INDEPENDENT ADVISORY PANEL ON DEVELOPMENT ISSUES

IN SOUTH-CENTRAL PERU

2011 REPORT
(Draft May 31, 2012)

EXECUTIVE SUMMARY

This document is the second in the series of annual reports prepared by the Independent
Advisory Panel on Development Issues in south-central Peru. The Panel was formally
established at the end of 2009 in the context of the Peru Liquefied Natural Gas Project (Peru
LNG Project) to advise the Export-Import Bank of the United States (Ex-Im Bank), and
other interested parties, on the environmental and social effects of development in south-
central Peru. The Panel acts independently of the Ex-Im Bank or any other public or private
institution or government.

With a total investment of approximately US$ 3.8 billion, the Peru LNG Project is the
largest foreign direct investment in Peru's history and the first LNG export project in Latin
America. In the context of the Panels work, and despite the notable and highly laudable
environmental and social efforts by the projects majority shareholder, Hunt Oil, it is not
possible to separate objectively the Peru LNG Project from the larger context in which it
operates. Peru LNG is part of a much larger series of hydrocarbon-based projects centered on
Camisea. There are other new and large infrastructure, energy, and hydrocarbon projects
planned or under implementation in the same region. Because these projects are so closely
interlinked and interdependent, it is difficult to separate out the broader social and
environmental impacts of one from the others. No matter how high the standards for
addressing environmental and social impacts are maintained within any given project, if
comparable and coordinated efforts are not made throughout the broader context, such
localized efforts could ultimately prove futile as impacts and consequences accumulate and
spread throughout the entire network of linkages. For these reasons, the first decision of the
Panel was to extend the scope of its deliberations beyond the Peru LNG project alone and to
include the larger south-central region of Peru, encompassing the departments of Madre de
Dios, Cuzco, Puno, Huancavelica, Apurimac, Ayacucho, Lima and Ica.

The Panel is therefore taking a broader look at long-term, fundamental issues that define the
way Peruvian society interacts with its environment, addresses social inequalities, builds social
inclusion, attracts foreign investment, and attempts to develop its south-central region.

In its first report (2010), the Panel developed a conceptual framework of the broader
context in which these complex issues can be studied. The 2010 Report identified and framed
six main issues that the Panel will continue to study in the remaining four years of activities.
These include:

Greenhouse gas emissions

Perus energy mix
Wealth distribution from extractive industries
Cumulative impacts and consequences
Socio-environmental impacts, focusing on the Camisea region, and
Community monitoring of extractive industries: What this can tell us about long term
social impacts in south-central Peru.

Although these questions can be addressed independently, they center on some very
fundamental issues: Does the current gas situation in Peru reflect a long-term and strategic
energy and natural resources policy, or does it simply reflect the accumulation of numerous
decisions by successive administrations, but without a long-term vision? Has Peru learned
from its long-established mistake of dealing with natural resource extraction in a way that has
led to boom and bust cycles? How is the wealth generated from Perus gas distributed among
its population? Is this wealth contributing to narrow the enormous social and economic
inequalities in the country? Is Peru using this historic opportunity to generate long-term
human and economic development rather than short-term investments or expenditures?
Which use of gas revenues would be best to aid the countrys transition to a developed
economy with greater quality of life for all? Is the country prepared, both legally and
institutionally, to deal with these issues?

The Panel acknowledges that many of the issues discussed here are not the direct consequence
of the Peru LNG Project, given that in most cases, Peru LNG does not have control or
influence over them. As mentioned above, however, the broad mandate of the Panel requires
us to look at them because of their far-reaching effects.

This years report covers the following issues:

(i) A brief discussion of key new developments which have arisen since the first report
and influence the wider context, including:

- A new government elected in Peru with an emphasis on social inclusion,

- The start of export operations of LNG from the Melchorita plant,
- International recognition that the Peru LNG biodiversity-monitoring efforts can
be considered best practice, and
- A series of highly visible demonstrations in Peru against large investments,
especially in the mining sector.

(ii) Perus Energy Mix and Greenhouse Gas Emissions.

The Panel engaged the support of international consultants well versed in these issues
(Garcia and Gamio, 2012) to answer the following questions: (i) What is the baseline
situation in the absence of policy interventions? (ii) What are the possible scenarios
of future gas reserve exhaustion? (iii) What are the implications of various policy
interventions regarding greenhouse gas emissions? (iv) What is the most
economically efficient use of natural gas?

The main conclusions of the scenarios presented are the following:

- The most favorable scenario from an environmental perspective is a veto of

electricity generation from natural gas. This scenario produces the minimum
greenhouse gas emissions, but in addition requires the minimum capital
investments. It also assumes an aggressive development of new small
hydroelectric projects.

- In the energy efficiency scenarios, the cost of reducing CO2 emissions through
the implementation of energy efficiency policies is fairly conservative at
US$9/Ton CO2 , which compares favorably with average costs above US$12/Ton
of CO2 reductions, making it feasible and cost-effective.

- Unless new reserves are found, proven natural gas reserves will only last another
ten years, assuming a conservative scenario of GDP growth of five percent per
year. Even if in the next few years, ten percent of possible reserves and fifty
percent of probable reserves become proven, then gas supply could be stretched
 to the year 2025 at the most. In addition, and if policies to prevent natural gas to
be used for electricity generation were introduced, the supply will only last
through 2026. Thus and unless new gas is found, the gas era is currently not
likely to represent a long-term bonanza for Peru.

- Any attempt to develop new non-conventional renewable energy sources requires

the development of additional transmission and distribution networks, particularly
considering the deployment of additional wind sources. Such costs are very
considerable and have not been taken into account in this analysis.

(iii) The Environmental Impact Assessment (EIA) Process in Peru, Cumulative Impacts
and Consequences

The Panel engaged the support of local expert consultants (DAR and Dr. Michael
Valqui) to analyze the cumulative impacts of the Camisea Natural Gas Project, in
light of the current gas demand and potential supply in southern Peru, and the
strengths and weaknesses of Peruvian environmental assessment processes and their
capacities to respond to increased pressure for hydrocarbon exploration and
exploitation in ecologically fragile areas.

The following weaknesses in the EIA process were found:

- Potential for conflicts of interest, when a sector promotes investment, while

having to approve the EIAs for the resulting projects.
- Limited institutional, financial, administrative and logistic capacities for the
evaluation and approval of the EIAs.
- Low quality of the studies themselves, due to a generalized lack of knowledge and
understanding by the companies carrying out the EIAs, and the lack of
meaningful participation by the populations.
- Stakeholders have difficulties in accessing EIA documents, and
- Lack of a comprehensive approach to social issues, especially regarding
indigenous groups impacted by oil and gas activities.

The following drawbacks and issues were found to impede the adequate participation
of local people in decisions:

- The weakness or absence of the state and the lack of planning processes for this
type of investment in land or areas where people live and have corresponding
rights.

- The constraints on meeting, discussing and agreeing on environmental and social

obligations assumed by the project owner through the EIA and other instruments
of environmental and social management.

- The Prior Consultation Law is an important step in the right direction, but there
are still gaps, such as the fact that indigenous peoples cannot participate in the
planning stage of sector plans and programs and are only involved when the
project is already approved.

(iv) Socio-Environmental Impacts, Focusing on the Camisea Region

This section presents the impressions from a single field visit by Panel member Dr.
Shepard (the author of a paper supporting this section) to ten indigenous
communities in the Lower Urubamba between November 26 and December 8, 2011.
 The purpose of this preliminary study is not to establish absolute causes and verify
objective facts. Rather, the goal is to appreciate and analyze the perceptions of the
people in the region most affected by the Camisea gas pipeline. Their perceptions of
the situation largely reinforced Dr. Shepards own: social development in the Lower
Urubamba is shipwrecked. Huge amounts of money have been invested without
adequate strategic planning or oversight, yielding modest results, if any results at all.
In all, Dr. Shepard interviewed twenty-one Matsigenka community members about
the changes that have occurred in recent years. The number of people interviewed
was fairly small, and yet the degree of independent confirmation among many of the
observations was striking. Almost every interviewee independently mentioned a
precipitous decline in the size and health of fish populations. Community members
gave various explanations for this decline, varying from contamination by spills,
vastly increased river traffic, or increasing population. In addition to these
possibilities, Dr. Shepard suspects that increasing demand for commercial fish catch in
urban centers like Sepahua is also a factor. Nearly all people interviewed mentioned
alcoholism as a major social problem that has arisen in recent years. Overall, they
also see little improvement in their health situation: while new medicines and
emergency evacuation funds have been introduced, frightening new illnesses have also
emerged while social strife has contributed to a rising sense of unease culminating in
accusations of sorcery.

Without independent and transparent monitoring procedures, and with apparently no

adequate baseline community resource studies, there is little hope of understanding
ultimate causes and responsibilities. The municipality of Echarate is currently one of
the wealthiest in Peru in terms of total income due to huge canon royalty
investments, yet this wealth has not filtered through to the local inhabitants. There is
no reason why native communities in the Lower Urubamba cannot have the most
modern, ecologically and culturally appropriate bilingual schools, water and sanitation
systems, resource monitoring and management, intercultural health care systems,
aquaculture, permaculture and silviculture projects etc. in the Amazon. The regional
government, the municipality, the gas and oil companies, the indigenous federations
and the communities themselves seem to have no long-term plans or priorities for
sustainable social development, and projects seem to be executed in terms of the logic
of maximum visibility and redundancy, rather than any strategic plan for social and
economic development.

(v) Community Monitoring of Extractive Industries: what this can tell us about long-
term social impacts in south-central Peru

One of the Panels mandates for 2011 was to determine if community monitoring of
the activities of extractive industries is an efficient and useful tool that helps the
communities achieve a more balanced relationship with the companies, lobbying the
Peruvian government to take on a more neutral role and satisfy, to a greater degree,
community expectations of benefits from the extractive activities and a cleaner,
safer environment. By analyzing how these initiatives are organized and functioning,
we have come to understand that the sustainability of these local systems depends not
only on financial resources and local participation, but also on a clear legal
framework that lends legitimacy to the initiative in the eyes of all the stakeholders.
While the legal framework is an important sine qua non, other more contextual
factors social, political and technical ones that encourage or discourage such an
initiative over the long haul are just as important.

