
of each phase of oil activity, pursuant to the criteria in this decree. In the case
of contracts for the exploration and production of oil, the juridical regulatory
code of each contract will be kept in consideration. For the preparation of the
Environmental Impact Studies, internationally accepted state of the art technology
will be used, compatible with environmental protection.25





23 Executive Decree 2982 pg. 20.
24 Executive Decree 2982 pg. 37.

25 Executive Decree 2982 pg. 43.







The article then proceeds with an outline of what is required of the EIAs, each outline

including specific regulations dealing with issues particular of the project to be

undertaken. Thirty days after the submission of the EIA, the contractor will receive the

revised EIA and will have 15 days to make any changes. Also, companies that at the time

of enactment of Decree 2982 already had facilities in operation are required to submit

(within 180 days after the approval of 2982 on August 24, 1995) the Environmental

Management Plan.26 Ultimately, all projects have to be designed with their potential

environmental impact in mind.27

The Ministry of the Environment is also responsible for the execution of an

environmental audit every two years. This audit applies to all stages of production and to

Petroecuador and all contractors. The extent and type of the audit is to be determined by

the Ministry. An additional--and extensive--environmental audit is to be conducted upon

the cessation of operations of a company in an area to determine what damages have

occurred and how to repair them.

Under special circumstances, an emergency environmental audit known as an

Examen Especial Ambiental (Special Environmental Exam) can be carried out by the

Ministry of the Environment on its own or by "request of Petroecuador, its affiliates, or

authorized oil companies...."28 Once an environmental audit or emergency audit is

conducted, a technical report must be elaborated. The Ministry of the Environment must

present the report to the audited entity within 15 days after its completion. The company


26 Executive Decree 2982 pg. 22.

? Executive Decree 2982 pg. 22.

28 Executive Decree 2982 pg. 58.








audited must provide the auditors with an appropriate work environment, food, shelter,

and transportation.29

Articles 62 to 63 establish guidelines for the punishment of those found guilty of

violations to Decree 2982. Punishment may consist of

* Fines ranging from 20 to 500 minimum monthly salaries according to the severity of

the infraction.30

* The perpetrators are responsible for compensatory damages.

* The perpetrators are responsible for reparation and/or restoration of affected areas

(polluter pays principle).

* Guilty subcontractors may also be eliminated from the central registry of qualified

firms for future contracts.

* Local health authorities, at the request of the Ministry of the Environment, can also

sanction infractions that violate health codes.

* Punishment imposed for violations of Decree 2982 can be appealed to the Ministry of

Energy and Mines.

* Punishment imposed for violations of public health codes can be appealed to the

Ministry of Public Health."




29 Executive Decree 2982 pg. 59.

30 The minimum monthly base salary as of 11 January. 1998. was 100.000 Sucres or $22.5 (4.450 Sucres
per U.S. dollar). This is not monthly take home pay, which is approximately 800.000 Sucres or $180. For
purposes of fines. references are to the minimum monthly base salary of S/. 100.000 ($22.5). so they range
from $450 to $11.230.

31 Executive Decree 2982 pg. 60.








Article 64 is interesting in that allows for "popular action for denouncing before the

Subsecretariat of the Environment (now the Ministry of the Environment) any event that

produces contamination in oil activities, which will study and analyze the allegations..."-2

It is clearly aimed towards NGOs and grassroots organizations. Such organized groups

have the resources and willingness to present claims and the law grants them what is

tantamount to the power of citizen arrest. Since the areas of exploration are not private

property but public lands, this concession allows NGOs and grassroots groups the ability

to monitor and denounce events which may go ignored or otherwise unnoticed by

government regulators or officials. The recent formation and proliferation of citizen

watchdog groups incorporating different elements of civil society for the purpose of

monitoring what Petroecuador and private companies do is testimony of the possibilities

that Article 64 allows. Such groups have been particularly active in the areas of heavy

prior contamination in the northeastern Oriente, where they have been monitoring oil

fields with the assistance of NGOs. It also firmly establishes the "polluter pays" principle.

Polluter pays principles is viewed by environmentalists as an important deterrent for

contamination since clean up costs can be extraordinarily costly in both economic and

public relations considerations. Although firmly enshrined in American law, the notion of

polluter pays is new to Ecuador and the industry and is a critical accomplishment.



The Committee of Environmental Advisement

Another entity recently created to deal with the issue of sustainable development is

the Comisi6n Asesora Ambiental de la Presidencia de la Republica (CAAM or the


32 Executive Decree 2982 pg. 60.








Committee of Environmental Advisement). The CAAM works through a series of

conferences, workshops and congresses with "ample participation" from different

segments of society. The CAAM itself is composed of a representative from the

presidency (who is the chair), one from the public sector, one from business, and one

from civil society--the environmental NGOs.33 The CAAM was directly involved in the

process of elaborating Decree 1802 and was one of the first public institutions to

recognize the variety of problems afflicting Ecuador's environment (1993).

The result of the CAAM's efforts is the Plan Ambiental Ecuatoriano (PAE or

Ecuadorian Environmental Management Plan), the elaboration of which received support

from Fundacion Natura, AID, the Inter-American Development Bank, and the World

Resources Institute. The objective of the PAE is to

implement a process of permanent planning for environmental management
that contributes to the sustainable development of Ecuador, fomenting the
participation of society as a fundamental element, fomenting change of attitudes
at all levels, orienting the behavior of governmental agencies, private sector,
organizations of civil society and NGOs, and promoting environmental
management at the national, regional, and local levels.34

The PAE is based on the general policy principles present in Decree 1802.35 It relies on

local as well as central government to adopt its principles, with the Municipality of Quito

being at the forefront of environmental protection in Ecuador.36 Moreover, the PAE



33 CAAM. 1996. Pg. 16.

34 CAAM. 1996. Pg. 5.

35 CAAM. 1996. Pg. 9.
36 Among the measures taken by the Municipality of Quito was the acquisition of electrically powered
"trole-buses" instead of internal combustion powered buses and the ban of lead in gasoline which will
begin in 1998.








reflects the hemispheric move towards sustainable development and recognizes as much

when it states the following:

the concerns, ever growing, of the international community over environmental
problems that are affecting the planet and that requires effective participation of all
countries in the world. Ecuador has subscribed to various agreements that benefit
and commit it, which would be best to execute in integrated and planned context.3

In Chapter 1, a sketch is presented of the major environmental problems of

Ecuador and the areas affected by them. It points out environmental problems that are a

well-known result of oil exploitation such as: deforestation, loss of biodiversity,

contamination in different environments, and badly managed toxic waste, among others.38

The CAAM singles out all oil-related activities as actual or potential sources of

contamination. It points out the Oriente as an area with major environmental problems. 9

The PAE stresses the need to create a process conducive to environmental

management. To foster this process, four elements are mentioned as important and these

are the National Strategy for Development, the Basic Environmental Principles, Basic

Environmental Policies, and the Ecuadorian Environmental Management Plan. Of interest

here are the Basic Environmental Principles.

The Basic Environmental Principles seek to promote interaction among different

actors in a conciliatory, participatory way, leading primarily to the conclusion that

consensus building is deemed necessary. They were enacted in 1993. The basic principles

are:



37 CAAM, 1996. Pg. 17.

38 CAAM. 1996. Pg. 11.

39 CAAM, 1996. Pg. 12.








* Environmental initiative is everyone's duty in every instance.

* The responsibility of one party cannot be passed along to another--although the state

is to play the role of final arbiter.

* Environmental action has to be socially just, economically profitable and

environmentally sustainable.

* Conflicts are to be resolved by the reconciliation of the interests of different actors,

and decisions are to arrived at in a participatory fashion.

* The basic strategy of environmental initiative is based on solidarity and an equilibrium

between society, the economy, and the environment.40

In the chapter on specific environmental policies in the PAE, special attention is

paid to international aspects affecting or influencing Ecuador. It states that: Ecuador's

external debt is not an excuse for violations of Ecuador's sovereignty nor the reckless

exploitation of the country's natural resources; foreign investment and transnational

corporations should use environmentally friendly (and modern) technology; they also need

to respect Ecuador's sovereignty, the rights of its citizens to live in a healthy environment,

and that they observe the regulations prevalent in their home country; international

commerce has to form a part of the concept of sustainable development and must not

foster an economic environment that is predatory towards natural resources; the use of

environmental loans should be optimized; obtain real support from developed nations for

the preservation of Ecuadorian environments considered unique in the world.4'


40 CAAM. 1996. Pg. 19.

41 CAAM, 1996. Pg. 36.








These statements deal with several of the international issues raised by exploitation

of oil in the Oriente. Critics frequently state one of the causes of such widespread

contamination is the capitalist world system in which Ecuador participates as a producer

of commodity or primary products for the developed world--and as a debtor country.42

In order to satisfy the requirements of debt servicing, Ecuador must exploit

primary products such as oil to pay its international financial obligations.4' As paying debt

becomes more burdensome, the result could be increased recklessness in oil production.

