Oil's Not Well in Latin America 11 FJIL 585

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Florida Journal of International LawFall, 1997 Note

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OIL'S NOT WELL IN LATIN AMERICA: CURING THE SHORTCOMINGS OF THE CURRENT INTERNATION-AL ENVIRONMENTAL LAW REGIME IN DEALING WITH INDUSTRIAL OIL POLLUTION IN LATIN AMERICATHROUGH CODES OF CONDUCT

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I.

Introduction

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II.

Background

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A. Latin America's Debt Crisis

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B. Oil Industry's Shift of Invest-ment Emphasis and Its Impact on theEnvironment

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III.

Current Environmental Framework

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A. Domestic Laws

595

1. United States

595

2. Latin America

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B. International Conferences andPrinciples600

C. Multilateral Trade Agreements

604

IV.

Codes of Conduct as an Alternativeto the Current Environmental Regulat-ory Framework

607

V.

Conclusion

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I. IntroductionFinding it increasingly difficult to internalize the cost of complying with domestic environmental regulations, many U.S.multinational [FN1]oil companies

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have shifted their petroleum extraction and production operations to less developedcountries where environmental regulations are far more pliable than in the United States.[FN2] Since 1989, the U.S. oil industry has spent more on exploration and production abroad, mainly in Latin America, than it has in the United States.[FN3] United States oil companies are the major foreign investors in Latin America's energy sector.[FN4]Many of the factorsthat have forced U.S. oil companies [FN5]to adopt environmentally sound practices at home are absent in investment-dependent Latin American nations because these governments lack both the financial resources and the regulatory mechanismsto force corporations to adopt environmentally safe operating procedures. [FN6]

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A one-billion-dollar class action suit, representing the interests of 30,000 Ecuadorian citizens,[FN7] was filed against Texaco, and it poignantly illustrates the enormity of the problem created by the U.S. oil industry's shift of investmentemphasis overseas.[FN8]The plaintiffs in Aquinda v. Texaco alleged

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that Texaco, a U.S. multinational corporation(MNC) operating in Ecuador, dumped over a billion barrels of oil into Ecuador's Amazon oil fields between 1972 and 1989.[FN9] The resultant pollution transformed what were once pristine rivers and streams in environmentally fragile Amazonforests [FN10] into viscous waterways of petrochemical waste.[FN11]Although Aquinda was initially dismissed in 1996, the case was recently vacated by the U.S. Court of Appeals and remanded to the District Court for further consideration.[FN12] The case exposes the ineffectiveness of the current environmental regulatory regime in dealing with expanding oil and gasdevelopment in Latin America's ecologically sensitive rain forests. Latin American governments, dependent on foreign directinvestment to stimulate their economies, and the U.S. oil industry are doing little to redress the situation. A cloud of environ-mental apathy hangs over the region and has led to unprecedented levels of environmental degradation. It is estimated that thevast majority of new oil and gas development will take place in the tropical zones of the

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world. [FN13]Although international environmental law has made some inroads in identifying global environmental problems, it has mostly proved in-effective at adequately addressing them.[FN14]The absence of a governing body to monitor and control the relationships between MNCs and host countries also permits MNCs to operate with virtual impunity. This note examines the shortcomingsof the present environmental regulatory system and suggests as an alternative, voluntary codes of conduct.Part II of this note provides background information on the economic and political transformation underway in LatinAmerica, focusing on some of the factors that have contributed to liberalization of trade and investment. It also discussesfactors that have influenced MNCs, specifically U.S. oil companies, to shift production to Latin America. It focuses on LatinAmerica's more favorable regulatory climate for MNCs and the impact of investment activities in the oil sector and the envir-onmental problems they have created for Latin America. In part III, this note discusses the shortcomings of recent legal

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trends in adequately addressing these problems at the national, regional, and international level. Part IV examines a prom-ising alternative to the existing environmental framework, that is, voluntary codes of conduct, and their efficacy in dealingwith the daunting environmental challenges facing Latin America. Part V concludes that it is essential that MNCs make acommitment to protect the environment in the future through voluntary codes of conduct.II. BackgroundA. Latin America's Debt CrisisIn response to the economic crisis[FN15] that hit Latin America in the 1980s, [FN16]many countries in the region implemented neoliberal[FN17]market

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reform policies advocated by the U.S. government and international financial insti-tutions. [FN18]The market-oriented development strategies emphasized the need to allow market forces a greater role in their economies and to grant a larger economic role to the private sector.[FN19] Although these policies succeeded in incor- porating most of the region into the global economy, the drastic reduction in fiscal budgets effectively marginalized environ-mental programs in many countries. [FN20] The opening of the economies to international markets, the privatization [FN21] of state-owned enterprises, the promotion of foreign direct investment[FN22]to accelerate economic growth, [FN23]

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and the maximization of exports through the exploitation of natural resources[FN24]were preeminent policy objectives.[FN25] This development resulted not only from the need to concentrate on economic growth, but also from the mistaken perception that restrictions, such as environmental regulations, would weaken the growth process.[FN26] According to the World Commission on Environment and Development, “the debt crisis is the most critical international pressure point forcingoverexploitation of natural resources in high-debt countries.” [FN27]The reasoning is straightforward. To counteract or min- imize the impact of the crisis “[i]ndebted Latin American governments have devalued local currencies to stimulate exportsand bring their external payments into balance.” [FN28]This encourages Latin American governments to exploit their natural resources and encourages foreign direct investment.[FN29]The convergence of these factors created a favorable investmentclimate for MNCs.B. The Oil Industry's Shift in Investment Emphasis and Its Impact on the EnvironmentThe rapid expansion of the global economy during the last decade, along with increased competitive pressures, haveforced the oil industry to expand its market base and curb production costs. [FN30]One cost cutting measure implemented by many multinational oil firms is to shift petroleum production and refining operations to developing regions, particularly heav-ily indebted Latin American countries, where production regulations are less stringent and

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oil [FN31]resources abund- ant. [FN32]United States oil companies have been motivated, in part, by a desire to escape what they perceive to be an unne- cessarily burdensome and costly set of environmental regulations in the United States. [FN33]They view Latin America as providing a more pliable regulatory climate on environmental issues.[FN34] In addition to Latin America's pliable environmental regulations, the promise of greater economies of scale, [FN35]lower labor costs, [FN36]and accessible natural resources [FN37]influenced U.S. oil companies to shift production operations to the region. [FN38]Environmentalists cor- rectly argue that the profit maximizing activities of MNCs operating in Latin America have profoundly damaged the environ-ment by producing pollutants and stripping the region of natural resources.[FN39]Petroleum companies are the primary emitters of toxic pollutants, as well as greenhouse gases. [FN40]Each stage of the operation--exploratory drilling,

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commercial extraction, and transport through pipelines--has devastating consequenceson the environment.[FN41] The exploratory drilling stage, for example, can result in patches of rainforest being clear cut in order to make way for drilling wells.[FN42] Toxic wastes also are generated at this stage of the petroleum production process. [FN43] In Ecuador, for example, oil drilling waste, which includes toxic sludge, often are released untreated into local water supplies or stored in open pits that breakdown and leak the sludge onto the surrounding land. [FN44]Commercial extraction of oil is equally damaging to the environment. In Argentina, 14,000 contaminated pools, which are deposits for toxicwastes generated at the drilling sites in crude oil exploration areas, have resulted in widespread environmental damage, for © 2009 Thomson Reuters/West. No Claim to Orig. US Gov. Works.