The Panel worked with a small team of Peruvian professionals under the direction of
Dr. Richard Chase Smith to conduct the studies into some of these questions raised in
 the 2010 Report. Members of this team include Dr. Carlos Soria Dallorso, specialist
in Peruvian environmental law and indigenous peoples, and three anthropologists
with experience in community relations with large mining projects, Jorge Caldern,
Mireya Bravo and Andrea Cabrera.

The Panel believes that a community monitoring effort, under favorable conditions,
can be a valuable tool that can help local communities, indigenous or not, to:

- Become more aware of their responsibility to care for the local environment and
its resources,
- Learn how to exercise greater control over the extraction and use of all natural
resources within their territories,
- Empower themselves to take action when a third party fails to comply with the
law or keep its agreements, and
- Have a greater capacity to negotiate solutions to disagreements that arise when
third parties are awarded specific rights that are superimposed on community
rights

Through the case studies and the critical review of a large body of laws, norms,
regulations and legal principles, the Panel has identified several clusters of ideas for
enabling and improving the community monitoring process.

The four areas covered this year start to provide a picture of the broader issues to be
analyzed within the Panels mandate. Because they are still independent building
blocks of the larger findings, conclusions are presented for each study, but not yet
regarding the Panels final objectives.
ORGANIZATION OF THE REPORT

The report includes the following sections:

(i) Key developments in 2011

(ii) Perus energy mix and greenhouse gas emissions
(iii) Cumulative impacts and consequences
(iv) Socio-environmental impacts, focusing on the Camisea region
(v) Community monitoring of extractive industries: what this can tell us about long-term
social impacts in south-central Peru.

The report also includes a bibliography section. The commissioned background documents
supporting the analyses in this report can be found at the Panels web site:
http://www.southperupanel.org/
KEY DEVELOPMENTS IN 2011

Several important events have taken place since the production of the first report. These
key new developments have a major influence over the Peru LNG Project and the work of
the Panel. They should be mentioned because of their importance to the broader context
relevant to our work:

(i) There is a new government in Peru with a stated emphasis on social inclusion. The
2011 elections were closely watched and were very narrowly won by President
Ollanta Humala. In the past, President Humalas positions were considered to be
antagonistic to foreign investment in large infrastructure projects, in particular in the
hydrocarbon and mining sectors. President Humala switched some of these positions
in the campaign and has promised to honor all foreign investments and past contracts
and commitments. A new and strong emphasis on addressing social inclusion has
characterized the first year of his presidency.

(ii) The start of export operations of LNG by the Peru LNG Project. Operations at Peru
LNG - the first such project in South America - started on schedule and within budget
in 2010. The plant was officially inaugurated on June 10, 2010 by President Alan
Garcia. The first cargo sailed on June 22, 2010 on the Barcelona Knutsen heading for
SEMPRA Energys Energia Costa Azul Terminal in Baja California, Mexico.

(iii) The full implementation of the Peru LNG biodiversity monitoring efforts, considered
an example of best practice of biodiversity monitoring of a large scale infrastructure
development. The Center for Conservation Education and Sustainability of the
Smithsonian Conservation Biology Institute at the National Zoo has designed and is
implementing a Biodiversity Monitoring and Assessment Plan (BMAP) for the gas
pipeline. The BMAP involves both terrestrial and marine species and habitats of
conservation concern. Scientists have developed research and monitoring protocols
to address critical conservation challenges. The BMAP is the first such program for
Peru and a unique opportunity for teams of national and international experts to
study and understand the biological and conservation challenges of the region and
make a positive contribution to biodiversity conservation and sustainability. The
BMAP will help scientists, managers, and other decision-makers understand the effect
of development and will apply adaptive management principles to protect and
conserve species and habitats while contributing to sustainable development.

(iv) A series of highly visible demonstrations against large investments, especially in the
mining sector. Numerous demonstrations took place in 2011 against the development
of the US$4.8 billion Conga gold mine. The demonstrators questioned the validity of
the Environmental Impact Assessment fearing that the development of the mine
would harm their water supplies. As a result, the company voluntarily suspended the
project and the government set up an international panel of independent auditors to
review the EIA. There is a growing local backlash against large investments in Peru
and the resolution of the Conga controversy is likely to have an influence over the
way such conflicts will be resolved in the future.

I. PERUS ENERGY MIX AND GREENHOUSE GAS EMISSIONS

In last years report, the Panel stated that a countrys ideal energy mix should be the result of
long-term policies for achieving specific objectives. Some of these objectives could relate to
long-term energy security, economically efficient use of resources, geo-political
considerations, avoidance of dependence of foreign energy sources, environmental targets
and social considerations.

In the case of Peru, reasonable objectives for its energy mix should include: (i) energy
security, particularly as it relates to possible exhaustion of non-renewable energy sources, (ii)
introduction of cleaner, more efficient energy sources, (iii) reduction of greenhouse gas
emissions, (iv) more efficient use of renewable energy sources present in the territory, (v)
development of infrastructure projects aimed to ensure access of the population to these
sources and (vi) lowering the cost of energy.

On November 24, 2010 the Peruvian government officially issued its National Energy Policy
2010-2040 through Supreme Decree No. 64-2010-EM and published it in the government
gazette El Peruano. To a great extent, the policy addressed these questions. Perus energy
mix needs to be periodically monitored by teams of qualified professionals and, except when
extraordinary events occur, should reflect long-term strategic policies.

In this context, the Panel examined several issues related to Perus energy mix in the context
of the countrys ability to manage its natural resources strategically. Specific issues identified
include:

(i) How should the most efficient use of gas be determined? Should it be injected into the
transport mix so that it replaces imported hydrocarbons? Or should it replace
electricity generation to lower costs, at the expense of making renewable sources
non-competitive?
(ii) What are the tools that can be used to determine the relationship between efficiency
and pricing?
(iii) How can the energy mix avoid unsustainably low energy prices (due to the
introduction of gas for electricity generation) over the long-term?
(iv) What are the relevant challenges and opportunities posed by the regional political
and social contexts?

To answer these questions, in 2011 the Panel engaged the support of international
consultants well-versed in these issues (Garcia and Gamio, 2012). The specific questions posed
to them were the following:

(i) What is the baseline situation in the absence of policy intervention?

(ii) What are the possible scenarios of future gas reserve exhaustion?
(iii) What are the implications of various policy interventions regarding greenhouse gas
emissions?
(iv) What is the most economically efficient use of natural gas?

The consultants used scenarios through the year 2040. The baseline scenario was constructed
using current and projected demand in a Business as Usual scenario using the expected
growth in demand for electricity, hydrocarbons, and natural gas published by the Ministry of
Energy and Mines (MINEM) in its 2008 2018 National Baseline Electricity Plan and its
2009 2021 National Baseline Hydrocarbon Plan. Based on this baseline scenario, additional
scenarios were constructed using Energy Planning Tools (Long-range Energy Alternatives
Planning or LEAP Model), which permits analysis of both supply and demand under changing
conditions, as well as tailor-made Excel models developed by the consultants to determine
hypothetical needed supplies to be met by non-conventional, renewable sources.

The full paper presents the comprehensive results of several scenarios (Garcia and Gamio,
2012). Below we summarize the main results:
(i) Baseline Scenario.

As mentioned above, this scenario was built using the expected growth in demand for
electricity, hydrocarbons, and natural gas published by the Ministry of Energy and Mines in
its 2008 2018 National Baseline Electricity Plan and its 2009 2021 National Baseline
Hydrocarbon Plan. In addition, the scenario contemplates new generation from future hydro-
electric and thermoelectric plants (both single and combined cycle) through 2040. It also
includes the supply of electricity demand with non-conventional renewable energy sources to
cover five percent of the total electricity demand. Of this five percent, the scenario
considers that eighty percent is generated from wind energy, ten percent from photovoltaic
energy, and the remaining from biomass. On the supply side, the model includes the projects
that have already been awarded concessions in the 2010 and 2011 auctions. Results are shown
below:

Figure 1.

Energy Efficiency. In this sub-scenario, the baseline is adjusted to accommodate a ten percent
reduction in electricity demand through the implementation of the across-the-board energy
efficiency measures contemplated in the 2009 Energy Efficiency Plan of the MINEM. The
results are shown below and do not represent a major
departure from the baseline.

Figure 2.
No Electricity Generation from Natural Gas. This sub-scenario introduces a veto of further
electricity generation from natural gas, starting in 2015. This results in the implementation
of additional renewable (hydro-electric) generation projects.

Figure 3.

Incentives to Non-
conventional Renewable
Energy Sources. This sub-
scenario assumes that fifteen
percent of the demand is
covered by additional non-
conventional renewable
energy sources. Of these, it is
assumed that wind will supply eighty percent (considering the potential of 22,000 MW), and
the remaining from photovoltaic (ten percent) and biomass (ten percent).

Figure 4.

(ii) When will Natural Gas Run Out?

These scenarios utilize the proven gas reserves as published by the MINEM, which primarily
considers Blocks 56 and 88 of Camisea. In addition to these proven reserves, there are those
located in Aguaytia and on the north coast (Piura). It is important to stress that here we
include both the proven natural gas reserves (gas that is separated in the separation plants
after being extracted from the wells), as well as the liquid reserves (liquids that are separated
from the gases in the separation plants) that later provide their components in the LNG
fractioning plants. In total, these proven reserves represent 12.46 TCF of natural gas and
657,968 barrels of natural gas liquids.

Once these proven reserves in the base year have been estimated, it is assumed that there will
be no further increases in proven natural gas reserves. Although this assumption is highly
unlikely, it has been used so that methodologically the results can be compared under the
various scenarios.

Considering the projected demand of natural gas in the baseline scenario, the proven natural
gas reserves (including liquids) will be sufficient to meet demands through 2021.
Figure 5.
Increase in Proven Reserves. Under this sub-scenario, there is an increase in proven reserves
based on a graduation of possible into probable and of probable into proven reserves
following accepted industry standards, but without assuming the discovery of any new gas
sources (i.e. the probability of finding natural gas in the proven reserves is ninety percent, in
the probable reserves it is fifty percent, and in the possible reserves it is ten percent
respectively). Gas only lasts an additional four years (through 2025).

Figure 6.

Energy Efficiency Sub-Scenario. In this case, the assumption is the implementation of an

aggressive policy of increased energy efficiency across the board to reduce electricity demand
by ten percent against the baseline scenario. This implies a reduction in the demand of
natural gas for electricity production, with the consequent delay in its exhaustion. The result,
nonetheless, is minuscule (one extra year).

Figure 7.