Based on the high level of debt Ecuador has acquired and that oil is one of the few reliable

sources of revenue for the state, it seems likely that debt servicing is part of the problem.

However, it would be a simplification to say that debt servicing is a major source of the

problem. It is difficult to conceive that today's environmental problems would not exist or

be less severe if the debt did not exist.

When the PAE declares that companies need to use modem technology and follow

the environmental regulations of their country of origin, it is implied that the contrary has

been occurring. Indeed, in the Texaco controversy, the company's use of obsolete

equipment and lack of adherence to any environmental code is pointed out as the primary

cause of the massive contamination that has hit Oriente. This was given the force of law in

Decree 2982 which made the use of obsolete equipment illegal. Most of the equipment

used up to recent years in Ecuador relied on technology developed well before

environmental concerns in oil development became a major issue. Such equipment was



4 Anamaria Varea. "Amazonia," in Marea Negra en la Amazonia. ed. Anamaria Varea (Quito: Ediciones
Abya Yala. 1995) 25-37.

43 Debt servicing usually consumes between 40 and 60% of Ecuador's fiscal budget.








"recycled" by transferring it from countries where it was outlawed to those were

regulatory environments were not so strong. Massive oil spills and the draining of

chemical byproducts of oil production into the area's hydrographic system were the

results. Such behavior would not be tolerated in the company's country of origin--which is

why the PAE demands that they engage in corporate behavior akin to what would occur in

the home country. by stressing the point that they have to respect the health of

Ecuadorians the PAE hints at Decree 2982: companies may have to answer to local health

authorities for their actions.

The other international link established in this section of the plan is that between

trade and the environment. It argues that the monies to be made from trade should not

constitute an excuse for disregarding the environment in product manufacturing. The

concern is that widespread desire for economic well-being may lead to an assault on

Ecuador's natural resources; indeed, there has been some debate as to the merits of

Western/U.S. style consumerism and especially its impact on the environment. This

concern is widespread although the relationship between trade and sustainable

development is not at all clear. Whereas many NGOs operating in Latin America are

opposed to extensive free trade pacts on grounds that they constitute an acquiescence to

Western models of economic development--and the concomitant environmental

degradation--the opposite may also be true. One of the most pressing concerns for Latin

American governments seeking to enter free trade pacts is that of "linkage" between trade

issues and environmental ones. Linkage usually involves that a country with higher

environmental standards demands that another adopt those standards in order to "level the

playing field" between the companies operating in potential trade partners, since it is








unlikely that a lowering of environmental standards would be politically feasible. Countries

that have lower environmental standards in would find it difficult to implement to new

standards in a short period of time. The result is that NGOs fear trade pacts because of the

push it may give to environmental degradation, but governments and companies also fear

them because an upgrading of environmental standards may place them at a competitive

disadvantage.

The issue of obtaining support from developed countries for environmental

protection is based on three factors: first, the belief that the industrialized world is chiefly

responsible and accountable for the current state of the environment; second, possession

of what is considered by many to be a valuable resource such as the rain-forest can be an

asset in international negotiations; and third, there are many groups willing to help finance

environmental projects. There is much truth in the fact that the environment has suffered

because of industrial development. This has been a premise used in a variety of forums by

developing countries versus developed ones, such as Rio and the Kyoto Treaty.

Ecuadorian policy makers are acutely aware of this and firmly believe that there is a sense

of regret and a need to make amends by industrialized countries.44 There seems to be a

sense among Ecuadorian policy makers that groups or governments in the developed

world are willing to assist poorer countries in developing there own environmental

programs with funds and expertise as a way to make reparations for the damage their

development has caused. There also is a notion that the issue of Amazonian contamination

can be an instrument in international relations for a developing country. This idea was



44 Personal interview with Oscar Garz6n, Minister of Energy under the Borja administration. Quito,
Ecuador, August 1997.








advanced by Hurell in his analysis of the deforestation issue in Brazil. The way this has

been used has varied from "economic contraction can accelerate deforestation" in order to

secure better terms in trade negotiations to "debt for nature" swaps in which certain

environmental commitments are made by Ecuador in exchange for better international loan

terms. Finally, it is clear to the CAAM that many groups are willing to help financially

with the cost of environmental protection and that this is a potential source of much

needed funding. Many of Fundaci6n Natura 's programs are at least partially funded by the

World Wildlife Fund, among others.

The PAE makes some policy recommendations for implementation of its goals.

among the most relevant ones are the following:

The state's environmental policies should focus on conservation and regulation of

natural resources instead of their exploitation.

Environmental accounting.

The state should develop and advanced regulatory framework and adopt "polluter
pays" strategies.

It calls for an environmental fund to finance various projects.

Government budgets should promote sustainable development.

Tight credit and monetary policies may increase poverty, leading to migration other

behavior that is environmentally destructive.

Trade policies geared towards the promotion of non-traditional exports may be

harmful as these new exports bring more land under cultivation.

These recommendations are finding their way into the books, as can be observed from the







variety of regulations being established at different levels of government concerning the

environment. Moreover, public awareness of these issues is being promoted through

private and public sector initiatives.

The overall goal of this chapter was to detail and highlight the major policy

initiatives concerning the oil industry of the last four years, setting them against a

background of prior regulatory absence. It is worthwhile to note that although in period

from 1972 to 1992 the industry was lacking of appropriate regulation--as was the whole

country--the last few years have seen a flurry of initiatives concerning the environment.

Moreover, entities in other fields are now being affected by policy changes that seek to

reduce environmental degradation. The oil industry was the first to come under intense

scrutiny, but the initiatives to change its practices have had a spill-over effect leading to

regulatory improvements in certain industries. The following chapter will detail the factors

that have led to the changes in the oil industry's environmental regulation.














CHAPTER 4
FACTORS LEADING TO POLICY CHANGES AND EFFORTS AGAINST OIL
CONTAMINATION




Analytical Framework

The goal of this chapter is to explain the factors that have propelled the changes in

the Ecuadorian state's policies as outlined in Chapter 3 and to provide cases which show

how groups opposed to environmental degradation achieved their goals. In these cases,

changes in actor behavior or loss of wealth or prestige were the results. This chapter

argues that recent changes in policy stem from a changing normative international context,

favorable to concepts of environmental protection and sustainable development. This

environment means that oil companies do not operate in a vacuum where corporate

prerogatives are the sole determinant of the management of their operations. Moreover, it

is now also difficult for governments to exploit natural resources and to condone

environmental damage by the state and/or private corporations. Pursuing such behavior

leads to loss of prestige for offending actors, or increasingly, to costly legal battles and

public-relations nightmares.

The main force driving policy changes in Ecuador is the emerging sustainable

development regime. As noted in Chapter 1, List and Rittberger define regimes as a form

of collective action by states, based on shared principles, norms, rules, and decision-








making procedures which constrain the behavior of states in specific issues areas and that

possess a minimum of effectiveness.' The regime forces change by: condemning reckless

disregard for the environment; providing a framework via agreements through which

countries can incorporate sustainable development into their own regulatory codes; urging

member states to incorporate the concept of sustainable development into policy; fostering

the development of mechanisms which allow for affected or concerned citizens to engage

offenders; by using multilateral institutions to further its principles; and granting legitimacy

and a strong participatory role to private groups that seek to protect the environment.

The Ecuadorian case is particularly well suited to a regime theory framework for

several reasons. First, the complexity of actors and forces involved requires a framework

that can incorporate many different elements and place them within a system in which one

can see the relationships. Second, Ecuador presents a situation in which there are linkages

between domestic and international actors in issues that are both international and

domestic in nature. Because of the peculiar nature of both the petroleum industry and the

Oriented, the issues involved are ones that have international ramifications and

repercussions. These lead to the presence of international forces that become influences on

Ecuador. These influences can take the form--for example--of multinational energy

corporations or international environmental groups. Regime theory is useful since it seeks

to explain precisely such kinds of linkages among both non-state and state actors and how

they impact state behavior. Regime theory also helps explains how relatively small groups

through their links, such as environmentalists in Ecuador and other social movements, are


Martin List and Volker Rittberger, "Regime Theory and International Environmental Management," in
The International Politics of the Environment, eds. Hurrell and Kingsbury (New York: Oxford University
Press. 1992) 86-89.








able to influence domestic policy to an extent that has not been obtained by much larger

groups.2 Fourth, because of the work of epistemic (or knowledge based, scientific)

communities, a consensus has emerged that the environment needs to be protected.

Finally, the environment is an issue area in which a regime approach is promising because

there is no generally agreed upon body of comprehensive international law for

environmental protection, yet we find a multitude of agreements appearing in recent years

that run counter to the professed interests to the state.3 In other words, states have been

forced to change their conduct and policies even if the result is an economic or political

loss.



The Hemispheric Sustainable Development Regime

Five principles form the heart of the emerging sustainable development regime of

the Americas and can be found permeating most discussions on the environment at the

hemispheric level:

* Human beings and their achieving a harmonious relation with nature are its main

concern.

