Contact l Sitemap

home industries issues reasearch weblog press

Home  » Issues » Corruption

Enron's Pipe Scheme

Energy giant bulldozed over environmental, human rights concerns to build Bolivian pipeline -- with U.S. government backing
by Jimmy LangmanSpecial to CorpWatch
May 9th, 2002

Pipeline construction in the Pantanal wetlands. Photo: Derrick Hindery, Ph.D, Amazon Watch
Pipeline construction in the Pantanal wetlands. Derrick Hindery,
Ph.D, Amazon Watch

Chiquitano Forest, June 2000. Photo: Amazon Watch
Chiquitano Forest, June 2000.
Photo: Amazon Watch

San Miguelito, Bolivia -- Enron's Cuiaba natural gas pipeline passes just 200 yards from San Miguelito, an indigenous village in Bolivia's Chiquitano Dry Tropical Forest. When Enron sought approval for the controversial pipeline in 1997, the company offered money to local residents and pledged to help them secure land ownership titles. Today, says village leader Bolnino Socore, the community has received 50 cows and a water well, but little else.

"The company says they will do no more to help us. But we have to live with the consequences of their pipeline for at least another 40 years," he said. Socore has cause for concern. The access roads Enron cleared in the Chiquitano are already attracting timber poachers and illegal cattle ranchers to the forest. He is also concerned about spills; another Enron pipeline in Bolivia burst on January 2000, leaking 30,000 barrels of oil into a river in the Andean highlands.

Ever since the Houston-based energy giant imploded in the midst of scandal last year, the name Enron has become synonymous with corporate corruption, accounting tricks, influence peddling, and environmental negligence. The company's record in Bolivia is no exception. Now, Enron faces government investigations and lawsuits as Bolivia tries to deal with the social, environmental, and economic damage inflicted by the company.

The 390-mile long Cuiaba natural gas pipeline, partly owned by Royal Dutch/Shell Group, stretches from near the city of Santa Cruz in eastern Bolivia to Cuiaba, Matto Grosso, Brazil. There, it fuels Enron's new 480-megawatt thermal power plant. The pipeline cuts through the 15 million-acre Chiquitano, the last, large, relatively intact tall dry forest in the world. The Chiquitano forest is "one of the world's richest, rarest and most biologically outstanding habitats on Earth" and one of the planet's 200 most sensitive eco-regions, according to the World Wildlife Fund. Approximately 90 species of mammals, birds and reptiles in the Chiquitano are listed as endangered. The adjacent Pantanal is the world's largest wetlands region, spanning 89,000 square miles and straddling the borders of Brazil, Paraguay, and Bolivia. It is one of the world's richest wildlife habitats.

Bolivia: Cuiaba Pipeline, June 2000. Photo: Amazon Watch
Bolivia: Cuiaba Pipeline, June 2000.
Photo: Amazon Watch

There are 271 indigenous communities in the Chiquitano forest region surrounding the pipeline, numbering an estimated 57,000 people. Poverty runs deep here. The thatched-roofed homes are generally without electricity, many without running water. Many villages lack schools, and almost all lack access to medical facilities. But in this hot and humid region on the southernmost fringes of the Amazon, the communities have also maintained a lifestyle that sustainably draws upon the animals and plants of the forest. To many villagers here, the pipeline symbolizes the rapidly encroaching threats to their environment and way of life.

In September 2000, protesters shut down Enron's pipeline work camp near San Miguelito. More than a hundred Chiquitano men, women and children from three nearby communities peacefully blocked the entrance. Within hours, indigenous communities nearby occupied two other Enron work camps. The protest, which lasted 16 days, ended after negotiations between Enron and indigenous leaders. At issue was a May 1999 agreement between Enron and 36 indigenous communities from the surrounding areas. The agreement required Enron to pay $1.9 million for an "Indigenous Development Plan" and to fund efforts to secure land titles for local residents. But as the pipeline neared completion, indigenous groups said they had only received about one-third of the promised funds, and they were no closer to owning their land.