No Electricity Generation from Natural Gas. This sub-scenario introduces a veto of further
electricity generation from natural gas, starting in 2015. This results in the implementation
of additional renewable (hydro-electric) generation projects, and a delay in the exhaustion of
gas through 2026 only (five more years).

Figure 8.
 Conclusions and
Recommendations

The main conclusions of the scenarios presented here and in the full paper (Garcia and
Gamio, 2012) are the following:

- The most favorable scenario from an environmental perspective is the veto of

electricity generation from natural gas which produces the minimum greenhouse gas
emissions, and in addition requires the minimum capital investments (Garcia and Gamio,
2012). This scenario assumes an aggressive development of new hydro-electric projects,
ideally on the coast and Andes above 2000 meters, to avoid the negative environmental
and social impacts of developing large hydro projects in the Peruvian Amazon.

- In the energy efficiency scenarios, the cost of reducing CO2 emissions through the
implementation of energy efficiency policies is fairly conservative at US$ 9/Ton CO2 ,
which compares favorably with average costs above US$12/Ton of CO2 reductions.

- Unless new reserves are found, the proven natural gas reserves will only last another
ten years, assuming a conservative scenario of GDP growth of five percent per year.
Even if in the next few years ten percent of possible reserves and fifty percent of
probable reserves become proven, then gas supply can be stretched to the year 2025 at
the most. In addition, if policies to prevent natural gas to be used for electricity
generation were introduced, the supply would only last through 2026. Such a scenario will
require the aggressive implementation of policies to promote the development of
additional hydro-electric projects.

- Any attempt to develop new non-conventional renewable energy sources projects

requires the development of additional transmission and distribution networks,
particularly considering the deployment of additional wind sources. Such costs are very
considerable and have not been taken into account in this analysis.

A final caveat: the Panel recognizes that these are conservative scenarios, because although
as yet undiscovered in other blocks, new gas deposits are likely to be developed that could
maintain the level of Perus indigenous gas production well beyond the period shown in the
graphs. At the same time, the rush to develop new sources can only exacerbate the patterns
found in the various sections of this report.

II. CUMULATIVE IMPACTS AND CONSEQUENCES

The goal of sustainable development is for natural resources to be utilized strategically, with a
proper balance between attaining equitable benefits for today and for tomorrow and with
minimum technologically feasible negative impacts and proper compensations for possible
damages to people and nature.

It is a symptom of the complexity of the issues at stake that in the case of Camisea gas
exploitation, the problems are not principally caused by a lack of capital resources for taking
the correct action or having the will to do so. Although environmental impacts can be
reduced even more, it is the social impacts and consequences that have and will cause the
most profound and irreversible changes. However, depending on the scenario that develops as
a consequence of the collective decisions taken by municipalities, indigenous peoples in
transition to still-to-be envisioned social dynamics, settlers and regional and national
governments, in twenty years the environment of the Lower Urubamba could be dominated
by deforestation and degradation.

We attempt to answer the following questions:

 Is there a national energy strategy and does the current hydrocarbon situation
conform to it?
How are hydrocarbon reserves estimated and how does this knowledge translate into a
strategy?
How does the sector allocate the rights and benefits of hydrocarbon activities?
What are the hotspots of hydrocarbon investments?
How can the Camisea hydrocarbon development be improved?

Diversification of the Energy Mix As shown in the previous section, natural gas has
contributed to the diversification of the energy mix: it has achieved a seventeen percent
participation in the current energy mix. However, this has not been enough to avoid the
advance and positioning of imported oil in Peru: the oil deficit reached a high of US$2.4
billion in 2008, a combination of high international prices and faster-than-expected growth
in the demand. In recent years the deficit has been reduced.

It can be argued that the Camisea Project has not been fully able to achieve its goal to reduce
Perus dependency on imported oil. One reason has been the weak implementation of
policies for the mass domestic consumption of natural gas, as well as insufficient incentives
to transform a national production model that is still dependent on oil. The other is the lack
of reserves and limited gas transport infrastructure, which has impeded the signing of more
contracts with energy producers and the petrochemical industry.

Hydrocarbon Reserves - The estimation of hydrocarbon reserves at a national level is

fundamental for strategic planning and decision-making in the sector. However, the
government lacks the capacity to define accurately and estimate natural gas reserves. Official
data analyzed show differences of up to fifty percent of the proven natural gas reserves, and
currently, both official and private documents on natural gas reserves show serious differences
that do not allow certainty about the size of natural gas reserves. The absence of a clearly-
defined institutional framework in legal and procedural terms for the definition of
hydrocarbon reserves at a national level aggravates this uncertainty.

Natural Gas and Natural Gas Liquid Production - Both the production of natural gas and of
natural gas liquids significantly increased after the Camisea Project started operating.
Production increased markedly again with the start of the commercial operation of the Peru
LNG Project. This increase in production of the Camisea blocks (Blocks 88 and 56
respectively) took place in the face of restrictions for natural gas in the domestic market.

Contracts - There are two kinds of contract: (i) for services, in which the companies have no
rights over the hydrocarbons and (ii) concessions for exploration and exploitation where
companies own the hydrocarbon and thus can decide over the final destination of the
hydrocarbons. Only four out of eighty-four contracts are of the former kind, while since
1993 all contracts are of the latter kind.

Individual oil and gas blocks can comprise large areas, sometimes larger than 1 million ha,
over land that in the Amazon is often titled to indigenous communities, although Perus
Constitution is in line with international practice in which underground resources, including
minerals and hydrocarbons are owned by the State. The large areas under concession in the
Amazon have not necessarily translated into more exploratory wells drilled, which are needed
to have the best possible information on hydrocarbon reserves and increase future
production. For example, only twenty-eight wells were drilled in Peru in the period between
2007 and 2010, while more than three hundred and fifty wells were drilled in a much smaller
area in Colombia, a country that probably shares some geological features with Peru and
many environmental and social characteristics. Given that exploration contracts can last for
seven years or more, while exploitation contracts an additional thirty to forty years,
mechanisms for gradually releasing unyielding block sectors should be explored and
implemented to reduce the perceived and real footprint of oil and gas operations or permit
the concentration of the operations in more promising areas.

New Investments in the Sector - the hydrocarbon sector is going through an investment boom.
Investments of US$9 billion are projected through 2014, a considerable participation in the
Gross Domestic Product (GDP). These investments are focused on two geographical areas:
the Napo Tigre Basin in Loreto and the Urubamba Basin in Cuzco. A large part of this
investment is to increase gas supplies, given the trends analyzed in the previous section.
However, this investment push does not include an overarching and comprehensive socio-
environmental strategy to tackle and prevent possible impacts on the protected areas, the
indigenous territories and on people living in voluntary isolation as shown in the sections
below.

In the case of Block 88, there is a new Exploration and Exploitation Campaign, one in San
Martin Este and two others, in mid-term for Kimaro and Armihuari. One concern is that this
campaign would involve an intervention over eighty percent of Block 88 which overlaps
with the Nahua Kugapakori territories for indigenous peoples in voluntary isolation and in
initial contact. The State has implemented a series of measures that will allow the Camisea
consortium to enter the area, putting these populations at risk. The government, represented
by the National Institute for the Development of Andean, Amazonian and Afro Peruvian
Peoples (INDEPA), does not have the institutional, logistic and budgetary capacities to
ensure the real protection of indigenous peoples in isolation and initial contact in the Nahua
Kugapakori Territorial Reserve.

In the case of Block 56 (reserved for exports), the increase in production may demand
increased transport capacity of the pipeline. The expansion of the pipeline from the
company Transportadora de Gas del Peru (TGP) involved the design of the Loop Selva
project. A group of non-governmental organizations representing a wide range of
stakeholders interested in the impacts of the Camisea Project proposed the implementation
of a corridor of pipelines responding to territorial planning, in this case mainly following the
right of way of the existing gasline and avoid the potential construction of a gas line with a
different ROW for each block, which would unnecessarily increase the gas transport
infrastructure footprint.

For example, there is an alternative project (the Loop Sur) which, compared with the Loop
Selva, has a better design and does not have significant impacts on protected areas and
communities. It is unfortunate that this has come to pass through socio-environmental
unrest. It is commendable that Repsols Block 57 and Pluspetrols 56 projects have been
integrated, for example with common infrastructure, which decreases impacts on fragile areas
caused by a duplication of infrastructure.

Even though the political decision has been taken, i.e. that gas will be delivered to the
southern regions, there is still a lack of regional development plans harmonized with national
policies to define the most strategic use of natural gas.

A Program for Development and Mitigation In response to these unaddressed problems,

civil society organizations have been advocating for the design and implementation of a
program for the development and mitigation of direct and indirect impacts in the Urubamba
Basin, with the objective of improving the existing mitigation measures and emphasizing the
socio-economic and cultural development of the native communities in the area.

For this purpose, this program must highlight different courses of actions, such as: planning
at the basin level; preparing and implementing a regional energy development plan which
allows the regions to benefit to a greater degree from hydrocarbon products; measures for
establishing compensation funds for managing them and establishing mechanisms for native
communities to benefit directly from mining royalties, among others. Likewise, this program,
during its design and implementation process, must ensure participation, accountability and
inter-institutional coordination as criteria for measuring its effectiveness.

Environmental Management System

The overarching question addressed herein is whether the legal and institutional framework in
Peru is properly able to address two separate sets of issues: (i) environmental and social
impact avoidance and mitigation and (ii) strategic use of gas and gas revenue to fuel and
sustain local, regional and national economic and social development. Both sets of issues are
explicitly addressed by the National Environmental Management System (SNGA), although
other institutions have more decision power, especially for the latter set of issues, an
example being that the SNGA does not take decisions over the use of gas and gas revenue.

As part of the SNGA, the National System of Environmental Impact Assessment (SEIA)
evaluates public or private projects, programs, plans and policies that may cause significant
environmental impacts. Projects are evaluated with EIAs, while programs, plans and policies
are evaluated with Strategic Environmental Assessments (SEA), a tool added to the SNGA in
2009.

Ideally, the national or regional government uses an SEA to evaluate and iteratively improve
a policy, plan or program to reduce environmental and social impacts, while strategically
improving the conditions (e.g. legal framework, coordination among government
institutions, resources) for the policy, plan or program to succeed. Once the SEA is finished,
projects are proposed by the public or private sectors. Individual projects are evaluated and
improved through the use of EIAs to reduce environmental and social impacts. Cumulative
and indirect impacts resulting from the aggregation of individual projects in the same
geographical area should have been addressed by the SEA.