* States are sovereign in their domestic policies but must respect their neighbors'

environments.

* Current development must keep in mind future needs.

* Environmental protection is an integral part of the development process.

Z For example. Oriente indigenous groups such as the Huaorani have managed to place their concerns at
the highest levels of the national agenda, whereas infinitely larger groups such as the Quichua dominated
Conaie have gone through great troubles to have their concerns noticed by the state.

3 Such agreements include the Climate Change Treaty of Kyoto. the Rio Declaration of 1992. inter-
American agreements, and environmental agreements in free trade pacts such as NAFTA.









* The needs of developing countries shall receive special priority.

The norms of most relevance are the following:

* International environmental cooperation shall be carried out by states with

differentiated responsibilities.

* The regime is to be inclusive and participatory.

* States should promote a free trade environment favorable to sustainable development

and should not use environmental legislation to the effect of a non-tariff barrier.

* States should cooperate to limit the amount of hazardous material being transferred

from country to country.

* The state is to promote the internalization of environmental costs.

* Effective environmental legislation is to be passed by each state.

The central rules consist of

* States are to notify other states of situations in which environmental problems may

have consequences on their own environment.

* Environmental impact assessments are to be conducted whenever large scale projects

that are likely to have adverse effects on the environment are planned.4

These elements are important in that they are factors that constrain the behavior of the

Ecuadorian state in certain areas of domestic policy.

The sustainable development regime has been bolstered by hemispheric efforts at

trade integration. The efforts to integrate trade among the nations of the Americas have



4 United Nations. Report of the United Nations Conference on Environment and
Development 12 August 1992: gopher://gopher.un.org/00/conflunced/English/riodecl.txt.







opened windows of opportunity in which environmental conditions are debated and

policies are scrutinized. This is because of several factors, primarily efforts at eliminating

non-tariff barriers to trade among partners. Countries with higher environmental

standards--and higher production costs--try to secure improved standards from their

partners in order to eliminate any cost advantages to be gained from environmental

degradation. This pulls in actors that represent the interests of private corporations (that

may see increased competition) into efforts to secure environmental agreements in trade

pacts.5 On the other hand, environmental and labor organizations see two distinct threats

in trading with countries with lower standards. The former see a threat to domestic

environmental regulations since countries that see themselves disadvantaged may lower

standards to enhance competitiveness; they also recognize that shifting towards a more

competitive trading environment may lead developing nations to further erode their own

regulations to gain competitiveness. Labor sees a threat in the developing world stemming

from lower costs due to both cheap labor and lower environmental. This was evident in

the NAFTA negotiations. The result has been the incorporation of diverse groups of

actors into hemispheric environmental negotiations.

The main agreements of the hemisphere's emerging regime to which Ecuador

subscribes, are the following:

* The Report of the United Nations Conference on Environment and Development (Rio

Declaration of 1992).

* The Declaration of Belem do Para (1994).

5 This was evident, for example, in the Kyoto agreements on global warming in which U.S. corporations
advertised strongly against allowing developing nations to incorporate emissions targets on a relaxed time
frame. Industrialized countries were to be subject to a tighter schedule.









* Plan of Action of the Summit of the Americas (1994).

* The Declaration of Santa Cruz de la Sierra (1996).

* The Inter-American Program of Action for Environmental Protection (1990).

These agreements strive to incorporate sustainable development into regional and

hemispheric integration efforts. They provide mechanisms to achieve greater

environmental protection and institution building concerning the environment. They also

have value in that their principles are a recognition of the validity of the claims by

environmentalists that environmental protection in the Americas has long been neglected.

What they do not provide--to date--are enforcement mechanisms that can effectively

punish or deter would be transgressors of the regime. This is what limits the possibility of

concluding that a sustainable development regime is effectively in place. However, an

argument underlying this thesis--especially this chapter--is that there are mechanisms that,

although they may not be institutionalized, have the effect of being enforcement elements

for the regime. Moreover, the principles, norms, and rules of the regime have been

translated into national policy in many countries. In Ecuador, this is manifested through

Executive Decrees 1802 and 2982, Ecuador's Environmental Management Plan, and

increasingly through local governments' environmental policies.

In Ecuador, regime enforcement has been primarily through three channels:

multilateral lending institutions, nongovernmental organizations, and through legal actions

and international agreements.








Multilateral Lending Institutions

Because of charges of environmental damage inflicted in the past, international

multilateral development organizations such as United States Agency for International

Development, the Inter-American Development Bank and the World Bank now require

environmental assessments of projects that seek funds. The World Bank, for example,

while observing that environmental protection and management are relatively new issues in

Latin American mining, notes that "environmental awareness is sweeping the world and

the mining industry is under particular pressure to adopt sound policies."6 Moreover, The

World Bank's definition of an environmentally sound mining industry is broad, consisting

of"one which exploits mineral resources with maximum economic efficiency without

harming human health, damaging local communities or biological diversity while

maintaining ecological stability."7 The World Bank also recommends key steps and

policies for environmentally sound mining which are addressed by Ecuador's Executive

Decrees 1802 and 2982, as well in Ecuador's Environmental Management Plan--the latter

having received support from both the Agency for International Development and the

Inter-American Development Bank for its development.8

The World Bank's lending portfolio for Latin American environmental projects has

increased from $2.91 billion or 3.1% of bank lending for the 1980-1986 period, to $8.84




6 Industry and Energy Department of The World Bank. A Mlining Strategy for Latin America and the
Caribbean (Washington. D.C.: The World Bank. 1996) 63.

7 Industry and Energy Department of The World Bank. A Mining Strategyfor Latin America and the
Caribbean (Washington. D.C.: The World Bank. 1996) 65.

8 See the different documents published by the CAAM.








billion or 5.2% for 1987-1994, excluding controversial loans for forestry.9 Most of the

multilateral bank lending is targeted towards urban environmental management rather than

resource conservation by a margin of 4 or 2 to 1, varying by year. 0 Nevertheless, World

Bank lending for "green projects" increased to $2.78 billion during 1987-1994, from

$132.2 million from 1980-1986. In Ecuador, environmental loans represented

approximately 2% of total multilateral development bank borrowing during the 1980-1986

period." However, this increased to approximately 9% during 1987-1994 with "green

projects" comprising a significant portion of this borrowing.12 The increases in lending for

environmental projects is attributed to environmentalists' efforts during the 1980s leading

to pressure from United States government officials, some of whom were alarmed at







9 The authors excluded forestry from their analysis due to its controversial nature. There is an ongoing
dispute as to whether lending for forestry promotes sustainable development or merely facilitates logging.
They also limited their analysis to the 10 largest Latin American countries, so presumably the amount of
environmental lending should be greater.
See David L. Nielson and Marc A. Stem. "Endowing the Environment: Multilateral Development Banks
and Environmental Lending in Latin America." in Latin American Environmental Policy in International
Perspective. ed. Gordon J. MacDonald. Daniel L. Nielson. and Marc A. Ster (Boulder. CO.: Westview
Press. 1997) 132.

o1 David L. Nielson and Marc A. Stem. "Endowing the Environment: Multilateral Development Banks
and Environmental Lending in Latin America," in Latin American Environmental Policy in International
Perspective, ed. Gordon J. MacDonald, Daniel L. Nielson. and Marc A. Ster (Boulder. CO.: Westview
Press. 1997) 131.

" David L. Nielson and Marc A. Stem. "Endowing the Environment: Multilateral Development Banks
and Enmironmental Lending in Latin America." in Latin American Environmental Policy in International
Perspective. ed. Gordon J. MacDonald. Daniel L. Nielson. and Marc A. Stem (Boulder. CO.: Westview
Press. 1997) 131.

12 David L. Nielson and Marc A. Stem. "Endowing the Environment: Multilateral Development Banks
and Environmental Lending in Latin America." in Latin American Environmental Policy in International
Perspective. ed. Gordon J. MacDonald. Daniel L. Nielson. and Marc A. Ster (Boulder. CO.: Westview
Press. 1997) 131.








environmental disasters resulting from multilateral development bank lending and

threatened to cut United States funds for the IDB and The World Bank.13

This has given such multilateral development banks increasing say on the

environmental policies of countries receiving lending in Latin America, including Ecuador.

In Peru, changes in environmental policy concerning oil exploration and production similar

to those in Ecuador have been attributed to multilateral development banks.14 However,

their role was explicitly observed by Dr. Rene Ortiz: "if a country opts for financing from

the Inter-American Development Bank, The World Bank, or the Corporaci6n Andina de

Fomento, it must accept environmental regulations, they are the ones exercising

pressure."'5 While multilateral banks have been urging and promoting sustainable

development, they have done so after being targeted by environmental transnational

organizations, a group which is widely accepted as being the primary motor of changing

attitudes towards the environment.

