PERU:Gas From the Rain Forest

Pipeline Backers See Energy Potential, but Opponents See Environmental Peril

Backers of a multibillion-dollar proposal to ship vast stores of liquid
natural gas from Peru's Amazonian rain forest to the United States are
seeking Bush administration support for international financing, but
environmental questions are complicating the bid.

Leading the project is Hunt Oil Co., a private Texas firm whose owner has close ties to President Bush. It is seeking administration backing for as much as $800 million from the District-based Inter-American Development Bank, which has already agreed to consider it. If approved, it would be the largest project the bank has financed in Latin America. In addition, the project's backers say they intend to ask for financial help from the U.S. Export-Import Bank, a federal agency.

The Hunt-led project involves an investment of $2.7 billion to build a pipeline, a gas liquefaction plant, marine terminal and other facilities to export 4.4 million tons of liquid natural gas annually. The bank is required to investigate its environmental impact before voting on it.

The Inter-American bank, however, is already looking into problems with an earlier phase of the project -- two gas pipelines it helped finance in 2003 with a $75 million loan. Hunt Oil has a stake in the consortium operating the lines, which were built by an Argentine company.

The pipelines carry gas 340 miles through the rain forest from Peru's Camisea Field, snaking across the 14,000-foot Andes Mountains to Pisco, a coastal fishing village south of the capital, Lima. One line carrying natural gas then extends on to Lima.

Since December 2004, there have been five leaks in the second natural gas liquids line, spilling thousands of barrels into pristine rivers and killing the fish upon which indigenous communities depend for their livelihood. The latest spill occurred March 4 and led to an explosion and fire that injured two residents.

Under pressure from U.S. and Peruvian environmental groups, the bank last month issued a statement saying it was "deeply concerned" about the pipeline's initial performance. The bank said it would conduct an "expanded review and analysis of the project design and construction" of the pipeline and perform another environmental study of the project.

The project has also been criticized by Ollanta Humala, the leading candidate in Peru's presidential race, who in an April 4 interview with an Argentine newspaper said the pipeline was "like Gruyere cheese, full of holes." He called for a revision of the contract with the pipeline's operators and higher royalty payments to the government.

Environmental groups say the problems with the pipelines illustrate the dangers of conducting such operations in the rain forest. Besides the spills, which the groups contend are the result of shoddy construction and defective materials, environmentalists point to a Peruvian government report that the gas development project is harming the once-isolated indigenous people living near the gas field and along the lines.

The report from the state Office of the People's Defender said 17 deaths among them could be attributed to influenza brought by contact with outside workers. "The diseases contracted by these groups due to contact with the company's workers could be catastrophic," said the report, citing syphilis, influenza, diarrhea and respiratory ailments.

There are about 11,500 indigenous people living either in the gas concession areas or along the pipelines, according to Amazon Alliance, one of the environmental groups opposing the project. Last fall, local residents at one point along the line blockaded the Urubamba River for several weeks to keep company workers out in protest, according to the alliance.

Even as the pressure builds among environmental opponents, a spokeswoman for Dallas-based Hunt Oil said efforts already are underway to gain the Bush administration's support for financing for the next phase.

The company's chief executive, Ray L. Hunt, has been a major financial backer for President Bush, his father and other Republican candidates. Jeanne Phillips, Hunt Oil's senior vice president for corporate and international affairs, headed Bush's 2005 inaugural committee after serving two years as Bush's ambassador to the Paris-based Organization for Economic Cooperation and Development.

"There is a lot of dialogue with stakeholders inside the U.S. government," Phillips said. "We're doing everything we can to assure them this project is worthy of U.S. support."
Hunt was finance chairman of the Republicans' Victory 2000 Committee and is a member of the National Petroleum Council, an advisory group to Secretary of Energy Samuel W. Bodman, as well as Bush's Foreign Intelligence Advisory Board. Together with his wife, Nancy, and his companies, Hunt has contributed about $1 million to President Bush and other Republican campaign committees since 1998.

Still, Hunt's political credentials did not prove strong enough to win U.S. support three years ago for financing of the pipelines, in which Hunt holds a smaller stake than in the new proposal. The Bush administration delegate at the Inter-American bank refused to support the financing, and the Export-Import Bank turned down the project.

Market conditions have changed radically since then, with a domestic natural gas shortage focusing attention on foreign sources. Since the last vote, the administration has also appointed a new executive director to the Inter-American bank, Hector E. Morales Jr., who has publicly called for the bank to play a more active role in facilitating Latin America's gas exports to the United States.

Hunt, which holds a 50 percent share in the new project, Peru LNG, plans to seek $400 million in loans from the Inter-American bank directly, as well as the bank's help in facilitating up to $400 million from private commercial banks. Hunt's partners in the project are SK Corp. of South Korea and Repsol YPF of Spain.

The company has not yet formally submitted applications at either the Inter-American bank or the Export-Import Bank, but officials at both institutions said preliminary discussions were underway.

Company spokeswoman Phillips said she did not anticipate any problems with the environmental impact study because the project was "not in an environmentally sensitive area." But environmental groups say the planned export terminal in Paracas Bay poses a threat to Peru's only marine reserve there.

A coalition of environmental groups wrote to Hunt in December condemning his company's failures to prevent "unnecessary harm" to the local people and the tropical rain forest by failing to use certain advanced drilling technology to minimize the number of wells. The coalition includes Amazon Watch, Amazon Alliance, Environmental Defense, Friends of the Earth, Oxfam America and the World Wildlife Fund.

Steve Suellentrop, the official in charge of Hunt's liquid natural gas projects, said the consortium had addressed all issues raised by the indigenous people and that "the alleged impact is much greater than the real impact."

"Nobody was directly impacted," he said. "Maybe indirect."

Suellentrop said the consortium operating the field, in which Hunt holds a 25 percent interest, had used "directional drilling" techniques, which he said were similar to the "extended reach drilling" advocated by environmental groups.

The Peruvian energy regulatory authority has so far imposed five fines totaling $2.8 million on Transportadora de Gas del Peru, the Argentine company that operates the pipeline, though the company has so far not paid any of them.

The company has, however, sent food to several affected communities and is building fish farms to compensate for their losses due to river pollution. It has also adopted a $25 million plan to reduce the risk of more spills.
A California-based nonprofit engineering consultancy, E-Tech International, hired by the environmental coalition issued a report in February alleging that the first four leaks were the result of poor quality pipes, shoddy workmanship and inadequate soil stabilization under parts of the pipeline. It warned of "a high potential for future ruptures" at half a dozen other locations.

The Argentine builder has denied the allegations but launched its own new inspection of the pipeline, while Peru's Congress has ordered a full-scale investigation into the causes of the leaks.

Robert Montgomery, who heads the environmental unit in the Inter-American bank's private sector department, said that "most" of the new pipelines recently built in Latin America had not experienced similar problems but that the Peru line was "somewhat unique" because it was built along mountain ridges to avoid populated areas.

At a February meeting at the bank's District headquarters, the president of the Argentine pipeline operator, Ricardo Markous, blamed the spills on heavy rainfall and landslides and said all the pipe was brand new and built specifically for the Peru project. On March 10, the company issued a 100-page point-by-point rebuttal of the E-Tech report, including documents tracking the history of the 188,000 tons of pipe used in the project.

But the report also pointed out that the complicated geography of the pipeline route made it "impossible to assure that there will not occur any incidents that might affect the system."

Staff researcher Alice Crites contributed to this report.


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