BIC Letter to the IDB Board of Executive Directors, Camisea Project

1 December 2003

July 24, 2003

Board of Executive Directors
Inter-American Development Bank
1300 New York Ave., NW
Washington, DC 20577

"Without a committed sponsor, it is extremely difficult to achieve the desired environmental and social outcomes and involves enormous costs on the part of the specialists...Therefore, because the sponsor is key…Assessing commitment and capacity on environmental and social issues should be a fundamental aspect of the investment department's due diligence of a prospective sponsor….(whose) demonstrated commitment to social and environmental due-diligence is the key determinant for Safeguard Policy effectiveness and impacts." -- Report of the IFC's Compliance Advisor Ombudsman (CAO), "A Review of IFC's Safeguard Policies: Core Business: Achieving Consistent and Excellent Environmental and Social Outcomes," January 2003, p 6-8

Dear Executive Director:

As the Board date for the final vote on the Camisea Natural Gas Project loan proposal approaches, we want to emphasize the importance of closely scrutinizing the track records and reputations of the project sponsors on social and environmental due diligence, as well as financial strength, as the best way to predict the potential success or failure of any loan conditions the IDB may be considering for the project.

Given the complexity of social and environmental concerns with the Camisea project, and given the less-than-exemplary corporate histories of the companies that form Transportadora de Gas de Peru (TGP), we are concerned that even the best of intentions by the IDB to bring additionality to the project are unlikely to be effectively carried out by the project sponsors. As such, approval of this project would carry profound implications for the future reputation of the IDB and for the reliability of the due diligence carried out by IDB's Private Sector Department (PRI), which is under closer scrutiny as a result of IDB involvement in the Termoelectrico del Golfo project [Note:1].

The social, environmental, and financial complexity of the Camisea Project is much greater than that of the Termoeléctrica project, and consequently it is critical to sincerely question whether TGP's member companies have shown themselves to be trustworthy partners both on environmental and social issues as well as financial strength.

Decision makers at the IDB would be wise to consider:

Pluspetrol (Argentina) Company operations in Peru:

• In October of 2000, a 5,500 barrel Pluspetrol oil spill contaminated the Marañon River of Peru, bordering the Pacaya-Samiria Reserve--Peru's largest protected area--and affected 10,000 local inhabitants from 41 rural indigenous communities, according to State officials. The contamination damaged crops, drinking water, and fishing supplies and resulted in serious and continuing health issues for the Cocamas-Cocamillas people. The emergency relief food provided by Pluspetrol was furthermore of low quality, and provisions were not enough to satisfy basic dietary requirements. The few who received company food had to sign a document of "gratitude" to Pluspetrol for the support received. There were also accusations that Pluspetrol forged some local community seals on such letters before presenting them to the authorities. (World Rainforest Movement bulletin Nº 43, February 2001.
• In November of 1999, a Pluspetrol-operated oil pipeline broke in the Pucayacu ravine of Peru, spilling an unknown quantity of oil into the Chambira River. A number of Urarina indigenous people suffered sickness after their water supplies were contaminated by the ensuing oil slick. (World Rainforest Movement bulletin Nº 43, February 2001)
• In oil blocks 1-AB and 8-8x in Peru, Pluspetrol has dumped millions of gallons of toxic wastewaters containing high levels of chloride and heavy metals into nearby rivers--particularly the Corrientes, Tigre, and Piedra Negra Rivers--using outdated technology and methods inherited from Occidental Petroleum and Petroperu (Pluspetrol has admitted to this pollution). These practices, which violate both Peruvian law and international oil industry standards, have resulted in serious health issues for the Achuar, Aguaruna, Urarina, Candoshi, Quichua, and other indigenous peoples. (Patricia Caffrey, "An Independent Environmental and Social Assessment of the Camisea Gas Project," April 2002: 39)

Company operations in Bolivia:

