Global markets and their effects on resource exploitation in the Pan Amazon

By Timothy J. Killeen

Investment capital flows when prices are high, but companies scale back investments when they fall. Nonetheless, companies do not often abandon projects once underway; in part, this is a natural resistance to writing-off an existing investment, but experienced businessmen also know that markets are cyclical. If companies wish to ‘cash in’ when prices are high, they must have installed capacity in order to ramp up production when the price is right.

The prices of industrial minerals were at historical lows prior to 2000 but increased dramatically through the next two decades as China began its unprecedented build-out of infrastructure as it transitioned from an emerging economy into a global superpower. The demand for industrial minerals was mirrored by increased demand for oil and gas at a time when supplies were constrained by war and geopolitics. Coincidentally, the price of gold quadrupled due to fiscal and monetary policies in the United States partially resulting from the credit crisis of 2008. This trifecta of market conditions favoured expansion of the mineral sector across the Pan Amazon, which saw revenues increase by 500% between 2000 and 2013.

Following the fall of commodity prices in 2014, most companies scaled back their investment strategies. Chinese companies were the exception; they were flush with cash and responded to a management philosophy that considers the strategic interest of the state. They have since scaled-back investments, presumably due to reduced demand in China linked to policies to slow infrastructure development.

Because mineral commodity markets are volatile, companies will model the viability of a project based on a price that is below the mean market value calculated over at least a decade. For example, gold projects are modelled on an international price of about US$1,200 per troy ounce, which is only 70% of its price in January of 2023. Oil companies once assumed that the long-term price of oil was about US$100 per barrel but, following the collapse of oil prices in 2015 they lowered that benchmark to US$50, which is about 50% of the cost-of-production for an existing oil field in Ecuador. Between 2020 and 2022, the price of oil fell to a remarkable low of US$30 due to the global recession caused by COVID-19, but rebounded to US$130 following the Russian invasion of Ukraine.

As of January 2023, another commodity boom would appear to be underway. In part, this is due to the war in Ukraine and the (still unknown) dimensions and duration of the sanction regime imposed on Russia by the United States, the European Union and their allies in the Asian Pacific.

This commodity boom will be different, however, due to the growing demand for certain strategic minerals needed to manufacture the components and infrastructure required by the energy transition from fossil fuels to renewable energy. These minerals exist in the Pan Amazon in globally significant quantities and there will be significant economic pressure to develop those resources.

The reality of political risk

Unlike mineral rights in advanced economies, the below-ground resources in all Latin American countries belong to the state, irrespective of the owner of the land. This includes private properties but also communal landholdings and territories that have been ceded by the state to Indigenous groups and traditional communities. Consequently, the relationship between the state and the private company defines the legal liability that is partitioned between the state and the operator, as well as the distribution of the costs and benefits that accompany mining and oil field development. Landholders may not have legal rights to the economic benefits, but they do have the power to disrupt a development by civil protest, which explains the design of royalty schemes to favor local communities.

The Lagunas Norte Mine, operated by Barrick Misquichilca S.A., is an open pit gold mine located in the district of Quiruvilca, province of Santiago de Chuco (La Libertad) in Peru. Image by the Peruvian Mining Institute.

The extractive industries are capital intensive, a term use to describe enterprises that require a large, typically upfront, deployment of financial capital prior to the generation of cash income. Industrial mines can require more than a billion dollars to develop; more than a decade, sometimes two, will separate the discovery of a mineral deposit and its eventual exploitation. Oil and gas development is even more expensive, due to the cost of seismic surveys and exploratory wells – many of which fail – that precede the decision to develop a field.

Time itself is a risk factor because time is money; it is a cliché because it is true. A delay can turn a promising investment into a mediocre venture, while an environmental calamity or political revolution can turn into a financial disaster. Successful ventures succeed because their proponents effectively identify and manage the various forms of risk that might imperil their investments.

The surge in revenues from the extractive industry in the 2000s heightened the political risk that reflects Latin America’s history of political turmoil. The region had experienced a boom of investment following the privatization of state-owned companies in the 1990s, which catalyzed the surge of new projects that matured in the 2000s and enabled the phenomenal growth in government revenues during the commodity boom. The high-tide of neoliberal policies led to a backlash in Bolivia and Ecuador but, despite the rhetoric by left-leaning governments, mineral development and exploration largely remained the domain of the private sector. Only Venezuela excluded investment from the private sector, and its natural resource economy, including both hydrocarbons and industrial minerals, is currently only a fraction of the size it was in the 1990s.

The Peruvian election of 2021 highlighted the potential of political risk with the election of a socialist candidate who (briefly) voiced a desire to nationalize strategic industries. His removal from office in December 2022 has led to widespread protest that threaten to further destabilize the country.

Stakeholders and vested interests

The revenues generated by the exploitation of industrial minerals and hydrocarbons flow into the balance sheets of corporations with shareholders on six continents, including several that are among the largest corporate entities on the planet. Their operations are supported by a multitude of local and national enterprises, either as contractors or as purveyors of essential inputs and services. Together, these multinational corporations and their domestic partners create tens of thousands of jobs that span the social spectrum from common laborer to skilled engineer. Corporate offices in regional and national capital cities usually employ members of social and political elites. Like businesses everywhere, they exert influence by purchasing publicity in major media outlets, by participating in chambers of commerce and by lobbying lawmakers to formulate policies that benefit their industry.