Transnational NGOs

A critical role is played by nongovernmental organizations in enforcing the

principles of the regime, often through international networks. Environmental NGOs have

become powerful in Ecuador where they constantly publish materials on environmental

conditions in the country, monitor private and public behavior, mobilize grassroots


13 David L. Nielson and Marc A. Stern "Endowing the Environment: Multilateral Development Banks
and Environmental Lending in Latin America." in Latin American Environmental Policy in International
Perspective, ed. Gordon J. MacDonald. Daniel L. Nielson. and Marc A. Stem (Boulder. CO.: Westview
Press. 1997) 132.
14 Personal consultation with Carlos Mora, Chevron Social Program for Peru, Executive for Community
Relations, Gainesville. Florida. 10 February 1998.

15 Personal interview with Dr. Rene Ortiz. ex Secretary General of the Organization of Petroleum
Exporting Countries (1978-1982). Quito. Ecuador. 15 July 1997.








movements, and influence public opinion through use of the media and advertisement.

Links with foreign NGOs grants an international audience which can be incorporated as an

additional supporter. Alliances with groups in other issue areas such as human rights and,

especially, indigenous rights groups, have strengthened their ability to influence public

opinion and raise awareness. The powerful combination of environmental protection and

the defense of indigenous rights has boosted the effectiveness of both substantially.

The success of environmental NGOs in Ecuador is a result of two developments:

the decline of the state and the traditional conceptualization of sovereignty; and the

international arena is now more sympathetic to the causes of sustainable development and

indigenous rights.

Whereas there is some debate as to the future of the state, the opinions expressed

today agree on several points: first, that the state in any case will remain much weaker

than the strong state that has characterized most of this century; second, the resulting

vacuum will be increasingly filled by networks, be they of businesses, environmentalists,

indigenous groups, or crime syndicates; third, a decline of sovereignty for the state; finally,

the strengthening of local governments in individual countries.16 According to Mathews,

the reduction of state power has diminished its ability to control its borders, facilitating a

reduction in its monopoly of information. This has occurred simultaneously with--some





16 See Anne-Marie Slaughter, "The Real New World Order." Foreign Affairs September/October 1997:
183-186: Alison Brysk, "Acting Globally: Indian Rights and International Politics in Latin America." in
Indigenous Peoples and Democracy in Latin America. ed. Donna Lee Van Cott (New York: St. Martin's
Press. 1994) 29-31: Kathryn Sikkink. "Reconceptualizing Sovereignty in the Americas: Historical
Precursors and Current Practices." Houston Journal ofInternational Law Spring 1997: 705-729; and
Jessica Mathews. "Are Networks Better than Nations?," New Perspectives Quarterly Spring 1997: 10-14.








argue a result of--the communications revolution sweeping the world. 1 The resulting

reduction in the cost of communication has led to an explosion in the ability of

transnational organizations such as NGOs to disseminate information virtually

instantaneously with little possibility for government interference of this flow. Where

governments once set the agenda, NGOs are now dominant in some issue areas. Mathews

presents as an example of changes in sovereignty the global climate treaty in which NGOs

conceptualized the treaty, devised its content, and set the agenda. Governments were

presented this treaty and signed it after much wrangling, in spite of the significant

implications for domestic policies." As Sikkink notes, internal sovereignty has never been

absolute, and the current push for regional integration--for example--further exposes the

state to outside interference on how it treats its citizens, or in this case, the environment.19

This presents a scenario in which transnational groups such as NGOs will continue

to influence policy. In Ecuador, faith in the state's management capacity has decreased

while a recovery of local government within major urban areas (Guayaquil, Quito,

Milagro, Cuenca, Machala) is underway. This increases the scope of operation for NGOs

to continue to influence policy. The formation of provincial committees to monitor oil

production activities in the Oriente, a result of efforts by local government, NGOs

(particularly Fundaci6n Natura), and grass roots organizations, is a reflection of the

increasing strength of local versus central government in Ecuador. It also justifies the



'7 Jessica Mathews. "Are Networks Better than Nations?." New Perspectives Quarterly Spring 1997: 11.

18 Jessica Mathews. "Are Networks Better than Nations?." Xew Perspectives Quarterly Spring 1997: 10-
14.

9 Kathrvn Sikkink. 'Reconceptualizing Sovereignty in the Americas: Historical Precursors and Current
Practices." Houston Journal oflnternational Law Spring 1997: 705-707.








current strategy by Ecuadorian NGOs and regional groups at local empowerment and

using existing legal mechanisms at the local government level to attain their goals.



Legal Action and International Agreements

The strongest channel leading to enforcement of the regime are legal actions and

international agreements. Lawsuits or contamination charges carry many risks for

companies in the oil industry. They combine the possibility of civil or criminal penalties,

tremendous loss of public prestige, and costly and protracted legal battles. Furthermore,

legal action has now become more sophisticated, with environmental and grassroots

groups using all legal resources at their disposal, including instruments designed for the

protection of human rights, local and national health codes, and strategically locating the

venue where legal action is to occur. This has resulted in several efforts which, at least,

have succeeded in achieving public sympathy to the detriment of oil operators and at best

halted oil exploration and production in sensitive areas altogether.

Groups concerned about the environment in Ecuador now have a variety of legal

instruments at their disposal as well as international accords. The Ecuadorian Constitution

guarantees the right of Ecuadorian citizens to live in a pollution free environment.

Executive Decrees 1802 and 2982 provide groups or communities with the legal backing

for denouncing and suing for environmental damages.20 Numerous other codes also



20 For example, a "small" spill of 100 barrels of crude oil by Petroecuador on 18 January 1998 was
denounced near Coca. In this incident, the individuals affected (loss of crops) noted that a much larger
spill had occurred a few years before. They received minimal compensation for their losses but seek a
peaceful resolution of the problem with the local manager of Petroecuador. This case is unique in that
press coverage of Petroecuador contamination is rare.
El Universe. "Denuncian Derrame de Petr6leo." El Universo 29 January 1998.








provide some legal base for citizen protection, such as article 2241 of the civil code, local

regulations such as Ordenanzas 2910 of Quito and Ordenanza 222 of Cuenca, and health

and civil codes at different levels of government.21 The Civil Code allows for lawsuits in

cases where one party causes economic loss to another, for example, when oil spills lead

to a loss of crops. Moreover, international agreements carry with them the commitment of

the signatory country to fulfill its stipulations at the domestic level. This is the reason why

there is a general similarity between Ecuadorian environmental codes and the agreements

on the environment which Ecuador signs. Indeed the Rio Declaration appears to be

influential as it is referred to in petroleum industry forums. Dr. Rene Ortiz observed that

international environmental agreements are one of the main factors leading to change in

domestic policies.22

Actors

Another component of the regime are its actors. These include the state,

environmental NGOs and indigenous groups, private companies, and private citizens.

States that are pursuing national development have an interest in what type of

solutions are found for the problem of environmental degradation. This is particularly true

for states that rely on mining as a source of fiscal revenue. Mining in its different

variations has significant impact on the environment even when the environment is

considered during the planning stage. As one staff member of Fundacion Natura points


21 See Byron Real L6pez. "C6mo Defendernos de la Barbarie Ambiental." in Debate Ecologico sobre el
Problem Petrolero en el Ecuador. ed. Esperanza Martinez (Quito. Ecuador: Acci6n Ecol6gica. 1993) 91-
93 and Giuseppina Da Ros, "Anailisis Econ6mico de la Contaminaci6n de Aguas en America Latina: el
Caso de Ecuador." in. ndlisis Econ6mico de la Contaminaci6n de Aguas en America Latina. ed. Jorge A.
Quiroz (Santiago, Chile: Centro Internacional para el Desarrollo Econ6mico, 1995) 280-284.








out, regardless of any environmental protection plans that companies undertake, negative

environmental impacts are unavoidable.2 This was also noted by one ex-minister of

energy.24 The result is a difficult choice for the state, one of self-imposed regulation for its

revenue generating petroleum industry.25 Oscar Garz6n noted that Maxus (now YPF

Ecuador Inc.) has significantly seen its production costs increase as it has moved towards

stronger environmental protection. This means less revenue for the state. Petroecuador

itself is moving towards higher environmental standards with support from its

Environmental Protection Unit (Unidad de Protecci6n Ambiental), although it remains a

significant polluter according to ex-OPEC Secretary General Rene Ortiz. 26 Of interest is

the future course that Petroecuador will take concerning environmental protection. Its

Environmental Protection Unit has certainly taken a strong stand on the Texaco issue.27



22 Personal interview with Dr. Rene Ortiz. ex Secretary General of the Organization of Petroleum
Exporting Countries (1978-1982), Quito. Ecuador. 15 July 1997.

23 Miss Lucia Burgos of Fundaci6n Natura. one of the NGO's experts on the oil issue, agreed to speak
independently of Fundaci6n Natura. Her views are hers only and do not necessarily represent those of
Fundaci6n Natura.
Personal interview with Lucia Burgos. Fundaci6n Natura Coordinator for the Provincial Commission for
the Monitoring of Oil Activities in Napo Province. Quito. Ecuador, 11 July 1997.