Due to a series of shortcomings the SNGA does not work as intended. On the one hand,
details on the regulations for the SEA have only recently been implemented and there are
still gaps, and on the other hand the EIAs have evolved into cumbersome documents, seldom
effective in working as intended.

Strategic Environ mental Assessment:

In Peru, the incorporation of SEA in the regulatory framework was established by the specific
regulations of the SEIA Law. This regulation indicates that the SEA is an environmental
assessment tool which aims to internalize environmental and social variables in the proposed
policies, plans and programs which are developed at national, regional and local levels in
order to become a preventive environmental management tool and is a binding instrument.

SEAs in Peru are still required to meet the follow principles:

Harmonization of policies, plans and programs for all levels of government. It is
essential to develop national policies for the different levels of government to ensure
that the impacts that could be generated by the development of the Policies, Plans and
Programs (PPP) will not generate irreversible effects on nature or populations, including
indigenous peoples. However, in Peru there is still no harmonization of policies, plans
and programs of different sectors and levels of government as the national economic
policy prevails over the others.
Complementarity with other instruments of environmental management. Bottlenecks
(technical and financial) to implement Regional Planning and Economic Ecological
 Zoning must be overcome to provide key information for comprehensive decision-
making in SEAs. The enactment of the Land Management Law and the identification of
a governing body are important steps for doing so.
Strengthening environmental governance. There must be an improvement in the
mechanisms of transparency and public access to information on decisions taken at
national level like policies, plans, programs and projects, as the information is fairly
centralized in ministries and agencies in Lima. Improving these aspects facilitates the
implementation of SEAs in Peru.
Influence on decision-making and implementation of sustainable development goals
should be visible. The regulations and implementation of the SEAs should seek, among
other things, that the SEA process is performed in parallel with the development of a
PPP to influence the decision-making process and should result in stronger
environmental governance and compliance with specific goals for sustainable
development.
Capacity-building for implementation of SEAs. Specific skills are required to define
and strengthen the financial and technical institutions that would be involved in the SEA
process like the Ministry of Environment and the National System of Environmental
Control (SINEFA), sectors and regional and local governments. It also requires advance
directives and guidelines to incorporate the SEA into the formulation of PPP.
Recognition of the rights of indigenous peoples. Any rule or guide on SEA
implementation must also recognize the right of indigenous peoples to be consulted on
plans, programs and policies that may affect them directly as established in the Prior
Consultation Law and ILO Convention 169 and Law No. 29785.
Improve performance standards in applying SEA. Some lessons have been learned
following the implementation of the SEAs of the Hydrocarbon Activities Development
Program in the Lower Urubamba (PDHIBU) and New Sustainable Energy Matrix Program
(NUMES):
The strategic level of SEAs to influence sector policy reform. Although in the
energy sector there are two important experiences of implementation of SEAs,
the Peru 2010-2040 National Energy Policy was approved without an SEA,
undermining it as a prior step.
SEAs apply to PPP, not to projects already approved, to influence decision-
making in a timely manner and prevent social and environmental impacts. For
PDHIBU, the results were not considered for the development of projects in the
Lower Urubamba.
SEAs should help identify a range of scenarios to choose an intervention with
better social and environ mental performance, and not just provide the sector
vision of development as in the case of PDHIBU.
The results of the SEA must be formally approved and have monitoring and tracking
mechanisms to avoid a repetition of the experience with the PDHIBU which is necessary
for strengthening the Environment Assessment and Supervision Agency (OEFA) and the
Ministry of the Environment (MINAM).
The SEA uses a series of parallel analytical approaches to the formulation of the
PPP which enriches the analysis and strengthens the decision-making process as in the
case of NUMES. However there must be political commitment to taking into account the
results of process planning and SEA.
The SEA requires a high degree of stakeholder participation. While the NUMES/SEA
uses adequate methodology for parallel influence in the energy sector planning, methods
of participation and transparency of information need to be improved.

Environ mental Impact Assessment:

The EIA has a longer history than the SEA. Some of the conceptual shortcomings were
addressed with the adoption of the latter. However, all involved sectors agree that EIAs have
evolved into cumbersome checklists, which fall short of achieving their purpose. The
following shortcomings and weaknesses have been identified:

Potential conflict of interests within the sectors involved. A sector both promotes
investment policies and also approves environmental assessments.
Limited institutional, financial, administrative and logistics for the approval of these
studies. A UNOPS consultancy to the public mining sector showed that delays of five to
six times the established statutory deadlines for approval of EIAs are to a great extent
due to the limited institutional, financial, administrative and logistics capacity for the
approval of these studies.
Content of the EIA still insufficient. In other words, in their function to mitigate,
minimize and reduce environmental and social impacts that result in economic activity,
the analysis shows that there is:
Little accurate knowledge of the elements and socio-environmental impacts of
the projects.
Lack of adequate criteria of inter-culturality and local reality, limiting the
affected populations understanding of the EIA, because it is written in a
different language or uses technical jargon.
Poor quality of EIA: repeated approaches to biodiversity assessment and
baseline studies, even using transcripts of previous EIA studies ("copy-paste").
No timely access to EIA according to the deadlines set by the EIA approval
process.
Population often lacks the technical skills to respond in a timely manner to the
points made by the EIA.
Failure to comply with the periods for review (120 days).
Socio-environmental conflicts and politization arise from the structural
weaknesses of the EIAs.

In view of these problems, we make the following recommendations:

Strengthening environ mental units with greater resources, qualified personnel and
incentives for EIA approval or rejection according to deadlines. An important element
will be to analyze emblematic EIAs and generate lessons for subsequent EIA
procedures. In this sense, the random evaluation conducted by the MINAM could help
improve this instrument in the hydrocarbon sector.
Taking into account the synergistic and cumulative impacts of all activities taking
place in the same area. The environmental and social impacts often go beyond the
project area, but typically projects do not seem to consider that complex direct impacts
can be extended in time and space.
More co mplex analysis tools are required in the EIA. These instruments could be:
1. More detailed analysis of baseline studies of the biological component,
specifically requiring biodiversity factor analysis beyond inventories of flora and
fauna, performing an eco-systemic analysis and the genetic component.
2. Economic valuation of natural resources and environmental services with
cultural criteria, especially cost and timeliness.
3. Economic assessments of environmental and social impacts that the activity
will produce.
4. Deeper and more detailed analysis of the social impacts (cultural,
anthropological, religious) that the activity produces.
Including a deeper analysis of the social, cultural, and anthropological aspects of an
oil extraction project. The annexes to the SEIA Laws regulations takes social issues into
account in the Terms of Reference for the preparation of detailed environmental impact
studies and in the criteria for identifying negative environmental impacts. Despite this,
 the MINEM has not employed a comprehensive approach to social issues in previous
assessments for the approval of activities.

Consultation and participation

In 2009, indigenous people called a strike in Bagua which after a police intervention resulted
in thirty-four deaths on both sides. In the aftermath of these events the issue of consultation
has been taken more seriously by Peruvian society. There are three ways in which local
people associated with proposed projects can express their concerns and needs:
1. By exercising the right to citizen participation in environmental issues during project
development.
2. By free, prior and informed consultation when dealing with indigenous peoples, especially
indigenous and rural communities.
3. Through negotiation between the project proponents and the local owner of a property
or community when it affects any particular right by the construction and development
of the work (lost profits or damages).

The following drawbacks and issues where found to impede adequate participation:
The absence of the government and the lack of planning processes for this type of
investment in land or areas where people live and have corresponding rights.
The limited information available to local people, especially indigenous peoples about
their rights, and the benefits and impacts of these projects.
The constraints on meeting, discussing and agreeing on environmental and social
obligations assumed by the project owner through the EIA and other instruments of
environmental and social management.

The Prior Consultation Law is an important step in the right direction, but there are still
gaps, such as the fact that indigenous peoples cannot participate in the planning stage of
sector plans and programs, and are only engaged when the project is almost a fait accompli.

A draft for the regulations of the Prior Consultation Law with a much more detailed legal
framework was submitted in November 2011. This still does not address some critical aspects,
for example: (i) the capacity, or lack thereof, of the stakeholders to meaningfully influence a
project, and (ii) the lack of involvement opportunities for indigenous peoples in the earlier
stages of the concession process, thus forcing the companies that have legally obtained rights
to defend them even against indigenous opposition.

III. S O CI O-ENVIRONMENTAL IMPACTS, FOCUSING ON THE CAMISEA

REGION
Picture 1: Shipwrecked hospital boat at the mouth of the Camisea river.

The shipwrecked ambulance at the mouth of the Camisea river shown in Picture 1, donated at
a price of US$150,000 by PetroBras as a part of initial community negotiations for gas
exploration, is an apt metaphor for the unfortunate state of development in indigenous
communities on the Lower Urubamba. During the first four years of operations, roughly
US$1 billion were invested in the broader Cuzco region through the Canon royalties
arrangement. The Echarate municipality, to which Camisea belongs, is currently the richest
municipality in Peru. In addition to these government royalties from the Camisea gas
project, distributed through the regional and municipal government, individual communities
also receive compensation packages directly from the various companies operating in the
region.

This section presents the impressions resulting from a single field visit to ten indigenous
communities in the Lower Urubamba between November 26 and December 8, 2011 by Panel
member Dr. Shepard (Map 1). Dr. Shepard has carried out research in the Peruvian Amazon
for over twenty-five years, and is fluent in Matsigenka, the indigenous languages spoken in
the communities most affected by the Camisea gas pipeline. He made several trips to the
region to carry out research between 1995 and 1997. He was impressed with the dramatic
cultural and economic changes that have taken place since that time. He was especially
dismayed by numerous examples of failed projects, incompetent execution, wasted money
and squandered opportunities for development.

Map 1. 28 Communities and 1 Reserve of Machiguenga, Ashaninka, Kakinte, Yine, Nahua

and Yora Peoples in the area of influence of the PlusPetrol Camisea Project, Urubamba
River, Peru.
In addition to noting his own impressions revisiting the region, Dr. Shepard also interviewed a
total of twenty-one adult local inhabitants from different communities. The sample included
seventeen men and four women, including federation leaders, elected community officials and
ordinary inhabitants from the ages of twenty to seventy. Interviews at this phase focused on
elected community and indigenous federation leaders (nine of twenty-one people
interviewed), so the sample is not representative of the overall population, being somewhat
biased towards males and people of middle age (mean age 39.3). Dr. Shepard asked each one a
simple question: how have things changed since the Company (their term for the various
gas and oil consortia working in several different concessions) began work? For those who
spoke little Spanish, he carried out the interviews in the Matsigenka language; those who were
more fluent in Spanish sometimes switched back and forth between the two languages
depending on the topic. He took notes on peoples open-ended responses, and then coded the
results which are summarized in the tables that follow. Despite some variation, there was
remarkable concordance between the independent responses of people from different
communities.