Carlos Cuasace Surubi, president of the Chiquitano Indigenous Organization, said they had no choice but to fight the company: "We told them that as indigenous people we still believe in a person's word. You have put the pipeline in the ground, but you have lied to us. We demand you comply with the agreement or we will not go."

After further negotiations, Enron did release the rest of the promised funds, but the dispute over the land titles persists. According to indigenous advocacy groups, no titles have yet been issued. But the government says that 30 percent of the indigenous communities have received their titles so far. According to Ivan Altamirano of the government's National Institute for Agricultural Reform, the other 70 percent of the titles require still more technical and legal work -- and therefore more funding. Enron maintains it has already fulfilled all of its commitments. "The land titling has been done, what we are waiting on right now for the majority of it is the signature of the president of the republic and we can't make him sign this stuff," said Laine Powell, manager of Enron's Cuiaba project.

Jorge Landivar, director of the national park service for the region that includes the Chiquitano, says that the villagers living near the pipeline were duped. He says they never should have signed the deal. "When the company came in with their negotiators prior to the pipeline, the communities did not know what they doing. They signed an agreement but were not prepared or trained to know what were the real benefits and disadvantages of the project. They don't even have land for all those cows the company gave them as compensation."


The OPIC Connection

The "Cuiaba Energy Integrated Project" cost an estimated $600 million to build, $200 million of which was originally to be financed by the Overseas Private Investment Corporation (OPIC), a US government agency that helps US companies with business projects in less-developed countries.

Over objections from environmental groups, Enron sought to build the pipeline straight through the Chiquitano dry forest. Environmental groups pointed out that by financing the Cuiaba pipeline, OPIC was violating its own regulations, which prohibit it from financing "infrastructure projects in primary tropical forests." Since 1992, the politically plugged-in Enron has been OPIC's No. 1 client, receiving more than $1.7 billion for its foreign projects, and had been promised $590 million more at the time of Enron's financial crash last year.

Five environmental organizations -- World Wildlife Fund, Missouri Botanical Garden, Wildlife Conservation Society, Noel Kempff Museum, and the Bolivia-based Friends of Nature -- carried out an assessment of the Chiquitano and told OPIC that it was "a primary tropical ecosystem of global importance." The groups also warned that the pipeline would open up the forested region to loggers, miners, hunters, farmers, colonizers, and cattle ranchers, while increasing the likelihood of forest fires.

But OPIC and Enron saw things differently. Originally, says Jon Sohn, international policy director of Friends of the Earth, Enron's own environmental impact assessment called the Chiquitano a primary forest. But in the spring of 1999, OPIC Chief Environmental Officer Harvey Himberg decided that the project would only be judged on how it impacted the forest immediately surrounding the pipeline. Meanwhile, OPIC also adopted an extremely narrow definition of a primary forest. Under OPIC's definition, for a forest to qualify as primary it must contain only limited "artisanal" or subsistence logging and other human activities. This definition was called antiquated by the non-governmental Forest Stewardship Council (the group Himberg claimed to have taken the definition from) and subsequently repudiated by the World Bank's senior biodiversity official.

After fires swept parts of the Chiquitano forest in the summer of 1999, OPIC even created a video highlighting the burnt out areas in an effort to convince individuals from other government agencies that the forest was not primary. The video led one US Agency for International Development staffer to tell an environmental group that he came away with the impression that there was no forest left.

"At every step OPIC sided with Enron, finding every way possible to circumvent its primary forest policy," says Atossa Soltani, executive director of Amazon Watch: "OPIC management put on an all out effort to defend its largest business client."

Eventually, the environmental groups who produced the study were persuaded to drop their opposition in exchange for $20 million from Enron toward a "Chiquitano Forest Conservation Fund." The World Wildlife Fund (WWF) later pulled out of the program citing concerns over conflict of interest and lack of indigenous participation in the leadership of the fund's board of directors. Indeed, a June 2001 WWF-UK report concluded that due to such flaws the program had "increased social and environmental conflicts" and presents "a risk to the sustainability of the forest and indigenous populations."