Governments are predisposed to support the mining and hydrocarbon industries because they are export-oriented and generate revenues for the state. With very few exceptions, mining companies can count on the backing of finance ministries that are attuned to (obsessed with) the need to maintain a positive balance of payments. The same logic holds for the production of oil and gas, but is reinforced by domestic production that alleviates the need for energy imports. Finance ministries are among the most influential government ministries, in part because of their technical expertise, but also because of their close relationships with multilateral development banks that view the extractive sector as an essential component of the global economy. Moreover, loans based on the extractive sector appeal to officials at development banks who are evaluated on their ability to close deals and generate interest income for the institution.

Bauxite mines in Paragominas, Brazil, Norsk Hydro ASA. Bauxite ore is converted into aluminum using an energy-intensive production process. In the Amazon much of that energy comes from hydropower. Image by Hydro/Halvor Molland via Flickr.

One of the more important tasks of multilateral development agencies is to organize and finance national development strategies; these guide loan portfolios and reflect the long-term development priorities of governments.

Over the last two decades, the philosophical orientation of these documents has gradually evolved to incorporate the concepts of sustainability; nonetheless, they retain the core components of conventional economic models. National strategic plans often seek to add value to natural resource commodities and are accompanied with initiatives to transform commodities into industrial goods. This requires energy, sometimes a lot of energy, which has fostered the expansion of hydropower and bioenergy.

In the twentieth century, development strategies largely emanated from national agencies, but now they are also being generated by regional governments where elected officials are less committed to sustainable development and remain a powerful force for promoting the expansion of the extractive sector. Local elites tend to have a philosophical orientation grounded in conventional business models and, although many pay lip service to sustainability and conservation, they simultaneously support the extractive sector.

The extractive industries also benefit from a revolving door of technical expertise between the private companies and government ministries. Although they may be bound by professional ethics, government functionaries often share a vision with their corporate colleagues that reflects their own personal ambitions. They believe a robust and profitable mineral sector is in the national interest. Many are committed to the concepts of sustainability and are convinced their actions to promote best practices are beneficial to the sector and the nation.

The stakeholders of the conventional economy are powerful and well-connected, but they must contend with a countervailing movement that opposes the ongoing development of the extractive sector. Organized as non-governmental organizations (NGOs), environmental advocates operate at the global, national and local level. Some are adept at waging public relations wars and routinely oppose all types of mineral development, while others seek to reform the industry by promoting best practices in both the environmental and social sector (see below). Both groups rely on information provided by academics skilled at identifying and quantifying the environmental and social impacts that influence a regulatory process known as an environmental impact analysis (EIA).

Critics contend this process is biased in favor of companies and governmental stakeholders; a view shared by local communities who are understandably reticent about welcoming a massive alteration to their local landscape. The most recalcitrant stakeholders are Indigenous communities who have inhabited the project landscape for decades, centuries or longer.

Indigenous groups know from first-hand experience that benefits from mineral extraction are short-term and that damage will be permanent. They also know that most of the economic resources, including the royalty and tax income, will flow to local and regional governments that are seldom controlled by their community. In the recent past, they have been entirely dispossessed of their lands, either by being displaced from the mineral concession itself or by a flood of immigrants who have been enticed by government programmes to settle the lands adjacent to the mine (e.g., in Parauapebas, Pará, Brazil) or along the access roads built to service the oil fields (e.g., in Succumbios, Ecuador).

Indigenous groups have become adept at defending their rights. Fortuitously, they possess an enormously powerful legal weapon referred to as ‘Free, Prior and Informed Consent’. Known by its English acronym FPIC, this principle is enshrined in an international treaty that obligates governments and corporations to sit down with the affected communities and explain, in accessible language, the dimensions of the proposed development. The project can only proceed if they consent to its execution. Because the treaty has been ratified by national legislatures, its elements are enforceable under the civil, administrative and penal codes of the signatory nation. Essentially, Indigenous communities have obtained de facto veto power over the development of any mineral resource located beneath or adjacent to their territorial lands.

It is highly unlikely that current governments would have agreed to the terms of the treaty if they had fully understood the repercussions of that decision. It was made during the period of the so-called Washington Consensus, when multilateral development agencies were imposing reforms on developing countries as part of a systematic process to improve governance and promote the role of the private sector. Governments have either ignored or tried to finesse the FPIC requirements by subverting or simply ignoring the consultation process.

The most obvious attempt to circumvent the FPIC process was organized by the Bolsonaro administration, which proposed a law in 2019 that would establish a consultation process controlled by government agencies rather than the communities themselves. Bolsonaro lost his bid for re-election but his party still remains a formidable electoral force that controls numerous local and regional governments. Regardless, wildcat mining in Brazil has always been a lawless phenomenon, and FPIC was used only by corporate miners.

In April of 2022, the Tribunal Constitucional court of Peru declared that FPIC was not a fundamental right enjoyed by Indigenous groups, a decision that opened the way for Pedro Castillo to propose the concept of rentabilidad social (social profitability), which expressly balances the national interest, as perceived by the central government, with local demands made by civil society. The Peruvian president, who was deposed in January 2023, nominally supported the concept of FPIC, but contended that local communities would support mineral development when it is in their interest.

Successive governments of Ecuador have attempted to sidestep FPIC by insisting that a consultation was not equivalent to consent, while recruiting Indigenous leaders to support mineral production in exchange for compensation packages linked to individual projects. That strategy was made inviable by the Corte Constitucional when it reaffirmed the primacy of consent. The administration of Guillermo Lasso remains committed to expansion of the mineral sector, but now it will be done while respecting the FPIC process.

“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