• In Bolivia, Pluspetrol has been the target of protests and accusations by the Guaraní indigenous federation, Asamblea del Pueblo Guaraní (APG), for the company's drilling activities in the Charagua Norte region of the Bolivian Chaco. A May 2000 report published by APG cited health problems caused by the poor disposal of solid wastes in work camps situated near local communities, and the complete lack of community participation in the drafting of the Environmental Impact Assessment. ("Un Ojo en la Repsol", Red Alerta Petrolera: May 2000)
• On October 18,1999, Pluspetrol's Madrejones X-1001 gas well, located near the Argentine border in the Department of Tarija, Bolivia, caught fire and burned for 118 days, causing immeasurable damages to the local ecosystem and displacing eight families. Pluspetrol failed to immediately inform the regional authorities of the fire, or to adequately compensate affected populations, who argued that the fire caused a regional drought. The civil organization for the community of Santa Marta further denounced Pluspetrol for threatening to take water from a community lake in attempts to contain the fire. ("Un Ojo en la Repsol", Red Alerta Petrolera: January 2000)
• Pluspetrol is also a member of the Bolivian consortium Empresa Petrolera Andina, which is now under public investigation for charges of fraud, violations of contracts, and illegal sale of gas and oil. The company's general manager, José Martín Moreno, admitted in March of 2003 that some company officials (who were subsequently fired) had favored certain firms in awarding contracts, against company policies. (El Deber: 26 March 2003) The Andina consortium is also involved in controversial drilling operations in Bolivia's Amboró National Park, and in the Chimoré block, especially at the Surubí and Paloma wells, where consultations with local indigenous and colonist groups has been reportedly very poor. ("Un Ojo en la Repsol", Red Alerta Petrolera: November 2000)

Techint (Argentina)

• In Ecuador, Techint is in charge of construction of the controversial 300-km OCP pipeline, which will transport heavy crude oil from Ecuador's Amazon to the Pacific coast. The pipeline Right-of-Way traverses seven national parks and protected areas, including the biologically rich Mindo Nambillo Cloudforest Reserve, and impacts dozens of communities, including at least six different indigenous groups. The pipeline has been at the center of intense public scrutiny, resulting in lawsuits, fines for degradation of protected areas and habitats of endangered species, and numerous protests by Amazonian indigenous groups, settlers, and construction workers. Some of the many grievances against Techint include starting construction of the Right of Way before obtaining permission, illegally cutting in protected areas, and trespassing on private land. (Independent Compliance Assessment of OCP with the World Bank's Environmental and Social Policies, Robert Goodland, 9 September 2002)
• As the lead construction firm on the Argentine NorAndino pipeline, Techint "experienced" a large explosion resulting in "leaping flames" in the Yungas forest of Argentina, an area of critical conservation status and home to indigenous communities as well as the less than 200 remaining endangered Argentine jaguars. (Caffrey 2002: 39)

SK Corporation (South Korea):

• SK Corporation's chairman, Chey Tae Won, was sentenced to three years in prison on June 14 for accounting fraud, by way of inflating the 2001 profit of the corporation's trading arm, SK Global, by 1.5 trillion won ($1.25 billion). SK Global, of which SK Corp owns 38%, currently carries over $5.6 billion in debt. Foreign creditors are currently threatening to push for SK Global's liquidation, casting doubt over the future of SK Corp as well. (Reuters, 27 June 2003)
  * The long-term credit rating of [SK Corp] was lowered from 'BBB-' to 'BB+' (non-investment grade) on May 7, 2003 mainly due to corporate governance and accounting issues. (IDB ESIR for Camisea, June 2003, section 2.18)

Hunt Oil (US):

• Ray Hunt, chairman and CEO of Hunt Oil, is a long-time friend and financial supporter of George W. Bush. He was named finance chairman of the Republican National Committee's Victory 2000 Committee (Cox News, 10 May 2000), and gave at least $90,000 to Bush's two gubernatorial campaigns. Hunt's son, Hunter Hunt, a vice president, was also a member of Bush's presidential Energy Transition Team and an energy adviser during the 2000 presidential campaign. Overall, the company and its employees have given Republican candidates and committees over $500,000 since 1990, according to the Centre for Responsive Politics (Alexander's Gas and Oil Connections, v7#24, 12 December 2002).

Grana y Montero (Peru):

• In August of 1998, an oil spill from a Grana y Montero pipeline on the southern Peruvian coast that juts into the sea to load ships with crude caused a 600-foot-long oil slick that drifted to within nine miles of the world-renowned Paracas Marine Reserve, which is also being threatened by the Camisea Project. (Reuters, 14 August 1998)

Tractebel (Belgium):

• Tractebel, which is building the gas distribution network for the Camisea project in Lima, also constructed the Itá (Rio Grande do Sul/Santa Catarina states) and Cana Brava dams on the Tocantins River of Brazil. For both dams, local populations have charged Tractebel for insufficient and incomplete resettlement and compensation programs that left hundreds of affected families with no compensation. The case of the Cana Brava dam, financed by the IDB, is furthermore currently under review by the IDB's Independent Inspection Mechanism for violations of IDB policies.
• Tractebel also owns 67% of the consortium operating Argentina's NorAndino pipeline, which was previously mentioned for its poor construction by Techint that resulted in a large explosion. (Reuters, 11 March 1998)

Endesa (Spain):