Before the trip Dr. Shepard interviewed officials from the departments of Natural Resources
and Social Development of the regional government in Cuzco, as well as technicians and
consultants for the Matsigenka Communal Reserve and Otishi National Park in Quillabamba.
In the Camisea region he also interviewed community relations representatives from
PlusPetrol, indigenous company employees and environmental monitors, and members of the
non-government organization PRISMA who are working to improve child health and
nutrition.
This section of the report is organized around the results of these interviews (for complete
results see Shepard 2012), supplementing local peoples perceptions with Dr. Shepard's own
observations and analysis. Because of the overwhelmingly negative opinions held by
everyone he interviewed about the situation, Dr. Shepard has chosen to preserve the
anonymity of all those who spoke with him.

Environ mental Changes:

Of all the changes noted by the people that Dr. Shepard interviewed, environmental impacts
were the most frequently and consistently mentioned (Table 1). Of the twenty-one people
interviewed, twenty spontaneously mentioned the reduction of fish stocks and nineteen
mentioned the scarcity of game animals; twelve mentioned various forms of direct or indirect
environmental contamination as being notable, and negative, changes brought on by the gas
extraction project. Among the kinds of contamination mentioned were: gas spills, gas burn-
off vapors, helicopter and airplane noise, strange chemical smells in the water or fish, and
common trash (especially plastic wrappers) left behind or thrown into the river by traveling
merchants and their customers.

Table 1: Environmental chang es mentioned independently in twenty-on e

interviews

Contaminatio
Fish Game
n (spills,
scarcity scarcity
nois e, etc.)

20 19 12

People in the region universally complain about the reduction both in the overall quantity of
fish harvested and in the size and health of fish.

One man noted: Fish have really disappeared. There are no more big fish. Theyve gotten
skinny, sometimes they have an illness on their skin. Fishing has really gone down since
PlusPetrol ca me. Both fish and forest ga me have gone, we are suffering from hunger. The
fish are really skinny, theyre all head, no body!

People gave a number of different explanations as to why fish stocks were declining, the
most common being gas spills (six spills have been properly documented since 2004) and
greatly increased river traffic (according to one man, thousands of boats passing) as a result
of company activities.
Picture 2: Local people blame gas spills and heavy river traffic for th e
disappearance of fish, their mai n source of protein.

Several people Dr. Shepard interviewed expressed both frustration and disbelief at the
Companys (i.e. PlusPetrols) apparent eagerness to deny responsibility for the widely noted
declines in fish stocks: The Company says there is no conta mination, but as a villager I see
the conta mination. There are no more fish. Before there were lots of fish in abundance.
Before you would go out and bring home half a kilo, a kilo. Now you spend all day and
come back with two little fish We can see its diminishing, the fish are getting small. For
me, its contamination, I dont know. But the Company says there is no contamination.

A woman Dr. Shepard spoke to was shocked and frightened in July of 2011 by the unusual
die-back of a species small catfish known as koryo in Matsigenka. Speaking in Matsigenka,
she showed Dr. Shepard photographs of the dead fish and also expressed dismay at the
Companys denials and explanations:

Karanki julio koryo isaatake itaki. PMAC dice calor, yontaikavaigetake kanyotaka osaatake
kovajari. Empresa ikantaka katsiringa nia. Shima pashini iengaagake, asurontoenga, sabor
qumico, empresa dice que Platn. Tetya pairani noneake yontaikavaigetake koryo.
Otayara ipokake empresa okantatiga oenkake shima:

Last July the koryo all died, they were all over the place, it looked like someone had
scalded their skin with hot water. PMAC [The Comm unity Environmental Monitoring
Program] said it was that the river water got too warm. And the boquechico fish had
a strange smell, acrid, like chemicals. They said it was from Plato [i.e., the
plankton]. I have never seen anything like that, all those fish dying. Only since the
Company arrived has the taste of fish changed.

She concluded in Spanish, observing: Even when the rivers got low the fish never had that
taste. The PMAC representative said it was our fault for throwing trash and old batteries in
the river.

Picture 3: Last July all the koryo died,

they were all over the place, it looked
like someone had scalded their ski n
with hot water I have never see n
anything like that, all those fish dying. Only since the Company arrived...

A few of the people interviewed by Dr. Shepard suggested that human population increase and
the growing use of gill nets might also contribute to fish scarcity. In addition, it is likely that
commercial overexploitation by booming regional markets is also a factor. The fish species
most often mentioned as having disappeared or become greatly reduced (paco, sabalo, dorado
catfish, doncella catfish, carachama armored catfish) are precisely the same fish species most
often served in restaurants in population centers like Sepahua. People also note that fish
prices have risen sharply in local markets, a further sign that commercial exploitation is a
factor.

While local people are willing to recognize their own contribution to the regional fish crisis,
the gas companies (as well as PMAC monitors) appear highly resistant to any suggestion that
their activities (whether actual spills or increased river traffic) have contributed to the
problem. As one man sees the situation:

Are we the predators? Is it the Company? For me it's both sides. We don't know how to
manage our resources, but the Company has also contributed with noise and contamination.

Social and Economic Changes:

Many of those interviewed consistently and independently mentioned a number of social and
economic changes, some positive though most negative (Table 2). The most often
mentioned negative change was alcoholism: seventeen of the twenty-one people interviewed
mentioned that indigenous community members are spending large amounts of cash income
buying alcoholic beverages, especially beer.

Table 2: Social and econo mic chang es mentioned independently in twenty-o n e

interviews

Other
Positive Corruptio
Alcoholis negative C ulture Conflict with
effects of n of
m effects of loss outsiders
cash income leaders
cash income
17
14 9 9 9 7

The Matsigenka and other indigenous peoples of the region consume a traditional beer made
from fermented manioc root known as masato in Spanish or ovuiroki in Matsigenka.
Producing and consuming large quantities of masato is central to traditional Matsigenka social
life (Shepard, 2002). Shepard observed several occasions in which beer was being used in day
to day life much like masato would be, as a refreshment to serve to guests or to share with
family members. Indeed, beer seems to be replacing masato in some more cash-dependent
communities, and many of those interviewed lamented how their traditional beverage is being
supplanted by store-bought beer. While masato is prepared (and of course shared) by women
using the produce from their gardens, beer is bought and controlled mostly by men who work
for the gas companies in various roles. This shift in alcohol consumption patterns is having a
profound negative affect on gender relations, and many of those interviewed (especially the
women) complained of increasing levels of domestic violence and wife abuse.

As one woman noted in Matsigenka, Ishinkivaigetei yantavaigeigi cerveza

ikisavakagaiganaka. Ikisakero ijina. Notomi ishinkitakero cerveza ikisakero ijina:
 The men who work for the company buy beer and get drunk. They get into fights with
one another. They beat their wives. My son went to work for the company. He started
getting drunk on beer and fighting with his wife.

Most of those interviewed mentioned the much greater availability of jobs and cash income
as being a notable change brought by the gas project. And yet fourteen of the twenty-one
people interviewed mentioned negative changes brought about by the cash economy: loss of
interest in agriculture among the youth, price inflation, monetization of social relations,
envy and greed, the loss of qualified school teachers to higher-paying Company jobs, and
the emergence of prostitution.

While we generally associate development with an increase in the value and quality of
education, several people note the opposite trend in Camisea. On the one hand, many of the
best trained bilingual indigenous school teachers have left their lower-paying teaching jobs to
pursue higher-paying jobs in various roles with the gas and oil companies. As one outside
professional working in the region noted:

We have lost many good bilingual professors. Seventy or eighty got their teaching certificates,
now theyve left, they were snapped up by the companies. They were leaders in their
com munities. The companies have snapped up a whole generation of qualified young
indigenous professionals: teachers, anthropologists. There are five companies, thats a lot,
theyre all hiring. This has weakened the public school system, now all the teachers are from
here [Quillaba mba].

Picture 4: A school house in a heavily impacted community along the Camisea in

disrepair.

Moreover, and paradoxically, several people noted that the cash economy has caused an
increase in illiteracy and a decreased interest among the youth in pursuing education. One
woman complained in Matsigenka about the new school teachers and their inverted system of
values, Maika iponiaka profesores nuevos, ishinkitaka cerveza, tera irogotaganatake,
yogotagake ovegaga. Ikantake tyara pikiaka esekuela, aityo empresa, aityo trabajo:
 New school teachers have come, they drink beer all night, they dont teach well, they
set a bad example. They told my son, Why do you want to go to school? Youve got
the Company! You can get a job.

She concluded in Spanish:

The children dont want to study any more, all they want to do is get a job and have their
girlfriend or boyfriend.

In all, nine people mentioned positive effects of the cash economy, mostly for young
people: its good to have money; we are able to buy boat motors, fishing nets; its good
for young people to have jobs. But even in four of the nine examples where people
mentioned positive effects of cash income, these comments were tempered by some negative
comment, such as people dont care about each other anymore, all they care about is
money; the young people dont know the value of money, they waste it on beer; or
simply people have gone crazy for money.

As one man summed it up: Its good for those who want to work. Money comes in. Thats
all.
Nine of the people interviewed mentioned the erosion of various cultural traditions among
recent changes, especially the replacement of masato by beer and the loss of spinning and
weaving skills and decreased use of the cushma, a traditional cotton tunic. An additional nine
people independently mentioned conflictive relationships with outside ethnic groups,
especially Andean colonists and roving merchants (comerciantes). Seven people
specifically mentioned the corruption or co-option of community leaders as a result of the
large amounts of money involved: our leaders have sold themselves.

As one young indigenous leader noted: Where is the weakness? For money. Before people
didnt know about money. They knew a 10 cent coin, a 20 cent coin. Now the leaders
manage 20,000 soles, 30,000 soles. They go crazy. They leave their families for money. The
com munities have become corrupted over money.

