In Costa Rica, a country that promotes itself abroad as an environmentally friendly tourist destination, talk of oil drilling is taboo. Unlike many other countries, Costa Rica has blocked multinational companies from exploiting its petroleum reserves. And local experts say that’s not likely to change soon, despite recent efforts by Mallon Oil Company Sucursal Costa Rica, a subsidiary of U.S.-based Black Hills Corporation, to cash in on a natural gas and oil concession it obtained from the Costa Rican government nearly 12 years ago.
Mallon Oil won the concession in 1999 under the administration of then-President Miguel Ángel Rodríguez (TT, June 17). Since then, environmental groups tried unsuccessfully to block the concession in court. Now, a group of lawmakers is taking up that effort in the National Assembly.
“Any kind of oil-related activity should be banned from our territory,” Claudio Monge, a lawmaker with the Citizens Action Party, or PAC, said during a June 16 legislative roundtable. “We should establish in writing that this country does not want to travel down the path that leads to pollution.”
Monge joined legislators from the Social Christian Unity Party, Access without Exclusion Party and the Broad Front Party in calling for reform of the country’s Hydrocarbons Law. Efforts to change the law have been ongoing for more than a decade (TT, Aug. 20, 2004). Broad Party Front lawmaker Jose María Villalta wants to outlaw oil exploration outright, and he is enlisting help from environmental groups.
“The oil industry provides nothing but pollution and a deteriorating environment,” Villalta said. “[Mallon Oil] should know that we will fight as lawmakers to prevent any concession contract.”
Former President Abel Pacheco (2002-2006) is supporting the lawmakers in their efforts. In 2002, Pacheco’s administration issued a moratorium on oil exploration, citing Costa Rica’s dependence on tourism to generate jobs and revenue (TT, June 7, 2002).
“I left political retirement in order to join you in this battle,” Pacheco told legislators. “[Mallon Oil] wants us to give them an oil exploitation license in exchange for a few dollars, and then leave our country completely destroyed. What tourist would want to come here to see that?”
Hitting the Environmental Wall
According to information Mallon Oil submitted to the National Technical Secretariat of the Environment Ministry (SETENA), the company hopes to extract up to 25 million barrels of oil per year, generating $7 billion in revenue at the end of the 20-year contract.
But University of Costa Rica geologist Allan Astorga cast doubt on the company figures submitted to SETENA.
“So far, no one knows exactly how much oil could be extracted from the country’s northern region,” Astorga said. “I find it curious that more people haven’t questioned the information provided by the company.”
Astorga also said that according to the Hydrocarbons Law, the government must establish a National Council on Hydrocarbons before granting oil contracts to any company. “This council exists under the Environment, Energy and Telecommunications Ministry, but no one works there,” Astorga said.
Outdated environmental feasibility studies could be another legal thorn in the company’s side. Environmental studies submitted to SETENA expire after two years. Mallon Oil’s environmental studies are more than a decade old, Astorga said.
“I don’t think an oil-drilling project is viable here for environmental reasons,” Astorga said. “Three-quarters of Costa Rican territory has important water tables that could be threatened, and any current study will highlight that. [In Costa Rica], water is our oil.”
Local environmental groups are also challenging statements that granting an oil contract to Mallon would help offset high local fuel prices. Mauricio Alvarez, of Oilwatch Mesoamérica, referred to the claim as “buying support by offering cheap gasoline.”
But allowing oil drilling here would have little, if any, impact on domestic gas prices, because Costa Rica lacks the regulatory framework to calculate prices based on domestic production, said Alvaro Barrantes, director of energy at the Public Services Regulatory Authority.
Many oil-producing countries set gasoline prices based on the international market. Revenue from those sales is used on improving domestic transportation infrastructure, Barrantes said.
“We would first need to create laws to define if consumers would pay less or not if oil is extracted from local deposits. It could happen that we are rich in oil reserves, yet people would continue to pay the same price for gasoline,” Barrantes said.
Last November, the Costa Rican representative of Mallon Oil, Pedro Oller, sent a letter to Foreign Trade Minister Anabel González warning that the company would seek legal recourse via the Central America Free Trade Agreement (CAFTA) should the Costa Rican government not grant a drilling contract.
But that legal process is complicated and many companies follow through only when they are certain they can win a case, said Federico Valerio, director of trade at the Foreign Trade Ministry.
“It’s not uncommon to hear companies saying they will sue a country for whatever reason,” said Valerio. “But it’s also true that many firms don’t follow through because it’s an expensive process that could cost $150,000 just to get the ball rolling.”
If Black Hills Corp. does follow through with its promise to seek recourse through CAFTA, Costa Rica’s Foreign Trade Ministry would create a special panel to hear the case and dictate a resolution.
If the company is unsatisfied with that resolution, it can then bring the matter before the International Center for the Settlement of International Disputes (ICSID), part of the World Bank, Valerio said.
“It is important to clarify that ICSID does not rule on whether governments acted correctly or incorrectly,” he said. “Its duty is to determine if private investors suffered damage and how much monetary compensation should be.”
“If Costa Rica is taken before the ICSID, this would not impact the country’s reputation as a safe place to invest,” Valerio said.
On Tuesday, Black Hills Corp., which acquired Mallon Oil in 2003, issued a press release that said the company is working with the Costa Rican government to obtain execution of an oil and gas lease concession contract that would be exploited on 2.3 million acres area in northern Costa Rica.
“Mallon Oil Company began working to obtain this concession in 1999, and we have continued that effort since acquiring Mallon in 2003,” said Black Hills CEO David Emery in a press release. “For years, it did not appear the concession contract would be executed, but now there is a reasonable possibility that the concession contract may be executed by the Costa Rican government this year. Black Hills will disclose more information as appropriate.”
Black Hills investor relations officer Jerome Nichols declined to answer specific questions about the company’s plans. However, Oller, Mallon’s spokesman in Costa Rica, said in a statement that, “Mallon Oil Company Sucursal has a long history of complying with Costa Rican law, and we are diligently following the government’s procedures as we look forward to the execution of the concession contract. We fully support and are confident in Costa Rica’s legal and governmental process in this matter.”