24 Personal interview with Oscar Garz6n, ex Minister of Energy under the Borja administration, Quito.
Ecuador. August 1997.

25 Environmentally sound industry practices does increase significantly the cost of production. This is
according to Douglas Southgate's research and Oscar Garzon. ex-Minister of Energy during the Borja
administration. See personal interview with Oscar Garzon ETC. and Douglas Southgate. Petroleum
Development in Tropical Rainforests: the Economics of Pollution Control in Eastern Ecuador (Quito:
Institute de Estrategias Agropecuarias. 1992) 14-17.

26 See ECO Polemica Revista de la Unidad de Protecci6n Ambiental de Petroecuador August 1997 and
personal interview with Dr. Rene Ortiz. ex Secretary General of the Organization of Petroleum Exporting
Countries (1978-1982). Quito. Ecuador, 15 July 1997.

27 See ECO Polemica Revista de la Unidad de Protecci6n Ambiental de Petroecuador August 1997 and
Unidad de Protecci6n Ambiental de Petroecuador. Analisis de la Operacidn de Texaco y del Plan de
Remediaci6n Ambiental (Quito: Petroecuador UPA. 1997).







The state, nevertheless, has changed policies only in the 1990s as a result of the emerging

consensus around sustainable development and has done so only reluctantly.

The main domestic environmental groups are Fundacion Natura and Acci6n

Ecologica. Fundaci6n Natura, affiliated with the World Wildlife Fund, is the largest with

1200 members and most influential with enough financial resources to carry on national

advertising campaigns aimed at promoting environmental awareness. Fundaci6n Natura's

position concerning oil exploration and production is that it has to be done with as little

environmental damage as possible. If oil exploration and production in ecologically

sensitive areas is necessary, Fundacion Natura determines what are the potential

economic gains compared with the losses. If the losses are excessive, then it will not

support a project.28 It also promotes local monitoring of oil activities and because of its

"moderate" position, participates with government in environmental policy making.

Acci6n Ecologica, a more radical and smaller group, is affiliated with Greenpeace

International and the Rainforest Action Network. It seeks to protect the Oriente through

activism such as picketing, public protest rallies, organizing letter-writing campaigns, and

through publishing research on the Oriente region and the impact of oil production. A

movement affiliated with Acci6n Ecologica is Amazonia por la Vida which attempts to

educate the public on the events of the Oriente and oil. Both groups are based in Quito,

with Fundaci6n Natura having an apparently well financed operation in the city and

Acci6n Ecologica running a far more modest operation in the Quito offices of the

Facultad Latinoamericana de Comunicacidn Social (FLACSO). Some indigenous groups


28 Personal interview with Lucia Burgos, Fundaci6n Natura Coordinator for the Provincial Commission
for the Monitoring of Oil Activities in Napo Province. Quito. Ecuador. 11 July 1997.








have supported the efforts of environmentalists in what Brysk considers a bright maneuver

on their part to defend their interests by "harnessing the power of the international

environmental regime" which she considers to be stronger than others--such as the regime

for the protection of indigenous rights.29 The influence of environmental groups on

Ecuador is strong, and they are perceived to be the voices of the international

environmental community.30 As such, they "speak" more loudly than their numbers would

suggest.

There are several companies operating in Ecuador's oil industry. The single largest

producer is PetroProducci6n (a unit of Petroecuador) with 60% of output. The other large

producers in order of importance are: YPF of Argentina (the single largest private

operator in Ecuador), Oryx, Occidental Petroleum (Oxy), City Investing (Canada),

PetroBras (Brazil), and Arco, which is scheduled to begin production in 1999. Because of

delays in the processing of required documentation, an unstable investment climate,

pressure from environmentalists, and preferential treatment for government favorites such

as Petroecuador and its subsidiaries, several companies have abandoned Ecuador in recent

years including Conoco and Elf Aquitaine."3



29 Alison Brysk, "Acting Globally: Indian Rights and International Politics in Latin America." in
Indigenous Peoples and Democracy in Latin America, ed. Donna Lee Van Cott (New York: St. Martin's
Press. 1994) 30-31.
30 Personal interview with Oscar Garz6n. ex Minister of Energy under the Borja administration. Quito,
Ecuador, August 1997 and personal interview with Dr. Rene Ortiz. ex Secretary General of the
Organization of Petroleum Exporting Countries (1978-1982), Quito. Ecuador. 15 July 1997.

31 Elf recently announced it will leave its Ecuador operations. This was ostensibly due to a reduction in the
company's production ceilings by the government from 2,225 barrels per day to 1.100. All other
companies were hit by ceiling changes which they have contested in court: PetroProducci6n and City
Investing have seen their production ceilings increased. The problem arose because Ecuador has limited
pipeline capacity (currently 400.000 barrels per day at over-capacity) and the government is apparently
trying to secure more transportation capacity for itself. The expansion of the pipeline has been planned for










Table 4-1
Major Oil Companies in Ecuador: 1997-1999
PRODUCTION PROJECTIONS 1997-1999
(barrels per day)
PetroProduccion YPF Oryx Oxy City Elf PetroBras
1997 302,500 52,699 25,370 24,690 12,073 9,278 1,852
1998 319,968 49,976 20,936 29,140 12,990 11,789 4,652
1999 340,836 89,221 17,398 22,480 14,093 12,487 11,247

Source: PetroEcuador 1997.
Note: Data includes Elf Aquitane which will no longer operate in Ecuador. Oxy is short for
Occidental Petroleum


TOTAL
428,462
449,451
535,622


YPF (Yacimientos Petroliferos Fiscales) entered the Ecuadorian oil industry in an

expanded role in 1995 through the acquisition of Maxus.



Mobilizations Against Polluters

Several cases have developed in the 1990s in which companies were targeted for

their lax--or nonexistent--environmental policies. These cases reflect the use of legal

mechanisms, NGO and grassroots mobilizations, and use of sympathetic international

audience in order to secure environmentally sound policies. These cases are primarily the

lawsuit against Texaco and the Maxus controversy (now YPF Ecuador Inc.).



The Texaco Lawsuit

The lawsuit filed against Texaco Corporation in Federal District Court in White

Plains, New York, by Ecuadorian indigenous peoples in November of 1993 provides a



several years but constant bickering among interested parties has delayed its construction. See "Elf pulls
out of Ecuador." The Oil Daily 29 January 1998: 6 and PetroEcuador 1997.








concrete example of how the regime's de facto enforcement mechanism operates. It is

illustrative of how the different forces that have shaped Ecuadorian oil policy in recent

years converge, interact, and influence different actors in different arenas. It has become a

public relations nightmare for Texaco and its persistence plagues the company to this day.

Key events in the Texaco Lawsuit are the following:

* The original suit was filed in November, 1993.

* Was decided on December 17, 1994, in favor of Texaco, but evidence gathering was

allowed until final dismissal in 1996; reinstatement was an option if Ecuador's

government chose to support it.

* It was a class-action lawsuit seeking $1.5 billion in damages.

* Ecuador's government initially (1994) opposed the suit.

* Former U.S. Attorney General Griffin B. Bell defended Texaco.

* Rulings have been unfavorable to the plaintiffs, with the courts stating that the case

should be tried in Ecuador.

* The Ecuadorian government decided to support the suit in 1997.

The lawsuit was filed in White Plains because the plaintiffs alleged that the events

that transpired in Ecuador were contrived from Texaco's corporate headquarters there.

Thirty Oriente Indians presented themselves in court to present the suit which was

registered as Maria Aguinda et al v. Texaco.Texaco was sued for "pollution of land and

rivers in the Amazon Basin" and charged that its primitive waste disposal systems had

created conditions that could lead to a public health crisis.32 It sought over $1.5 billion in


32 "Ecuadorean Indians sue Texaco for Damage to Rivers. Land in Amazon Basin." BNA International
Emnironment Daily 5 November 1993: 2.








compensatory and remedial damages. A lawsuit by foreigners in the United States for acts

committed abroad is permitted by the Alien Tort Victims Act, which allows aliens to sue

U.S. entities for any personal injury they may have caused. Texaco respondeded that it did

nothing wrong and complied with industry practices of the time and with Ecuadorian

regulatory codes.33

The organizations participating in this effort were a combination of indigenous and

environmental groups. The indigenous groups included the Coordinadora de

Organizaciones Indigenas de la Cuenca Amazonica (Coica), the Confederaci6n de

Nacionalidades Indigenas del Ecuador (Conaie), the Confederaci6n de Nacionalidades

Indigenas de la Amazonia Ecuatoriana (Confeniae), and the Federaci6n de Comunas

Uni6n de Nativos de la Amazonia Ecuatoriana (Fcunae). Among the environmental

groups participating were the component members of the Campana Amazonia por la Vida

including Acci6n Ecologica. They organized the first boycott of Texaco in Ecuador,

known as "Texaco week" from July 5 to 9, 1993. The goals of the boycott were: to raise

public awareness, to make Texaco responsible for a clean-up of the areas affected, to

make public the HBT Agra audit (which was believed at that time to relieve Texaco of

responsibility), and to hurt Texaco financially through boycotts not only in Ecuador but in

Norway. There were additional anti-Texaco efforts in England, Denmark, and Holland.34


33 See Ricardo R. Veiga, Vice President Texaco Petroleum Company. "To the Editor," The New York
Times 6 February 1998: A22 and "Ecuadorean Indians Sue Texaco for Damage to Rivers, Land in
Amazon Basin." BNA International Environment Daily 5 November 1993: 2.