The Chiquitano fund caused a rift between indigenous leaders and the conservation groups who had endorsed the program. It also provoked bitter division among environmentalists, with critics branding the fund as an exercise in corporate "greenwashing." Henry Tito, who works on Chiquitano issues for CEADES, a social development group based in Santa Cruz, argues the fund violates international and Bolivian laws; these laws, he says, require indigenous participation in development decisions that affect them. "Indigenous people are not against conserving the Chiquitano. But as this is their home they have the right to decide how their ancestral land is conserved. Enron and the conservation groups continue to ignore that right," says Tito.

Indigenous leaders in the Chiquitano also maintain that while some conservation groups enjoy big salaries and other perks from the fund, the impacts of the pipeline on local communities are not being adequately addressed. While Enron is estimated to rake in $50 million per year over the 40-year life span of the pipeline project, the company's compensation to indigenous groups amounts to only four percent of the pipeline's first year income. Meanwhile, Erwin Chuve, president of the Natividad indigenous community, said the roads built by Enron are already adversely impacting the villages. "Illegal timber cutters, cattle ranchers, and others are starting to invade the Chiquitano with greater speed," he says.

Enron claims it merely improved existing roads in the area." In the Chiquitano forest, there were concessions for mining [and] concessions for forestry. It is not an area that has never seen the impact of humans. The commitment that we made was that we would use the access roads that were there and not build anymore and that is what we did," said Powell, general manager of the Cuiaba project. But residents in the town of San Matias, located on the border with Brazil, complained that Enron had created more than 60 unauthorized access roads. And Patricia Caffrey, former executive director of World Wildlife Fund Bolivia, says Enron's "improvements" created a new network of roads that violates the commitments contained in the company's own environmental management plan. "You couldn't penetrate the mass of forest before, now you can very easily with Enron's so-called improved roads. I was with two visitors from WWF-UK when we saw, coincidentally in one afternoon, two illegal logging trucks hauling out logs via these roads."

Enron also violated a host of environmental requirements during construction of the pipeline, causing Bolivian authorities to issue a warning to the company in February 2000. In September 2001, OPIC sent a 6-page letter to Enron outlining how the company had failed to meet its environmental obligations. OPIC canceled the Cuiaba loan in February, allegedly because the company failed to resolve contractual disputes with Brazilian authorities. But critics say the damage has already been done.

In a May 6 letter to OPIC president Peter Watson, six leading US environmental groups called on OPIC to take responsibility for its role in facilitating Cuiaba. "Significant promises were made by OPIC with respect to environmental and social protections that would occur on the condition that OPIC's Board approved the Cuiaba project, " the letter stated. "Those promises were not met by Enron nor were they met by OPIC. A mechanism for repairing the damage done and resolving outstanding promises is now sought."

Environmentalists have also long alleged that Enron used its influence with the Bush administration to shape the White House's energy policy. Indeed, one section of that policy does seem aimed at justifying the Cuiaba project and other Enron operations in South America. Chapter 8 of the document includes a provision stating that gas pipelines in Bolivia, Brazil and elsewhere in South America "aid the environment."


Greasing palms?

In Bolivia's 12,500-feet high capitol La Paz, the national congress has formed a special committee to investigate Enron business deals in light of events in the US. In particular, the Bolivians are looking into charges that Enron illegally obtained its ownership interest in the Bolivia-Brazil gas pipeline and the transportation unit of the formerly state-owned oil and gas company YPFB.

On July 9, 1994, Enron won a public bid to partner with YPFB in the construction of the Bolivian side of the Bolivia-Brazil pipeline. Armando de la Parra, a congressmen and president of the Bolivian commission investigating Enron, says that as early as five months prior to the public bid, Enron began communications about the venture with then-Bolivia President Gonzalo Sánchez de Lozada. Meanwhile, competing companies were only given 13 days advance notice of the bid, said Parra.

Parra says that two days after Bolivia officially gave Enron the nod for the project, a 20-page detailed memorandum of understanding was speedily signed. Such negotiations normally drag on for weeks, he says. Then, in December 1994, the final contract was signed under New York state law between Sánchez de Lozada and Enron. The contract, which was illegal under Bolivian law, allowed Enron to set up the joint venture as an international, offshore company free of Bolivian taxation. Furthermore, says Parra, this original contract has mysteriously disappeared: Enron and government officials told his commission that they cannot find it.