Perceptions of Development Aid:

Vast amounts of development aid are entering the Camisea region, both via the regional and
municipal governments Canon royalty payments, and through direct compensation
payments and social projects by the companies. Local peoples perceptions about these
investments are ambiguous at best, indeed in the balance, their evaluation is mostly negative
(Table 3). For example, sixteen of the twenty-one people interviewed independently
mentioned failed infrastructure projects in their communities: of these, nine independently
noted failed water and sanitation projects.

In the ten communities that Dr. Shepard visited, all had been provided with house-by-house
tap water systems by the municipality or other sources over the past decade. Of these, eight
were currently inoperative, apparently due to incompetent execution or inadequate planning.
Neither of the two communities with functioning tap water had any sort of filtration or
purification system, meaning that contaminated stream water is piped to households. Health
care workers instruct people to boil or purify this non-potable tap water with chlorine; but in
Shepards experience evaluating similar tap water systems installed by government projects
(www.cyberschoolbus.un.org/pufp/peru/about.asp), it is exceedingly difficult to get adults,
much less children, to follow-up with water purification. There is no excuse for such poorly
planned and executed water projects, given the extremely successful, sustainable water
projects that have been carried out by modest NGO investments in Madre de Dios and Manu
National Park (www.houseofthechildren.org/programsTayakome.html).
In three communities Dr. Shepard observed quaintly painted, cinder-block flush-toilet
outhouses that had been built based on a model used wisely throughout the region.
Unfortunately, none of these communities had running water so the toilet/wash basin
complexes were dry and in a complete state of disuse, in one case for over two years. In one
community (also without water) Dr. Shepard observed a construction team building similar
bathroom units using cinder blocks. It was perplexing as to why he was building the structure
before the septic tank was installed in the ground beneath it. Shepard asked the construction
worker, Wouldnt it be easier to build the structure over the septic tank after the hole has
been dug?. He replied, Its another company that digs the hole, all we do is build the
structure.

Pictures 5-7: Failed water projects abound in the region: Left: A clogged, non-functioning
utility sink; Center: A new sink/toilet module that has been dry and closed for two years due
to lack of water in the community; Right: The people of Segakiato carry untreated stream
water manually from a tube inserted into the holding tank of a failed water project.

In two communities with failed tap water systems, Dr. Shepard observed large billboards
announcing multi-million Sol expansion projects for the existing water systems. While
billed as expansions these renewed water projects appear to be, in fact, repair jobs to fix
incompetently executed prior projects. After just a few days in these communities, Dr.
Shepard came down with a severe case of dysentery that included three different kinds of
amoebas and protozoa, despite treating his own water with chlorine pills but consuming foods
and the occasional cup of fermented manioc beer at the invitation of local communities.

As one indigenous university student summed it up: Is this develop ment? No way. The
companies dont want to help build water systems, bathrooms, latrines. They say, The
government is responsible for that. We give the government money, the government needs to
take care of it. What do they give us? Emergency medical transportation and zinc roofing.
Thats all.

And yet counter-balancing this view in a somewhat more positive light, one young indigenous
leader noted: The Company is already here, there's nothing we can do about it. But the
Company isn't the enemy. We need to make the best of the situation and seek benefits that will
last for ten, fifteen, twenty, thirty years. The Company is just here for what's under the ground,
they didn't come here to develop us. We have to join together and develop ourselves. They
have been doing projects just to spend money. We have to make sure these investments last
for fifty years. It is sad to see people spending money, living just for the current moment,
though in their hearts they are poor. Water is the most primary need, the best quality
possible. Then education.

Table 3: Ben efits and failures of developm ent aid mentioned in twenty-on e
interviews

Governan Negative Positive

Fail ed Successful Governance
ce program program
projects projects failures
progress experi ence experi ence

16 13 12 3 6 2

Of those interviewed, thirteen mentioned successful infrastructure and other compensation or

aid projects as being positive changes brought about by the Company. While the most
universally criticized examples were government-installed water projects (above), the most
commonly mentioned successful examples were direct compensation aid from the Company
for house or community center construction, zinc roofing, solar panels, and electrification.
Travel aid for school teachers, patients and community leaders as well as university grants
were also mentioned by some as a successful example of Company aid. Some, however, had
criticisms of the university grant program. One man noted that of twenty-five students who
had received university scholarships through his indigenous association, only seven had
graduated. The rest had languished or failed due to lack of mentorship, support, or because of
social problems like alcoholism.

Three people noted that the current legal context governing indigenous communities rights
and contracts with gas and oil companies is an improvement over previous experiences in the
1980s and 1990s, when Shell and Chevron carried out exploratory work in the region. At
least the companies have a code of conduct now, said one young indigenous leader, even if
they dont always keep their promises.

Twelve people mentioned lapses in governance and planning that contributed to project
failures. The government-funded water and sanitation projects were again the most frequently
mentioned culprits. One community president described these tribulations: It took us six years
to finally get water. Three million soles [close to a million Dollars]. We first asked the
Company for help but they didnt want to. So the municipality started the project in 2004.
Six years later they ran out of money. Only in 2010 did we start having tap water, and they
still havent finished, my street doesnt have water yet. When they designed the system there
were 150 families, by the time they finished there were already 200 families. The engineers all
stay in Echarate [municipal seat on the upper Urubamba], they dont come here, they just
calculate it all up there.

Another leader described similar problems in his own community: Were waiting for water for
two years. Bad designs, outdated designs: it doesnt work. A year and a half, two years
theyve been working on it, we see the money piling up but they never finish. Its the same in
all the co mmunities, they start sanitation projects but they never finish!
In two cases, people criticized Company-financed fish culture ponds installed with money
meant as compensation for gas and fuel oil spills that affected fish populations: They spilled
fuel oil in the river and we asked them to make a fish culture pond. Carp, tilapia. We dont
know anything about it, didnt know the tanks needed to be made of cement. They made the
tanks out of compacted earth. They dammed up a stream. But the engineers arent from
here, they dont know our reality. With the first floods, the river rose and washed out the
tanks. It all went into the river. There they are, all empty. What we need is a lawyer to advise
us.

This man shrugged his shoulders and laughed as if this kind of tragically squandered
investment were a common, even expected outcome. Again, poor planning, poor governance
and a lack of recourse lead to a sense of futility. Only one community in the region, the
community of Camisea, has a strategic, long-term plan for channeling and prioritizing
development investments. The rest of the communities work with one-year fiscal plans,
whose only strategic goal is to spend as much money as possible. Both indigenous
representatives and other observers told Dr. Shepard that Echarate municipality is so flooded
with money from the Canon payments they hardly know what to do with it. One man
described teams of engineers roaming from community to community proposing (and
charging the municipality for designing) a whole series of projects, many of which are never
executed. The ones that are executed appear to be done so with no degree of strategic
planning, capacity-building for local communities, or plans for long-term social sustainability.

The amounts of money being invested (and sometimes wasted) are very large. One
community president noted as follows: Repsol gave us 80,000 soles compensation,
PlusPetrol gave us US$ 300,000 direct co mpensation plus US$ 400,000 for the pipeline
right of way. The community meeting center was built with indirect compensation funds, but
that project failed: mismanagement of funds. TGP paid us US$ 40,000 for the gas spill on
the Palotori river, we used that to finish the community center. In 1999 the municipality put
in a water project but it never worked, every summer it dried up and now it doesnt work at
all. Two years ago they began an expansion project, 2 million soles, but they still havent
finished it, its been a year and a half, almost two years, and no result yet.

Six people interviewed mentioned negative experiences with Company-financed community

programs, notably the PRISMA child health program and the PMAC community
environmental monitoring program. The company-sponsored environmental monitoring
program was viewed with distrust by five of the six people who mentioned it. Only one
person mentioned appreciating PMACs work teaching people how to deal with trash. The
two main criticisms are lack of independence and lack of transparency. Community members
clearly identify PMAC as working for the company, so when an event of environmental
contamination is reported and the PMAC team comes to carry out its observations and tests,
the assumption is that PMAC is there to look after the company interests in the first place,
and not the community interests. Moreover, several complained about not having access to
the results of the tests.

One man expressed an especially direct and skeptical view: PMAC doesnt work. Nothing.
Dont you see all the trash? The merchants are a mess, throw trash all over the co mmunity
port. PMAC doesnt investigate anything Some fish die, we think there was some kind of
contamination, then they come and say no They monitor it with their Cloro-Lab but the
information doesnt get to us, the people of PMAC dont get the information to us.

It is not only the communities who complain about not getting the results of environmental
monitoring. A high official in the Regional Department of Natural Resources Dr. Shepard
interviewed said the department has been trying to get environmental monitoring results for
the past five years to no avail. The PMAC community monitors Dr. Shepard interviewed said
they gathered regular data on fish and game harvest. Dr. Shepard saw none of these results on
the PMAC bulletin boards in the community. Such results could be extremely useful to
evaluate more objectively the widespread observation of diminishing fish and hunting stocks.
And yet, as far as Dr. Shepard could find out, no baseline study of fish and game harvest was
done in the communities prior to the initiation of gas exploration and drilling to serve as a
basis for such important comparative studies into the future. This in itself is a fundamental
lapse in any environmental monitoring program concerned with community resources.

The child health program, run by the Peruvian organization PRISMA, only operates in the
seven communities in the direct area of influence of PlusPetrol. One person made a positive
comment about PRISMAs activities. Other communities who also suffer problems of child
malnutrition do not understand why the PRISMA program cannot benefit them as well. And
yet some communities where PRISMA is active are resistant of its methods and skeptical of
its results.

The basic idea of the program is sound: to instill better hygiene and nutrition habits among
mothers to improve child health. And yet the PRISMA workers themselves complain of
difficulty with both language and cultural communications with indigenous women. Yet
paradoxically, there is no anthropologist on the PRISMA team, despite the teams
recognition of important cultural barriers. Their strategy of introducing exotic vegetables like
onions, tomatoes, cucumbers and cabbage is not likely to succeed among most families,
unaccustomed as they are to these foreign foods. It would seem wiser to adapt richly
nourishing local foods such as various palm fruits, nuts, tubers, wild and domesticated fruits
and so on.