34 The independent HBT Agra was initially believed to have been another Texaco and government public
relations maneuver aimed at diffusing growing public outcry over Oriente contamination. Part of the
problem was that the parameters had been set by the government and these did not include local input into
the audit. However. the audit was apparently done professionally within the parameters placed. See
Rainforest Action Network. "Ecuadorian Indigenous People. Environmental Acitivists call for
International Boycott of Texaco." Urgent Appeal 5 August 1993 posted to Native Web








Texaco customers were urged to return their credit cards with a letter stating that "(I)

refuse to purchase your products until Texaco cleans up their mess in the Ecuadorian

Amazon...Where clean up is not possible, the company should provide full

indemnification to the individuals and communities affected...and to install injection wells

and pollution controls to avoid further environmental disasters in the future."35

The boycott attracted initial public attention to the events that had occurred in

Ecuador. The lawsuit added a much more potent element because it pitted the poor

Oriented Indians against one of the largest and most powerful corporations in the world.

The plaintiffs chose to sue in the United States for several stated reasons. First was

because they felt they would not receive a fair hearing in Ecuador because of Texaco's

influence there, the slowness of Ecuador's legal system, and endemic corruption.

Moreover, Ecuador's judiciary has little experience with this kind of issue which could

work in Texaco's favor. However, it should be noted that the difficulties with Ecuador's

judicial system could work both ways. The presence of corruptible judges does not

necessarily mean that they would actually be corrupted--especially in light of the Foreign

Powers Corruption Act. Later litigation in Ecuador on a variety of issues shows that the

judiciary, for all its failures, cannot avoid sanctioning patent violations of the law and is

capable of going against powerful interests. Moreover, Texaco opponents are not

necessarily all NGOs and activists. As shown by the position taken by the Petroecuador's



www.nativeweb.org and Glenn Siitkes, "The People vs. Texaco" North American Congress on Latin
America (1994).

35 Rainforest Action Network. "Ecuadorian Indigenous People, Environmental Activists call for
International Boycott of Texaco." UrgentAppeal 5 August 1993 posted to Native Web
www.nativeweb.org.








Environmental Protection Unit and the current government's hostile stance towards the

company, it is also possible to develop enemies within players in the industry.

Nevertheless, corruption in Ecuador's judicial system raises poses uncertainties that some

organizations are not willing or capable of affording. As Dr. Rene Ortiz observes,

"demanding Texaco in the United States for damages is a recognition of a corrupt and

unreliable judicial administration in Ecuador."36

Another reason for the venue was the attention that the lawsuit would receive in

the press and in the industry. The lawsuit was a public relations bonanza for

environmentalists. Texaco's dumping of millions of gallons of crude oil and toxic waters in

such ecologically sensitive areas was the perfect example of a corporation operating

without regulation and causing vast damages. Coverage of the suit and Texaco's

contamination of the Oriente was significant in The New York Times, The New Yorker, The

Oil Daily, North American Congress on Latin America, El Comercio, El hUniverso,

Diario Hoy, in addition to the publications of a large number of environmental groups.

Press coverage continues to this day, with articles reporting on the environmental damage

provoking a response from Texaco in its "to the editor" pages.

Texaco now finds itself consistently on the defensive, as illustrated by the presence

on its web site of an area dedicated to the environment, including updates on the situation

in Ecuador. Texaco's position on the issue has always been the following:






36 Personal interview with Dr. Rene Ortiz. ex Secretary General of the Organization of Petroleum
Exporting Countries (1978-1982), Quito, Ecuador. 15 July 1997.








Texaco was a minority owner with Petroecuador, the state oil company,
in an exploration and production consortium...Texaco was in full compliance
with environmental laws and regulation, and the state oil company and the
Government approved all investments and operations. After concluding
operations in 1990, Texaco undertook a remediation program with the
approval of Petroecuador and the Government.37

And the company views its presence in Ecuador as environmentally sound in an official

statement on the issue: "...Contrary to the impression conveyed, Texaco Petroleum

Company (Texpet) conducted its business with the utmost care and concern for the

Ecuadorian rainforest and the people who live there..."38 In the same statement, Texaco

Petroleum Company president Janet Stoner adds that "As a company, we can look at our

record in Ecuador with great pride...We conducted a successful business operation, while

also protecting a fragile environment and providing major benefits to the people."39

However, there is widespread acceptance in Ecuador that Texaco has polluted its

areas of operations in the Oriente extensively. In addition to the previously discussed HBT

Agra audit, the analysis by Petroecuador's Environmental Protection Unit, and

Kimerling's study, there was extensive media coverage in Ecuador showing damage on

television, newspaper stories, and individuals familiar with the industry. Although qualified

as an "allegation," coverage notes that contamination exists and was caused by private

multinational energy companies, referring to time periods when Texaco was the only

company operating on a large scale. Environmentalists speak freely in the media. For

example, Fundaci6n Natura's former executive director, Dr. Roberto Troya in discussing


7 Ricardo R. Veiga. Vice President Texaco Petroleum Company. "To the Editor." The New York Times 6
February 1998: A22

38 Texaco Petroleum Company, "An Update on Ecuador." www.texaco.com.

39 Texaco Petroleum Company. "An Update on Ecuador." wvw.texaco.com.








future oil concessions notes that "we believe that we cannot fall into the mistakes of the

past, we think that the lessons lived with Petroecuador, as well as Texaco, and other

companies both domestic and foreign, should open our eyes and the government will need

to make serious decisions to avoid that the damages...will be repeated in other parts of the

country."0 Others are even more direct, with Dr. Rene Ortiz calling Texaco's

contamination "malpractice" and Oscar Garz6n noting that there was either "bad practice,

intention, or faith (mala fe)" in the way Texaco conducted itself environmentally.41

Overall, there is widespread acceptance that Texaco's environmental controls were faulty,

but that the state is partly to blame as well because of its majority stake in Texaco's

Ecuadorian operations.

The suit was also important in that it shed some light on how United States courts

view international environmental agreements. Under the Alien Torts Victims Act, a breach

of international treaty needed to be shown in order to proceed against Texaco. However,

the treaties on sustainable development are agreements and at best constitute a--non-

treaty--international consensus. Nevertheless, such agreements are now treated by United

States courts as the "sober second thought of the (international) community" that all law

ultimately rests on.42 Greater strength is added to such agreements in United States courts

when they concur with "domestic law and its objectives."43



40 Quoted in El Universo, "Contaminaci6n en el Oriente." El Universo 2 March 1994: El Pais 1.

41 Personal interview with Dr. Rene Ortiz. ex Secretary General of the Organization of Petroleum
Exporting Countries (1978-1982). Quito. Ecuador. 15 July 1997 and personal interview with Oscar
Garz6n, Minister of Energy under the Borja administration. Quito. Ecuador. August 1997.

42 Aguinda v. Texaco 17.

3 Aguinda v. Texaco 17.








The Rio Declaration of 1992 was presented by the plaintiffs as an agreement which

Texaco did not comply with, and it was deemed the most pertinent of such documents by

the court because it constitutes a broad guideline on what sustainable development is and

the role of the state in its promotion. On this issue, the judge noted that agreements such

as the Rio Declaration eventually become international law through "accretion." By this

process, as more countries incorporate the principles, rules, and norms of the agreement

into their own legal systems and regulatory codes, they become international law since the

behavior that the declaration seeks to correct becomes increasingly unacceptable. There is

increasing acceptance that this is indeed happening among legal scholars and some

political scientists, who note the rapid proliferation of environmental legislation worldwide

regardless of whether the state favors them or not. Latin America has been one of the

regions that has seen rapid development of environmental protection codes, in spite of the

professed opposition of some governments to such regulatory additions or changes.

Treaties such as that on Climate Change signed in Kyoto in 1997 will only strengthen

previous agreements. However, the judge observed that for the purposes of the suit, the

Rio Declaration was not relevant because it was not a treaty to which the United States

was a signatory country, a prerequisite for conducting a tort trial in the country under the

Alien Torts Act.