• Endesa Spain's local power generation subsidiary, Etevensa, who in May acquired Electroperu's contract to buy 70 million cubic feet a day of gas from the Camisea project, is currently caught in a tax dispute that may result in a pull-out from the project. Etevensa's acquisition of the contract had been considered "a key factor in the Camisea project securing financing," according to a July 14 BNamericas.com article, as it was the only company that submitted a bid to begin purchasing Camisea gas by the project completion deadline of August 2004. (Etevensa already has a 300 MW thermoelectric plant in the region that could be converted to natural gas.) With the likely pull-out of Endesa, the financial security of Camisea gas end-markets is thus severely threatened, as it is unlikely that any other potential buyer could develop the necessary infrastructure by the project completion deadline.

Halliburton (US):

• Though not part of the downstream consortium, Halliburton is involved in plans for the LNG export facility on the Peruvian coast and is thus a relevant stakeholder company in the Camisea project.
• Halliburton has strong ties to the Bush Administration, as Vice President Dick Cheney was formerly the company's chairman and CEO. Halliburton was recently awarded the largest contract in the Iraq reconstruction front in a closed bidding process. Congressional hearings into the fairness and transparency of that process have recently been requested by Senator Lieberman.
• Halliburton has been the target of a series of class-action lawsuits over allegations of improper accounting practices while the company was under the leadership of Cheney. The lawsuits claim that a new accounting technique used by the company resulted in approximately $534 million in uncollected debts over the past four years being counted as revenue. (Washington Post, 20 July 2002: A1) The Securities and Exchange Commission conducted a high-profile investigation of the allegations, and on May 30, Halliburton agreed to pay $6 million in settlements, denying any wrongdoing. (Associated Press, 30 May 2003)
• In 1996 and 1997, Halliburton's subsidiary European Marine Contractors (EMC) helped lay the offshore portion of the notorious Yadana pipeline project in Burma, which runs from offshore, through Burma and into Thailand. The project has caused numerous environmental damages and human rights abuses--the Burmese military, in providing security for the project, murdered, raped, tortured, force-relocated, and employed in slave-like conditions thousands of villagers--for which consortium leader Unocal will go to court this September in a high-profile human rights lawsuit. (Halliburton's Destructive Engagement, Earthrights International 2002)
• In Nigeria, Halliburton has been accused of complicity in the shooting of a protestor by Nigeria's Mobile Police Unit while protecting company property. (Earthrights International 2002)
• In Indonesia, the contract for Halliburton's engineering subsidiary Kellog Brown & Root was cancelled by the government for charges of corruption and the use of collusive practices with former president Suharto's family. (Earthrights International 2002)
• Halliburton's subsidiary Kellog Brown & Root also performed work on pump stations and other facilities associated with the infamous Chad-Cameroon oil pipeline project. The project, financed by the World Bank, is widely cited for its numerous environmental impacts as well as human rights concerns associated with its social impacts. (Earthrights International 2002)
• Halliburton's subsidiary Brown and Root-Murphy was part of the four-company consortium that constructed the World Bank and IDB-financed Bolivia-Brazil natural gas pipeline, which has been widely critiqued for its numerous environmental and social impacts and inadequate mitigation programs. (Earthrights International 2002)

Examining the track records of these companies, it is evident that their overall commitment to social and environmental due diligence, not to mention their financial solvency, is questionable at best. The IDB would be best served to save its private sector investments for companies that have a proven commitment to upholding the purported values of the Bank, and the IDB would probably also be well advised to develop a list of companies with which it will not do business, as has been done recently by the World Bank. With these guidelines, the IDB might actually bring additionality to a project as well as catalyze further corporate commitment to social and environmental issues among potential project sponsors in the future.

Sincerely,

Amy Gray
Director, Latin America Program
Bank Information Center

Notes:

1. Concerns about the thoroughness and accuracy of the due diligence carried out by the PRI stem from IDB financing of the Termoelectrico del Golfo project. The original loan was made to Alstom/Sithe for a single 250 megawatt power plant. However, IDB money financed the construction of two 250 megawatt plants on the site, there is no EIA that captures the cumulative impacts of both plants, and the owner of the second plant is Industrias Peñoles S.A de C.V., a silver-mining company notorious in Mexico for severe and widespread health impacts resulting from lead poisoning in Torreon, department of Coahuila. Since 1999, this information has been in the public domain: http://www.texascenter.org/publications/torreon.pdf. It is unclear how the due diligence conducted in preparing the IDB's loan to Alstom/Sithe did not discover Piñoles' involvement in the project or the existence of a second power plant, nor is it clear why this information was not immediately made available to the public.