Such cultural and language barriers make some Matsigenka women feel uncomfortable with
PRISMA workers attempts to change their basic eating and hygienic habits. As one woman
described in Matsigenka, Ipokavetaka dos aos, no hay mejoramiento, tera nonkogakeri.
Ogotagakero tsinaniegi. Patiro, dos, lo mismo, como van a dar sus hijos. Opokake
Matsigenka okantakero tera onkivero ananeki. Okiritikakero tera onkoiratake,
okisakoiganaka. Tovairo tera onkogaigero:

PRISMA came for two years. There was no change for the better. They taught us the
same two things over and over. This is what your children should eat, this is how you
should wash their hands. Their Matsigenka translator came from down river and
criticized us for not washing our babies, for not taking good care of them. She yelled
at us. Most of us here dont want them back.

An indigenous leader summarized his view of PRISMA, Its as though these girls come here
to get grossed out by us.

Health Impacts:

Health is one of the main areas that indigenous communities expect and demand
improvements as a result of development and modernization. Eight of the twenty-one people
interviewed mentioned improved medical attention as a result of Company interventions,
mostly the transportation of gravely ill patients back and forth from communities to distant
health clinics. Certainly these interventions have saved some lives and greatly improved
others.

And yet overall, people are under the impression that, as much as medical attention
advances, so do new and more dangerous illnesses appear and cause suffering. Fourteen of
those interviewed independently mentioned the emergence of new, previously unknown
diseases to the region as a result of the myriad changes brought by gas extraction. Of these,
five noted the appearance of venereal diseases including HIV/AIDS, previously unknown in
the Lower Urubamba. According to statements by several of those interviewed, there are
apparently six cases of HIV/AIDS in the Lower Urubamba, an unusually high rate of infection
for such a small population. Several people also mentioned an unusual new illness
characterized by high fevers and dizziness. One person mentioned rabies. Several suggested
that water contamination and air contamination by gas burn-off was causing skin and eye
irritation. The Matsigenka believe that epidemic illnesses are transmitted by unwholesome
vapors or odors that rise into the atmosphere and fall from the sky with rain or fog. The
eerie glowing of the gas plant at night as gas is being burned concerns many Matsigenka as
being a source of such airborne pneumatic illnesses (Izquierdo and Shepard, 2003).

Table 4: Perceived health impacts mentioned in twenty-one interviews

Improve
d Emergence Sorcery
Persistent
m edical of new accusation
illnesses
attentio illnesses s
n

8 14 12 5

In addition to such frightening new illnesses, twelve of the people interviewed had the
impression that certain persistent traditional illnesses, especially gastrointestinal conditions
such as diarrhea, had either not improved or else gotten worse. For example, several
mentioned the emergence of a stronger form of bloody diarrhea which one person said
came from colonists and comerciantes defecating in the river. The sorry state of sanitation
projects and Dr. Shepards own experience of triple amoebic dysentery reinforces this
perception. Several people also noted that child malnutrition had increased as result of the
environmental and social changes noted above.

Five people independently noted that illnesses associated with sorcery have continued to
increase in recent years. Internal social strife and competition as well as increasing
conflictive interactions with outside ethnic groups has led to a kind of sorcery epidemic in
the Camisea region. Those who mentioned sorcery universally described economically-
motivated envy as being its root cause: Mantsigarentsi pashini tengo nogotero. Mameri
pairani. Pinkamake shintsi: curandero. Ikisavitake los que no tienen trabajo, algo
timankitsirira. Tengo cargo, algo ipakena koririki, ikisavitake:

There was no sorcery long ago. Now youll die quick if you cant find a shaman to
heal you. The ones who dont have a job get envious of those that do. I have a job, I
earn a little bit, someone gets angry at me and does sorcery on me.

Sorcery is considered a foreign introduction, something the Matsigenka did not traditionally
practice, but resulting from contact with other ethnic groups: Not at first among ourselves the
Matsigenka. They would hire a brujo (sorcerer, witch) from far away to do sorcery. But
now our own fellow Matsigenka learn to do sorcery from the comerciantes, from the colonists
who come from other places.
The proliferation of sorcery accusations in such communities testifies to the coincidence
between exotic illnesses and new kinds of social and economic stress (Izquierdo, Johnson and
Shepard, 2008).

Conclusions:
The purpose of this preliminary study is not to establish absolute causes and verify objective
facts. Rather, the goal is to appreciate and analyze the perceptions of people in the region
most affected by the Camisea gas pipeline. Their perceptions of the situation largely
reinforced Dr. Shepards own: social development in the Lower Urubamba is shipwrecked, like
the PetroBras hospital boat in the picture. Huge amounts of money have been invested
without adequate strategic planning or oversight, yielding modest results, if any results at all.

In all, Dr. Shepard interviewed twenty-one Matsigenka community members about the
changes that have occurred in recent years. The number of people interviewed was fairly
small, and yet the degree of independent confirmation among many of the observations was
striking. Almost every informant unanimously and independently mentioned a precipitous
decline in the size and health of fish populations. Community members gave various
explanations for this decline, varying from contamination by spills, vastly increased river
traffic, or increasing population. In addition to these possibilities, Dr. Shepard suspects that
increasing demand for commercial fish catch in urban centers like Sepahua is also a factor.
Nearly all people interviewed mentioned alcoholism as a major social problem that has arisen
in recent years. Overall, they also see little improvement in their health situation: while new
medicines and emergency evacuation funds have been introduced, frightening new illnesses
have also emerged while social strife has contributed to a rising sense of unease culminating in
sorcery accusations.

One would expect that a serious baseline study by the gas and oil companies, followed up with
ongoing community monitoring such as several companies have implemented, would be
sufficient to diagnose these problems and propose management strategies to address them.
And yet so far Dr. Shepard has seen no evidence that any such studies have taken place.
Instead, social and environmental impacts, both direct and indirect, have been cascading for
years. Without independent and transparent monitoring procedures, and with apparently no
adequate baseline community resource studies, there seems little hope to understand ultimate
causes and responsibilities.

Dr. Shepard is not alone in observations and criticisms of the sorry state of development in
the lower Urubamba. An assistant manager for Social Development of the regional
government visited the lower Urubamba with a commission accompanying the regional
president and described the situation there as calamitous. As a result of this commissions
findings the regional government suspended, in late 2011, the renewal of PlusPetrols
collaborative agreement with the department of Social Development until these serious
problems with development planning had been addressed.

The municipality of Echarate is currently among the wealthiest in Peru in terms of per capita
income due to huge Canon royalty investments, yet this wealth has not produced resulted
sustainable results in the communities most affected by gas extraction. There is no reason
why native communities in the Lower Urubamba could not have the most modern,
ecologically and culturally appropriate bilingual schools, water and sanitation systems,
resource monitoring and management, intercultural health care systems, aquaculture,
permaculture and silviculture projects, etc. in the Amazon. As one community leader noted:
The gas well is 5 km from here They are taking gas out of our territory... At least we should
have clean water and a sewer system!

Many of the communities do, in fact, have electric power, and all the household gadgets
(TVs, radios, refrigerators, boom boxes, etc.) that go with it. And yet, in terms of priority,
should not clean drinking water, bilingual education and intercultural health come first? The
regional government, the municipality, the gas and oil companies, the indigenous federations
and the communities themselves seem to have no long-term plans or priorities for sustainable
social development, and projects seem to be executed in terms of a logic of maximal
visibility, and redundancy, rather than according to any strategic plan for social and
economic development (Yu, Levi and Shepard 2010). The levels of waste, haphazardness and
incompetence suggest rampant corruption.

An indigenous leader from the region summed up the situation this way:

What is happening in the lower Urubamba isnt develop ment. Its confusion. Everyone has
their chain saw, their boat motor, their zinc roof The rivers are contaminated, the young
people who have jobs dont plant crops People have money but malnutrition and illiteracy
are on the rise. There is no food, just cans of tuna. When theres no tuna, theres always
beer. What kind of future will their children have? This isnt development. Development is
education, health: in other words, living well. True development happens in relationship with
our worldview, with nature.

The social degradation caused by misspent money and squandered projects not only blights
lives, it also saps native populations capacity to defend 1.3 million ha of indigenous
rainforest reserves and titled lands surrounding Camisea. This figure grows to 2 million ha if
drilling proceeds in Madre de Dios, where prospecting is underway (see
http://ethnoground.blogspot.com/2012/02/roadless-and-fishless-in-camisea_16.html). It
will be a tragedy if the hydrocarbon economy overwhelms indigenous cultures and destroys
their well-documented ability to protect nature (Nepstad et al., 2006). Without closer
scrutiny of such insidious long-term impacts, the roadless utopia envisioned by some
conservationists for Camisea (Tollefson, 2011) may prove to be a mirage (Shepard and Yu,
2012).

The upper Madre de Dios river and Manu National Park, running parallel to the lower
Urubamba system to the south, are by comparison still relatively untouched by the chaotic
forces of large-scale development, though catastrophic gold mining is taking place on the
lower Madre de Dios. The upper Madre de Dioss economy is based mostly on ecotourism
and selective logging, with many native communities still largely depending on subsistence
hunting, fishing and agriculture. Dr. Shepard visited this region shortly after returning from
Camisea. The contrast could not have been greater. When Dr. Shepard asked several people
how fish and game populations were doing. Everyone said, Normal (Ohl et al., 2007).

Some companies are currently prospecting for gas and oil in the upper Madre de Dios in an
area every bit as sensitive as the Camisea, including some of the same predominant
indigenous groups such as the Matsigenka and Piro and others even more isolated and fragile
such as the now notorious Mashco-Piro. The region is especially sensitive due to the presence
of Manu National Park and a small but internationally famous ecotourism industry. The
impacts observed in Camisea should give pause to anyone considering a similar development
strategy for the upper Madre de Dios.

While in Madre de Dios Dr. Shepard ran into an old Matsigenka friend who was originally
born on the Manu River, was later raised on the Camisea, but came back to Manu as an adult
to marry and raise his own family. He had just returned from visiting family members on the
Camisea, and he had observed the same devastation, confusion and futility Shepard had seen
in that region. His comment was simple and direct: There is no life to live. No fish, no game.
The water is contaminated. There are many illnesses. Envy, sorcery. There is only work and
money. But there is no life to live.

Plans for Future Research:

After this preliminary research visit, the Panel has decided to commission three more
detailed studies by professional consultants under Dr. Shepards direction to look at key
aspects of social development highlighted in this report: (1) the status of bilingual
intercultural education in the lower Urubamba (currently in preparation); (2) a more
objective, comparative evaluation of health care issues and the status of community
sanitation projects; (3) a more quantitative evaluation of fish and game harvest and impacts.

