Extractive industries look at degraded land to avoid further deforestation in the Pan Amazon

By Timothy J. Killeen

Mining and energy companies invest in the Amazon because it is profitable. Opportunities are large because of geology, but development is costly due to the region’s isolation and lack of infrastructure. The decision to pursue a mineral exploitation project depends on several factors, but there are two primary technical criteria: (a) the richness of the mineral deposit, which determines the cost of extraction; and (b) the volume of the geological formation, which determines the productive lifetime of a mine or oil and gas field. Taken together, these two factors allow investors to estimate the return on investment and decide whether or not to deploy financial capital. Scale is essential to ensure that the cost of production is lower than revenues; consequently, only the richest and largest deposits are developed.

Any investment opportunity is balanced by risk, which includes market risk driven by macroeconomics and geopolitics, as well as social and environmental risk unique to each project and nation. Corporations tend to be skilled at managing the former, but they often mismanage the later. Social conflict can delay a project and wreak havoc on the financial models used to guide investments, while a botched environmental review can lead to its rejection by a regulatory agency.

Large-scale mining, as in the case of Cóndor Mirador in Ecuador, is of concern due to the inability of government institutions to monitor and control its activities. Image by Ana Cristina Alvarado.

Greenfield versus brownfield investments

An investment that occurs in a geological formation that has not been previously exploited is known as a ‘greenfield’ investment. The term ‘green’ has nothing to do with ESG investing principles, however, and is used to describe a new project where the developer will have to plough up or alter a virgin (green) landscape. In contrast, a ‘brownfield’ investment describes new projects on landscapes with a prior mining or oil field production history; they are referenced as brown because they have been impacted previously by industrial development.

Greenfield investments are inherently risky, even when the ore-bearing formation or the oil field is accurately mapped to generate estimates of reserves. They tend to be more expensive, because developers must build a processing mill and develop a rail or pipeline infrastructure to move the mineral commodity to the nearest export terminal. Many things can go wrong, and numerous projects have been delayed or cancelled by unforeseen complications linked to the remoteness of the construction site or inadequate management of environmental and social liabilities.

Large expanses of the Amazon are still considered wilderness and any sort of development will trigger robust opposition from local, national and international organizations, particularly if the mineral deposit is located within or adjacent to a protected area. When this is the case for an Indigenous reserve, the potential for delay is compounded by the obligation to consult with Indigenous communities, many of whom are vehemently opposed to the extractive sector.

A mosaic of legal forest reserves, pastures and soybean farms in the Brazilian Amazon. Image by Rhett A. Butler.

Opposition tends to be much less intense for brownfield initiatives. Previous development will have degraded natural ecosystems or altered the social landscape, which tends to lessen the degree of opposition from environmental and social advocates. Cattle pastures do not provoke the same reaction from environmental and social activists when compared to pristine forest, while private landholders are much more amenable, if not eager, to sell or grant access to their land holdings. There are exceptions, particularly when catastrophic events, such as oil pipeline failures, have led to severe impacts that have alienated the local population.

Economic factors also favor brownfield developments. Royalty payments for local governments create a dependence on mineral rents for maintaining essential social services. Local and regional politicians are eager to keep the income stream flowing well into the future and, since mineral deposits are finite, the lifetime of facilities can only be extended by the discovery and development of new mineral deposits. Mine owners and oil field operators seek to extract more value from infrastructure assets created with the initial greenfield investment. All these factors are obvious to banks and investment funds that seek to minimize risk and maximize profits by expanding their investment portfolios. Brownfield investments meet all these criteria.

There are numerous examples of the evolution from greenfield development to brownfield investment. The original Carajás iron ore mine in Pará was a classic greenfield investment. It took more than twenty years to develop after the discovery of the mineral deposit in 1962 and the initiation of mining activities, which occurred only after the Carajás railway was completed in 1985. The subsequent expansions from one to eight open-pit mines were all brownfield investments that were accomplished with a minimum of environmental review. More extensive evaluations were carried out for the development of nearby mines at Salobo, Onça Puma, Sossego and S11D; in each case, they were approved despite opposition from environmental and social advocates. Investment risk was diminished because of previous investments in geological surveys and exploration, while profitability was enhanced by the expansions of the Carajás railroad, associated port facilities and the administrative capacity at regional corporate offices.

Investments in the oil production in Amazonian Ecuador in the 1970s was also a greenfield investment, and have led to more than fifty years of additional exploration in adjacent blocks to ensure that production and revenues remain high. A key brownfield investment was the construction of a specialized pipeline in the early 2000s, which was needed to transport heavy crude oil discovered in the 1990s. Ironically, the ongoing expansion of exploratory and production drilling in Yasuní National Park can be considered a brownfield investment designed to prolong the life of and extract more value from the existing infrastructure of the Ecuadorian hydrocarbon industry.

Low terrace forests near the banks of the Algodón River in Peru. Its relief is flat and susceptible to river flooding, due to its location. Image by Diego Pérez / SPDA.

The original investments in the first three Camisea gas pipelines (TCP-Gas, TGP-Liquids and Peru-LNG) were part of a suite of early phase investments that carried significant political risk during a time when populist governments across the region were questioning the benefits of direct foreign investment. Royal Dutch Shell initiated the project in 1981 when it started exploration activities but it walked away from the project in 1998 due to contract disagreements with the Peruvian government. Other companies completed the project according to the terms dictated by the Peruvian government, which now had less production risk because the reserves were already well documented.

“A Perfect Storm in the Amazon” is a book by Timothy Killeen and contains the author’s viewpoints and analysis. The second edition was published by The White Horse in 2021, under the terms of a Creative Commons license (CC BY 4.0 license).

To read earlier chapters of the book, find Chapter One here, Chapter Two here, Chapter Three here and Chapter Four here.

Chapter 5. Mineral commodities: a small footprint, a large impact and a great deal of money

This article was originally published on Mongabay