A controversial position was that assumed by the Ecuadorian state in support of

Texaco during the first suit in 1994. The Duran-Ballen administration presented an amicus

brief (friend of the court) asking for the suit's dismissal. The brief argued that if such a

trial were to proceed it would be a disincentive for foreign investment in Ecuador because

firms expect such problems to be resolved through the Ecuadorian judicial system and not








United States courts. The judge noted the difficulties confronting countries such as

Ecuador which require capital to develop:

Developing nations such as Ecuador benefit from foreign investment but
are injured by environmental pollution. As indicated by the amicus brief, in
order to attract investment such countries often seek to create the most
favorable climate possible....44

But the judge also noted that the government could create a favorable investment climate

through investor protection, adding that "any disincentive caused by exercise of

jurisdiction here (in the United States) would not be to investment in Ecuador...but to

conduct likely to violate applicable legal norms regardless of the site of the property

affected." The judge recognized the power of the suit, which environmentalists realized as

well. A lawsuit or even a threat of lawsuit in the United States could have a deterrent

effect against contamination.

The Texaco suit was ultimately dismissed in November 1996 on the grounds that

Ecuador, not the United States, was the proper forum for the trial, because the

participation of Petroecuador and the state was deemed necessary, and because the

plaintiffs had failed to show that Ecuadorian courts could not handle the case.45

Petroecuador and the state's participation was considered necessary because of their role

as majority stakeholders in Texaco's Ecuadorian operations. Immediately thereafter, the

Ecuadorian government entertained the idea of joining the suit against Texaco. It

resurrected the case once more in 1997 when it finally joined. This in spite of warnings

from Texaco that noted it would sue Ecuador's government if it went ahead, and would


44 Aguinda v. Texaco 19.

45 Mark O. Donoghue and Eduardo Brito, "Texaco's Strategy in Ecuador," International Commercial
Litigation November 1997: 42-44.







be responsible for 62.5% of any damages awarded (Ecuador's share in Texaco's

operations there).46

Texaco, however, has already agreed to clean up part of its area of operations and

to settle with regional municipalities as part of a little publicized May 1995 deal with the

government. Municipalities such as Lago Agrio received $1 million from Texaco without

an admission of guilt. Texaco has not escaped the stigma from its Ecuadorian operations,

however. At its annual shareholders meeting on 13 May 1997, in Rye Brook, New York,

protesters--some from the Rainforest Action Network--focused attention on the

Ecuadorian allegations as well as problems with contamination and deforestation in

Myanmar. They were joined by members of the Rainbow Coalition upset at racial

discrimination at the company.7



The Maxus Controversy

In 1991, Maxus was awarded a 200,000 hectare concession in Block 16, one of

the most environmentally sensitive areas of the entire Oriente. It is also the home of the

Huaorani indigenous group who were adjudicated that same land in 1990 by the

government of President Rodrigo Borja. Block 16 is simultaneously the location of Yasuni

National Park, which was declared a reserve because of its extraordinary bio-diversity.

Maxus was granted the concession by the Borja administration in 1991. Maxus is a

Dallas based oil exploration and production company which has operations in the United

States, Asia, and Latin America. The root of the conflict lies in the fact that, since Block


46 "Texaco Eyes Suing Ecuador." The Oil Daily 30 April 1997: 5.

47 "Texaco Meeting Is Hit by Protests." The New York Times 14 May 1997: D2.








16 is legally Huoarani territory, the Huoarani are supposed to have the right to determine

how the land under their control is used. At least at the beginning, they were hostile to oil

exploration in their lands and refused to negotiate a deal after prior experiences with

Conoco attempts to operate in their area. Maxus, however, decided to proceed regardless,

and seismic exploration began in 1991 and was completed in 1992. On 28 January 1992

Maxus and the government of president Borja signed a letter of understanding which

contained some provisions for protection of the Huaorani--apparently without consulting

the Huaorani.4 However, the building of roads and the realization of its consequences led

to a bitter dispute between environmentalists and indigenous groups against Maxus.

The dispute reached Quito in October 1992, when Conaie issued a press release in

which they accused Maxus of invading private property. In it, they reveal their greatest

fears, oil companies and settlers. They explicitly accused settlers who bring "their

"civilization," destroy everything in their path: our culture, our territory, our lives."49

Indigenous leaders from the Oriente and those in Quito as part of Conaie sought to meet

with the president of Petroecuador, the president of Congress, Maxus executives at their

Quito offices, and the Minister of Energy. They were able to meet with the Ecuadorian

government representatives. The president of Petroecuador offered to search for a

"reasonable solution" after having met with Conaie, Confeniae, and Onhae representatives

on 27 October 1992. The indigenous representatives also met for two hours with Carlos

Vallejo, then president of Congress, who also offered his support but without noting any


4 Ivan Narviez. Huaorani vs laxus (Quito: Corporaci6n de Estudios y Promoci6n Cultural. 1996)
Annex 7.

49 Confederaci6n de Nacionalidades Indigenas del Ecuador. "The Huaorani People Will Stay in Quito
until their Demands are Met." Press Release 28 October 1992: 1.







specific action that he would pursue. However, they were less fortunate in meeting with

Maxus executives. After appearing at their offices, they not only refused to receive the

indigenous representatives but also called the police and had them removed. In order to

establish negotiations, Maxus demanded that the indigenous representatives had to dialog

through its public relations specialist, Rosana Fayeta, who was accused of continuously

attempting to undermine the unity of the indigenous groups. The dispute began to receive

worldwide attention, with journalist Joe Kane, formerly of the Rainforest Action Network,

publishing two extensive and damning articles in the New Yorker magazine. In them, he

depicted a two-faced Ecuadorian administration (that of president Duran-Ballen) that,

while professing support for the indigenous cause, conspired against them.50

Negotiations between the company and the Huaorani dragged on as they accused

Maxus of using gifts to divide the loyalties of the Hiaorani. Accion Ecologica released a

statement in which they alleged that Maxus engaged in the destruction of Hiaorani

culture, bio-prospecting (granting educational, hence pharmaceutical institutions access to

local biological organisms), deforestation of 29,355 hectares of primary rainforest, leaving

toxic debris on roads, and releasing toxic fluids--among other allegations.1 On 19 April

1995, the Huaorani peacefully occupied Maxus' installations, accusing the company of

failing to meet the terms of the agreement signed with the government and lied about

certain environmental impacts. Besides the allegations made public by Accion Ecologica,

they were also upset at the fact that the agreement did mention, cultural, and economic



50 See Joe Kane. "With Spears from All Sides." The New Yorker 27 September 1993: 54-79 and Joe Kane.
"Moi Goes to Washington." The New Yorker 2 May 1994: 74-81.

51 Amazonia por la Vida. "Maxus and the Ecuadorian Amazon." Acci6n Ecologica Bulletin 21 April
1995:1.








impacts and the contracting of Brazilian transnational Andrade Gutierrez for road and

infrastructure development.52 Andrade Gutierrez had been sanctioned in Brazil for bribing

government officials. 3 The Huaorani wanted the following:

* Protection of their organizational, cultural, and territorial rights.

* Their participation for decisions affecting the areas which they influenced.

* Guarantees of their economic, social, and organizational rights.

* Consolidation of the integration process with the rest of Ecuadorian society on

a basis of mutual respect.

* Economic participation on just terms for their integral and autonomous development

* Overall, called for respect of their human rights and dialog with the actors involved.54

The Huoarani had the most to lose. Among the indigenous groups living in the

Oriente, the Huaorani were among the last to establish contact with Ecuador (in the

middle of the 20th century), a country they were technically citizens of. Their main initial

contact was with American missionaries, some of which were killed in encounters with the

Huoarani whom they sought to convert.55 For the last 40 years, though, they had been

able to live relatively isolated from other inhabitants of the Oriente and from the state.

The presence of oil in their territory led to new threats, particularly the presence of

workers, settlers, and other, much larger indigenous groups. Two processes were



52 Onhae. "Pueblo Huaorani se Levanta en Defensa de sus Derechos," Boletin de Prensa 19 April 1995: 1.

53 Onhae. "Pueblo Huaorani se Levanta en Defensa de sus Derechos." Boletin de Prensa 19 April 1995: 1.

54 Onhae. "Pueblo Huaorani se Levanta en Defensa de sus Derechos." Boletin de Prensa 19 April 1995: 1-
2.

55 See Ivan Narviez. Huaorani vs Maxus (Quito: Corporaci6n de Estudios y Promoci6n Cultural. 1996)
32-34 and Joe Kane. "With Spears from All Sides." The New Yorker 27 September 1993: 57-58.







particularly threatening concerning Maxus--the impact that the oil exploration and

production would have on their environment and settlers that would come in whenever the

company built roads. These settlers would potentially be mestizos or Quichna Indians,

with cultural traits and organizations that have dominated smaller indigenous groups.56 A

process of"quichuaizaci6n" of the Huoarani has already had an impact, with their outlook

on material goods, their relationship with the state, and their political system being

significantly altered as a result.57 The threat of contact with settlers can be potentially

devastating, since such contact with the Ecuadorian nation will also mean incorporation

into the world capitalist system, one into which they will probably enter in a position of

dependency and poverty.58

To further their own interests, the Huoarani organized the Organization of the

Huoarani Nation of the Ecuadorian Amazon, or Onhae. Originally led by Huaorani men

Moi, Amo, and Enqueri, the organization forged an alliance with the Confeniae and

Conaie. Together, they demanded: a moratorium to Maxus' oil exploration in Block 16,

suspension of work on oil roads, and the right to manage their own territory.59

The road in question consisted of a 150 kilometer freeway connecting main oil distribution

facilities with Maxus sites in Block 16. The construction of this freeway came under fierce


56 Ivan Narviez. Huaorani vs Maxus (Quito: Corporaci6n de Estudios v Promoci6n Cultural. 1996)
79-85.
57 Such process of quichuaizaci6n has also occurred with the Aucas. another Amazonian indigenous
group.
58 See Ivan Narviez. Huaorani vs Maxus (Quito: Corporaci6n de Estudios y Promoci6n Cultural, 1996)
81 and Judith Kimerling, El Derecho del Tambor (Quito: Ediciones Abya-Yala, 1996) 193-202.

