Yasuni National Park: To Excavate or Not?

Enviromental Experiment

In 2007, Ecuadorian president Rafael Correa announced a proposal to protect part of Yasuini National Park from exploration for oil deposits. Speaking at the United Nations, he asked the international community to pledge USD 3.6 billion toward the initiative, which would account for half of the potential oil revenues Ecuador could receive from developing this area of the Amazon rainforest. Six years later, the international community had donated, through a U.N. administered trust, only USD 13 million. In August 2013, Suarez scrapped the initiative, and the Ecuadorian government began putting out tenders for oil exploration of the Ishpingo-Tambococha-Tiputini (ITT) block of Yasuni National Park.

ParaSol, an international oil and gas company with corporate headquarters in Madrid, Spain, and U.S. headquarters in Houston, Texas, has the opportunity to bid on the exploration rights of the ITT block. It would like to submit a proposal in response to the 11^thround oil exploration and development tender released by the Ecuadorian government. Lucia Moreno is a risk analysis supervisor for ParaSol. Her manager has asked her to lead a team tasked with analyzing the risks associated with this venture, developing a risk analysis report and providing recommendations for going forward.

Risk Research

ParaSol is a world leader in corporate social responsibility (CSR) and was named the "most transparent and sustainable oil company in the world" by the Dow Jones Sustainability Indices. Its processes are informed by the work of its Risk Management Policy Division, which has developed standards and protocols related to entering and working in developing countries all over the world. In addition, ParaSol employs a Community Relations Team, which is responsible for communicating with local stakeholders such as community groups and indigenous people, whose lives are affected by Parasol's development activities. Lucia's team will begin by researching the region and its history of oil exploration and development.

The Risk Analysis Team's Initial Findings

Yasuni National Park is known for its incomparable biodiversity, and researchers worldwide have declared it the most diverse area in South America and possibly the world, according to the openaccess scientific journalPLOS ONE. Most notably, it is home to over 4,000 plant species, 173 types of mammals and many indigenous tribes living in small communities. Two tribes, the Tagaeri and Taromenane, have chosen to live in voluntary isolation from the outside world and are some of the only isolated peoples on Earth.

Due to the unique qualities of the area, environmentalist and community groups have put up strong opposition to any development of the park, especially activities related to oil extraction. One environmental group, YASunidos, started a national campaign and collected 757,000 signatures on a petition to halt any action by the Ecuadorian government. The government recognized only 359,761 signatures, which did not meet the threshold 600,000 signatures required for a petition's success.

Indigenous communities are also protesting the potential contracts. The controversial Amazon blocks being tendered overlap the territory of the Spara and Kichwa peoples. The Spara is a threatened group of only 300 people, officially recognized by UNESCO as an "Intangible Cultural Heritage of Humanity". In accordance with Article 57 of its constitution, the Ecuadorian government claims it consulted the Spara prior to releasing the tender, but the Spara people disagree. They have taken the discussion one step further to claim they will not recognize any agreement that provides access to their territory.

There is a history of failed contracts in this region. In 1986, Tesico Inc. signed an agreement with the Ecuadorian government to explore a portion of Yasuni National Park. Within three years, the company had found oil deposits that would yield 100 million barrels of oil, and it proposed to build two extraction pipelines and a 120-kilometre-long road. Almost immediately, a local indigenous group and two environmental organizations issued warnings to Tesico against exploring and excavating in this sensitive area. One group, RAN, became extremely organized and banded together a number of interested groups. Tesico responded by producing a detailed environmental management plan and, in 1989, formed a team to meet with local stakeholders to discuss development. In the three years it took Tesico to form and activate this team, opposition groups had gained significant momentum and had already won the battle. Tesico decided to withdraw its operations and leave the country. Numerous other companies, including ARNK and Hamilton Resources, have also been forced to withdraw projects from the country due to community and environmental opposition.

There is also the continuous threat of the Zika virus. The virus is prevalent in Mexico, Central and South America, and the Caribbean. Both business and leisure travellers are at risk of catching this virus, which is transmitted byAedesgenus mosquitoes. International medical researchers are endlessly learning about the virus. It is known to cause neurological complications in humans, such as progressive muscle weakness, as well as development issues in infants born to women who are pregnant and have been infected by the virus. The disease can also be transmitted sexually by men who have been infected by the virus. There has been a global travel and health warning to all travellers to the South American region where the Zika virus is active. If awarded the tender, the production and engineering team from ParaSol will be in Ecuador for quite some time for oil exploration. Pre-drilling activities alone could take up to six months.

The Ecuadorian government is in a position to benefit greatly from any agreement for oil extraction in Yasuni National Park. The government is known worldwide for its financial difficulties and is in debt to the Chinese government for many billions of dollars. It is a developing country with more than one-third of the population living in housing with inadequate water and sewage facilities, and more than one in five children suffering from chronic malnutrition. Poverty and underdevelopment in this country sometimes leads to illegal logging and associated water pollution. Ecuador appears to have an environmentally responsible government, developing a "National Plan for Good Living" and acknowledging the "Rights of Nature" in its constitution in 2008.

Problematic Proposition

The ParaSol team meets to discuss the findings and determine next steps. The team members agree the majority of the risks identified are important and will require consideration. They discuss the fact that a smaller company would most likely find this proposal overly risky and decide not to submit a bid. ParaSol, on the other hand, has a project already underway in other parts of the Ecuadorian rainforest, a team of 30,000 employees worldwide, a high performing Risk Management Policy Division employing rigorous standards and methods, and almost unlimited resources. Although the challenges are significant, the team has decided to move on to formulating risk management strategies and proceed from there.

Should the bid and the ensuing project be successful, ParaSol stands to make multibillion dollar profits. Alternatively, if ParaSol wins the bid and is forced to withdraw after the exploration phase, similar to others before them, the result will cost the oil company a decrease in not only profits, but its reputation and the success of its future projects. Lucia and her team have a lot to consider.

Learning Outcomes

This case study relates to the following learning outcomes from the moduleRisk Analysis and Managementin the courseFeasibility of International Trade:

• Analyze the health, safety and security risks to personnel of an organization working in a foreign country.
• Analyze social risks related to an organization's involvement in the global value chain to be able to demonstrate social responsibility.
• Implement mitigation strategies to guard against possible financial losses posed by the business relationship with foreign customers and suppliers.

Case Study Questions

1. What risks did Lucia's team uncover in its analysis of a potential oil venture in Ecuador and what are the possible consequences of each?
2. Using the risks identified in Question 1, analyze each risk and place a checkmark indicating the degree of impact (critical, serious or marginal) in the second column.

Risk

Degree of impact

1.

Critical

Serious

Marginal

2.

Critical

Serious

Marginal

3.

Critical

Serious

Marginal

4.

Critical

Serious

Marginal

5.

Critical

Serious

Marginal

6.

Critical

Serious

Marginal

1. What strategies might the risk analysis team suggest to mitigate the most probable and impactful risks identified in Question 2?
2. Based on the overall risk posed to ParaSol should it successfully submit and win the bid, what should Lucia's team finally recommend?

NOTE: Responses to this question may vary.

Although based on research of actual events, organizations and/or individuals, this case study is fictional and is intended to support learning. Cases are not intended to serve as endorsements, sources of primary data or illustrations of effective or ineffective management.