Ecuador: Could low oil prices still save Yasuní from devastation?

Ecuador’s plans to extract Yasuní oil are still in place, but could there be trouble ahead for President Rafael Correa – and hope for Yasuní’s defenders – thanks to low oil prices?

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It has now been more than two years since the Ecuadorean government, led by President Rafael Correa, made the controversial decision to abandon its ground-breaking Yasuní-ITT Initiative. The scheme sought to protect a section of Yasuní National Park, one of the most biodiverse places on Earth located in the western Amazon rainforest which is also home to several indigenous groups living in voluntary isolation from mainstream society, by leaving the 900 million barrels of oil estimated to be deposited there in the ground. In exchange for this move, which would have left an extraordinary corner of the Amazon intact while preventing the significant contribution to climate change that would result from the extraction and burning of this oil, Ecuador hoped to raise US$7bn from the global community.

However, after six years in which it had raised barely US$150m in pledges and donations, Correa made the decision to abandon the initiative and press on with plans to extract the oil, in spite of ongoing opposition to this policy reversal and the subsequent controversy of a public referendum on the decision that was rejected by national authorities. All seemed lost for the defenders of Yasuní-ITT, but now there could be new hope on the horizon thanks to the complicated (read: in what is little short of an existential crisis) outlook for the oil industry.

A short while ago, the Ecuadorean daily El Universo reported that the ‘ups and downs’ (mainly downs) of global oil prices in the past year have put the future development of the Yasuní-ITT oil blocks in doubt. This is because the costs associated with extracting oil from the remote and fragile Yasuní National Park (estimated at around US$30 per barrel, according to the article) would barely be covered by the price that a barrel of crude oil currently fetches on global markets – averaging just US$50 over the first half of 2015 and currently below that ever since China’s economic woes deepened from the end of August.

The fall in oil prices has been completely contrary to the Ecuadorean government’s plans. In 2013, when the Yasuní-ITT Initiative was abandoned, the price of oil was comfortably above US$100 per barrel, and the government based their projections of the amount of money that Ecuador would stand to gain from extracting the oil (as much as US$18bn) on what they themselves termed “conservative” forecasts of between US$70 and US$90 per barrel. That the prognosis for the next few years is for prices to linger nearer the US$50 mark – and nowhere near the original forecasts when planning for the extraction of Yasuní’s oil – is something that has already been tacitly accepted by the Ecuadorean government, since they have based the forthcoming 2016 Budget on a price of just US$40 per barrel.

In this sense, some experts are now arguing, it is not currently economically viable for Ecuador to press ahead with its plans to extract oil from Yasuní-ITT. It is a situation that has already contributed to the ditching of several other controversial plans around the world, such as Shell’s plans to drill for oil in the Arctic, and potentially now the Keystone XL pipeline that has been slated for the transportation of Canadian tar sands oil. (*Update 6th November – Keystone XL has now officially been rejected by the Obama administration)

But before opponents of the Ecuadorean government’s plans can get too carried away, it is worth considering a couple of points. Firstly, Petroamazonas – the Ecuadorean state oil company which was granted the key rights to develop the Yasuní-ITT block – has indicated that it intends to maintain its daily oil production rates through 2016, and has reaffirmed its intention of beginning operations in the Tiputini sector (one of the T’s in ITT) by the end of next year. This is in spite of the ongoing outlook of low oil prices, and in fact Petroamazonas say they see the beginning of operations in Yasuní-ITT as essential to their efforts to maintain financial performance throughout the current market conditions.

Secondly, and perhaps more importantly, one has to consider President Correa’s ongoing commitment to his public spending programmes and social policies – which, whatever his government’s faults may be in other social spheres (such as civil liberties and freedom of expression), are still highly popular among the Ecuadorean population; and quite rightly so, given Ecuador’s recent progress in bringing down levels of poverty and inequality and raising health and education standards, among others. Correa recently pledged to continue with these social investments in spite of the drop in oil prices.

This success in recent years has been largely helped by money generated from Ecuador’s oil production, and indeed a major part of the rationale for the abandonment of the Yasuní-ITT Initiative was to generate funds for these social policies and the ‘development’ of the country as a whole. Maintaining these levels of public spending is an essential part of Correa’s political vision, but with low commodity prices (not just among oil but among metals and minerals as well) affecting export revenue and pushing the country close to recession, the perverse truth is that the government may consider it more essential than ever to pursue new oil extraction projects such as Yasuní in order to generate the funds for this spending – even if low oil prices make it that much harder for any oil extraction to be worthwhile from an economic point of view.

In summary, the Ecuadorean government remains committed to extracting oil from under Yasuní-ITT in order to keep the oil money required for its public spending flowing in, but there remains vocal opposition to these plans, and now the global outlook on oil prices further complicates the picture and compromises the government’s hand. Yasuní-ITT may yet survive. Its defenders shouldn’t give up hope yet (even if the chances of things going their way remain slim). Watch this space.