59 Confederation of Indigenous Nationalities of Ecuador. "The Huaorani People will Stay in Quito Until
their Demands are Met." Press Release 28 October 1992.







attack because it would destroy large swaths of rainforest as workers received the right to

cut and sell forest woods a total of 60 meters deep on either side of the road. The fauna of

the area would also suffer as habitats and hunting grounds were physically altered.

Deforestation, pollution, erosion, and sedimentation would also alter the ecosystem in the

areas affected. At the time, all freeways built in Ecuador were free and accessible to the

public. Even if access to the freeway were controlled, and military personnel were to

guard it, that would still not avoid the problem of settlers during the construction phase.

Moreover, the military itself has traditionally been a significant source of settlers.

The freeway was approved by the Ecuadorian government. Activists in the area

immediately mobilized to peacefully block construction crews and their machinery.

Congress, however, was contemplating a moratorium on all exploration in the area and

this led to appeals pressure Congress, the president of Ecuador, and Maxus offices in

Quito and Dallas.

The response from activists was sharp. YPF (Maxus' parent company) CEO

Roberto Monti received a bouquet of oil drenched roses symbolizing the contamination

that Maxus had allegedly caused in Block 16. It was presented to him by activists from

Acci6n Ecologica; pictures of the event show an upset Monti receiving the flowers.

The response of Maxus to criticism was one of accommodation. Maxus

implemented several policies aimed at reducing pollution and colonization. It should be

noted that the greatest efforts at satisfying criticism began in 1995, when Decree 2982

became law and Maxus was acquired by YPF of Argentina. By renaming Maxus Ecuador

Inc. to YPF Ecuador Inc. in 1997, an act which did not occur with the rest of Maxus'

operations around the world, YPF was apparently trying to break with the negative image







associated in Ecuador with the Maxus name. This however, was denied by YPF Ecuador's

public relations coordinator, Lucia Rivas, noting that YPF Ecuador has addressed public

concerns about its operations. 60

Several innovations were adopted by Maxus (YPF Ecuador Inc.). One was the

construction of roads using Geotextil. Geotextil is a highly resistant material designed to

contain asphalt. This minimizes the amount of spreading of asphalt and permits the

clearing of a minimum amount of land when compared to non-Geotextil roads, requiring

only 8 meters of road (2 meters to the sides). Moreover, the use of Geotextil eliminates

the need for hardwoods as a base for the roads. The use of these woods, obtained by

cutting down trees in the rainforest, leads to enormous loss of vegetation, as much as 30

meters to either side of a road. The longer the road, the greater the amount of

deforestation. Geotextil essentially replaces the wood in road construction. This is an

expensive process; however, environmental groups applaud the use of Geotextil. Another

innovation is the underground installation of oilducts. They are inserted into channels that

are filled with compact granular filling. This translates into less exposure for the ducts to

the elements, earthquakes and minimizes the impact of leakage, reducing the risk of

contamination for the rivers of the area. The underground placement ofoilducts reduces

the deforested area from an average 60 meter tract of forest to approximately 10 meters,

representing an enormous saving of vegetation. Furthermore, Maxus placed the ducts

underground immediately to the side of the road, reducing costs for the company and the




60 Personal interview with Lucia Rivas. Public Relations Coordinator. YPF Ecuador Inc.. Quito. Ecuador,
21 July 1997.







total amount of forest cleared. Maxus also adopted a policy of re-vegetating with native

plants the areas that are cleared and are not used for roads.

A final innovation adopted by Maxus is the practice of perforation in clusters.

Cluster perforation involves the construction of one platform that drills twelve wells into

the ground. Conventional methods would require the construction of twelve individual

platforms, each with its own support facilities and roads, with the corresponding threat of

colonization and deforestation. In cluster perforation, wells are reached by the use of

special machinery capable of directional (lateral) perforation. This way, the amount of

deforested lands is reduced by approximately 70%. The toxic underground "formation"

waters are dealt with by Maxus. When these waters are extracted from their underground

reservoir, they are re-injected into the same reservoir they came from through machinery

located at a different location.

The Maxus innovation that has received the most applause, however, is its strict

control of colonization in the areas under its concession. Maxus simply does not allow

settlers from outside the area to enter its concession. Its guidelines are clear:

* Use of ferries to cross the Napo River in lieu of bridges.

* Establishment of control points at strategic locations for settler control.

* Indigenous cooperation as park keepers and supervisors, both Quichua Huaorani.

* Identification cards for employees and contractors sensitivity training concerning

policies for the respect of the indigenous population and their territory.








* Approval for the entry into the Maxus concession to be granted by INEFAN and

the armed forces.61

The president of Maxus Ecuador in 1994, William Hutton, noted:

This operation is placed within the framework of sustainable development,
combining the most advanced technologies in perforation, production, and
transport of heavy crude with the most sophisticated programs of environmental
protection and of absolute respect for the indigenous communities that inhabit
the areas of influence.62

Testimony to the change of behavior by Maxus came from former Energy Minister

Garzon who noted that because of its environmental policies, its costs had increased

substantially and were being offset by cuts in other areas of its operations--something

which he did not approve of.63 Lucia Burgos of Fmdaci6n Natura also approved of the

company's efforts, particularly the use of Geotextil and its strict policy of denying access

to the areas under its concession without proper clearance since these efforts reduce the

possibility of colonization of Block 16.64 Perhaps the strongest indication that there has

been some change by YPF, particularly concerning pollution and deforestation, has been

the fading away of criticism from activists. Public appeals and literature on the issue of

YPF Ecuador's operations practically disappeared by 1996, and the company's

headquarters in Quito is no longer surrounded by groups of protesters.


61 Petroecuador and Maxus Ecuador Inc.. "Nueva Era Petrolera en el Ecuador." Un Nuevo Modelo de
Desarollo 21 April 1994: 14.
62 Petroecuador and Maxus Ecuador Inc.. "Nueva Era Petrolera en el Ecuador." Un Nuevo Modelo de
Desarollo 21 April 1994: 3.
63 Personal interview with Oscar Garz6n. ex Minister of Energy under the Borja administration. Quito.
Ecuador. August 1997.
64 Miss Burgos adds. however, that any oil operation will produce at least a minimum of contamination.
Personal interview with Lucia Burgos. Fundaci6n Natura Coordinator for the Provincial Commission for
the Monitoring of Oil Activities in Napo Province. Quito. Ecuador. 11 July 1997.








Nevertheless, YPF Ecuador continues to receive some critiques in the handling of

its relations with the Huoarani. One charge is that it seeks to create a culture of

dependence among the Huaorani for material goods, thereby securing their acquiescence

to oil exploration; another is that it seeks to divide the Huaorani into two groups and

isolate them, which explains YPF Ecuador's policy of denying entry to individuals

without clearance. These arguments are posed by the head of Petroecuador's

Environmental Protection Unit, Ivan Narvaez, and similar ones within other social-

environmental conflicts are posed by Anamaria Varea of the Facultad Latinoamericana de

Ciencias Sociales Sede 01uito.65

The issue of creating dependency among the Huaorani is complex. The Huaorani

and Onhae are split between its leaders Moi and Enqueri, the current leader of Onhae. Moi

advocates a split from YPF Ecuador to secure the traditional way of life of the Huaorani,

whereas Enqueri believed that the Hzuaorani could benefit economically from a

relationship with the company. Enqueri, once he replaced Moi as the president of Onhae in

1994, agreed to Huaorani support for YPF Ecuador in exchange for a wide variety of

services, primarily medical care, education, and community facilities. As Narvaez himself

notes, the Huaorani had been deprived of basic social services by the state and YPF

Ecuador came to fill that role. However, that role also gives the company powers similar

to that of the state, in which it exchanges services and goods for obedience to its

authority, an argument echoed by Varea. It does seem clear, however, that the Huaorani

entered the agreement on their own free will and they demanded the services in exchange


65 See Ivan Narvaez. Huaorani vsMAaxus (Quito: Corporaci6n de Estudios y Promoci6n Cultural. 1996)
62-67 and Anamaria Varea. "El Manejo Alternativo de Conflictos." in Marea Negra en la Amazonia. ed.
Anamaria Varea (Quito: Ediciones Abya Yala. 1995) 150-162.




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