"We have not yet uncovered conclusive evidence proving it, but all signs point to probable corruption... The public bid was obviously a sham to mask a secret deal between Sánchez and Enron," said Parra.

However, Enron was never able to line up financing for the pipeline and eventually Brazil's state energy giant Petrobras said it would back the project. It appeared that Enron would be forced out of the deal. But in October 1996, Bolivia offered up for sale the transport unit of state oil and gas company YPFB as part of its privatization program. The transport agency, now called Transredes, is responsible for all the pipelines in the country. Enron, in partnership with Shell, gained controlling ownership of Transredes. Parra says Sánchez de Lozada also inexplicably awarded Enron an additional 40 percent ownership of the Bolivian side of the Bolivia-Brazil pipeline without any evidence that the company had invested so much as a dime in the planning or construction of the project. Because of Enron's 50 percent ownership of Transredes, Enron now held the rights to 70 percent of the pipeline's annual profits, which it later split down the middle with Shell. This amounted to an annual gift to Enron and its partner in excess of $25 million net profit.

Enron's Transredes has since demonstrated serious environmental negligence. In January 2000, their "Sica Sica Arica" oil pipeline burst, depositing nearly 30,000 barrels of oil along 160 miles of the Desaguadero River and contaminating as well the surrounding watershed, farmland, Lake Uru Uru and Lake Poopo. The livelihoods of many communities, including the 5,000-year old native tribe, Uru Morato, were destroyed.

Environment ministry officials called the company negligent for allowing the petroleum to flow out of the pipeline for more than 23 hours before shutting off the valves on either side of the hole. They said the company failed to clean up the mess until 8 days later. Further, Bolivia's Environment Minister Hernan Cabrera says that Transredes was warned by his offices well in advance of the spill that the pipeline was old and needed to be replaced. "They had ample time and warning to prevent this from happening and they did nothing."

Cabrera says Enron has agreed in principle to pay $5.9 million in compensation for damage to the communities, public infrastructure and ecosystems, but it is refusing to pay a $1.9 million government fine. Steven Hopper, general manager of Transredes, maintains that the company's response to the disaster was "a model for other companies in Bolivia."


Shell game

According to US congressional investigators, Enron's Bolivian investments were part of the company's elaborate accounting shell game. Investors in the Cuiaba pipeline included LJM1, one of the fictional investment partnerships that eventually brought down Enron. According to a Feb. 16 article in the Washington Post, in order to present a rosy image to investors, Enron wanted to record profits from its Cuiaba project by using "mark-to-market calculations," an accounting trick that allows projected revenue to be put on the books in a current year.

"But Enron was not allowed to use such a calculation because its pipeline ultimately connected to an Enron power plant," the Post reported. "To get around that, Enron sold a 13 percent stake in the plant for $11.3 million to LJM1, that allowed Enron to book the revenue, and it did so in the last two quarters of 1999. The deal was all the more stunning because the pipeline had yet to deliver any gas and, therefore, had produced no revenue." In August 2001, Enron bought back LJM1's interest in the power plant for $14.4 million, giving the Enron execs in control of the LJM1 partnership a $3.1 million profit.

Enron's Bolivian operations were not included in the company's December Chapter 11 bankruptcy filing, and company officials say the Cuiaba is a key aspect of their reorganization plan. Despite its financial woes, Enron claims it will honor its social and environmental obligations in the country. But Bienvenido Zacu, secretary for land and territories of the Confederation of Indigenous Peoples, is not optimistic. He says that indigenous groups have had to resort to strikes and blockades to get the company to comply with many of its promises. "If Enron wants to stay in the Chiquitano, they must respect their permanent obligations to the people who were there before them," said Zacu.

Jimmy Langman is a journalist based in Santiago, Chile. He writes regularly for the San Francisco Chronicle, Miami Herald and other publications.