In addition, it is critical to study successful experiences of indigenous development from

similar contexts elsewhere. If the current top-down approach is failing, then alternative
development scenarios need to be studied and considered.

IV. C OMMUNITY MONITORING OF EXTRACTIVE INDUSTRIES: WHAT THIS

CAN TELL US AB OUT LONG TERM SO CIAL IMPACTS IN SOUTH-
CENTRAL PERU

Introduction

One of the Panels mandates for 2011 was to determine if community monitoring of the
activities of extractive industry is an efficient and useful tool that helps the communities
achieve a more balanced relationship with the companies, advocate the Peruvian government
to take on a more neutral role and satisfy, to a larger degree, community expectations
regarding benefits from the extractive activities and a cleaner, safer environment. Even
though at the national and international levels there is a body of legal principals and norms
that encourage and support community involvement in local monitoring efforts, the
Peruvian government has not complied with those norms. The few cases of community
monitoring we have found in the oil and gas industry are ignored by the Peruvian government
and isolated from the wider debates regarding the impacts of extractive industry.

In fact we have identified only five monitoring initiatives in Peru that involve local
communities whose land and resources are affected by the extraction of oil or gas. The Panel
team that carried out this study (Dr. Smith) selected three of those to visit, interview their
participants and analyze their results. The first case is the Community Environmental
Monitoring Program in the Lower Urubamba Valley (PMAC-BU) which carries out its work
in the area of the Camisea gas project lead by Pluspetrol Peru Corporation S.A. (Block 88)
(Map 2). The second case is the Community Environmental Monitoring Program in the
Corrientes River valley which corresponds to the area where Pluspetrol Norte S.A. is
extracting crude oil and shipping it to the coast through the northern pipeline (Blocks 1AB
and 8). The third case is that of the Independent Territorial Monitoring Program of the
Federation of Native Communities of the Corrientes Valley (PVTI-FECONACO). This
program works in the same area as Case 2 (Map 3).

Map 2. Indigenous Communities Participating in the PMAC Program, PlusPetrol Camisea

Project, Urubamba River, Peru
Each large investment project for extraction of oil, gas or minerals has its own distinct
history of development and community relations. For example, the Camisea Project,
developed originally by Shell Oil during the decade of the 90s, is the largest such project in
Peru in terms of gas reserves and total investment. For that reason it has long been
considered a project of great national interest and given high political priority by three
successive governments. When the project was turned over to the Camisea Consortium, lead
by Pluspetrol, it came under more intense international scrutiny and criticism than any other
hydrocarbon project in Peru.
 Map 3. Indigenous Communities Participating in the PMAC
Corrientes Program, PlusPetrol Norte Project and Territorial
Monitoring Program of the Federation of Native Communities
of the Corrientes
Valley (PVTI-
FECONACO),
Corrientes River,
Peru

In our second case, over a decade ago, Pluspetrol bought two oil blocks and the other assets of
Occidental Petroleum located in the Corrientes valley of the Loreto Region. Included in the
package were all the environmental and social liabilities generated during the more than 20
years of crude production, during which time, the Peruvian government conducted little or no
impact monitoring. Once under the administration of Pluspetrol, a series of conflicts arose
with the local communities regarding the responsibility of the new owners to remedy the
accumulated negative impacts of the extraction and transport of the crude.
The extractive activities in both Pluspetrol projects brought important changes for the
people who live in the area of influence, a majority of whom are members of the
Machiguenga, Nanti, Nahua and Yine indigenous peoples in the lower Urubamba and Achuar,
Quichua and Urarina in the Corrientes valley. For many of them, the community monitoring
initiative was perceived as an opportunity for greater participation and involvement in a
large-scale economic project. That involvement, as it turned out, has taken place within the
context of a complex and dynamic interaction among the company, the Peruvian
government (including representatives of local, regional and national governments) and the
civil society (including the communities and their organizations as well as private and church-
based NGOs and foundations). This three-way relationship has been tense and conflictive, in
part because of the fundamental inequality in terms of power and resources among the
players.

The communities were interested in participating in the monitoring effort in part for their
fear of possible suffering both from negative environmental impacts and their mistrust that
the company would live up to its promises and agreements. The expectation, then, was that
it would increase their collective bargaining position for negotiating with the company and
the government.

By analyzing how these initiatives are organized and functioning, it is clear that the
sustainability of these local systems depends not only on financial resources and local
participation, but also on a clear legal framework that lends legitimacy to the initiative in the
eyes of all the stakeholders. If the legal framework is an important sine qua non, other more
contextual factors social, political, technical ones that encourage/discourage such an
initiative over the long haul are just as important.

With that in mind, the research team established as objectives for this exercise two important
methodological points of departure: 1. A critical look at the legal framework to understand to
what point it supports local monitoring initiatives and creates political-legal conditions that
are favorable for its independent operation, and 2. An analysis of case studies to understand
the conditions under which these initiatives emerged, how they function, the expectations
that they create and the results they produce.

This study of community monitoring initiatives in the context of the gas/oil industry, carried
out by a small team lead by Panel member, Dr. Richard Chase Smith, was oriented by the
research agenda established in the Panels 2010 Report. The team worked through structured
interviews of people with different types of involvement in the three case studies. The
interviews were carried out in the areas of all three cases, as well as in Iquitos, Cuzco and
Lima. Questions were asked regarding their perception of existing relations, how each
initiative and its governing bodies were established, the daily activities that the monitors
carry out and other relevant issues.

The Objective of This Study

This study seeks to determine, through three case studies and an analysis of the legal
framework, to what point a community monitoring effort constitutes a useful tool that
allows communities who live in the shadow of extractive activities of the gas/oil industry:

to achieve a better collective bargaining position with the company

to convince the Government to take on a more balanced role in this context, and
to satisfy, to a larger degree, community expectations regarding benefits from the
extractive activities and a cleaner, safer environment.

The Legal Framework for Community Monitoring

Peru has a legal framework that establishes principles and norms for regulating community
participation and initiative in monitoring impacts caused by extractive industries. It is a
complex matrix of principles stated in international covenants and declarations and national
legislation, expressed in the Constitution, laws, decrees and regulations. This body of laws can
be interpreted as supporting community monitoring as a meaningful instrument for
enforcement of citizen participation in environmental management and enforcement.
Criteria established by the Inter-American Human Rights Commission requires governments
within the Inter-American system to ensure that any environmental monitoring activities
taking place within the territories of indigenous peoples not be an isolated act, but part of a
set of appropriate mechanisms capable of: a) stopping activities that violate human rights; b)
leading to administrative or penal sanctions; and c) providing compensation for affected
communities. This is the standard to which Peruvian law and policies regarding
environmental monitoring by indigenous communities would be held accountable.

Peruvian environmental legislation specifically recognizes and supports citizen (indigenous

peoples included) efforts to monitor environmental impacts of activities affecting their
communities. Firstly, the General Environment Act considers monitoring as part of citizen
participation mechanisms in environment management (article 49). The information
emerging from monitoring should be part of the National System for Environment
Information in order to ensure public access (article 44); however, this provision is not being
enforced. The purpose of the information emerging from monitoring is to guide the adoption
of measures to comply with environment law and its policies (article 133).

Secondly, the Framework Law for the National System on Environment Management
provides that the Municipal Environment Commissions on vigilance and monitoring of
environment quality foster citizen participation in environment monitoring (article 27).
Therefore there is room to improve environment monitoring by ensuring that information
emerging from monitoring reaches all parties concerned, is of public access and contributes to
decision making on environment monitoring. Also there is a need to ensure that information
emerging from environment monitoring reaches Municipal Environment Commissions
involved in order to help them better assess environment conditions in the area concerned.

The provisions from the energy and mines sector are third level provisions that need to be
integrated with the mandate of the General Environment Act and other relevant legislation
governing citizen participation on environment management. These regulations provide for
monitoring within the sector; however, monitoring needs to comply with all provisions
emerging from the General Environment Act and all of this should be in concordance with
constitutional provisions and by the criteria set up by the Inter-American Human Rights
Commission (IAHRC) on their analysis of indigenous peoples rights affected by
environmental contamination in the Ecuadorean Amazon.

In theory, all these legal provisions with diverse hierarchical levels should serve the purpose
of protecting citizens rights to access information, to collect data regarding environmental
impacts of others, and to influence environment management at the local level in a
meaningful way. However, current experiences with environment monitoring of oil and gas
extraction by indigenous peoples suggest that, in practice, these legal provisions are not
fulfilling their purpose. In two of the cases studied here, information from environment
monitoring goes directly to the company, which then decides whether to disclose it or not to
the authorities. Even when community monitoring data reaches government agencies, it is
most often ignored as not up to scientific standards.

In conclusion, the necessary legal elements recognizing and supporting community

monitoring efforts are already provided by law. However, in practice, the Government does
not enforce them for many reasons; for example, there is no political will to enforce them
due to a perception that rural communities constitute a threat to the extractive industry.
Other factors include a widespread ignorance of these legal provisions by all parties involved,
a relatively undeveloped process of political decentralization, a lack of technical and
financial resources at local, regional and national level for environmental management and
indigenous peoples policy enforcement, and poor governance in areas where environment
monitoring of hydrocarbons is carried out by indigenous peoples.

Institutional Aspects of the Community Monitoring Programs

In all three cases, the local inter-community organizations were very interested in the idea of
community monitoring given their perception of environmental problems caused by the
extractive activities and possible conflict arising over these incidents. Nevertheless, there is a
significant difference in the way the monitoring initiatives were organized and launched.

In the case of the PVTI-FECONACO, the organization included their right to monitor the
extractive activities on their list of demands negotiated with Pluspetrol as part of the
settlement of a long series of protests. This conflict over the companys perceived inaction
vis-a-vis their environmental liabilities had won the attention of the international press. The
settlement, signed in the Dorissa Act, included an annual fund deposited in a bank account in
FECONACOs name. These funds were used, among others, to establish their own monitoring
system. At the start, FECONACO managed the program with the technical and
administrative help of the NGO Shinai; FECONACO now continues to manage the program
but has hired its own small team of technical personnel.

In the two PMAC cases, Pluspetrol, while under international pressure, took the initiative to
establish and finance similar monitoring systems in each of their two projects. Afterwards,
and with the help from the NGO ProNaturaleza hired by the company, the monitoring
initiatives were organized in a way that allowed the communities and their organizations to
participate actively in the management and administration of the programs. Today, both
PMACs function under a tripartite arrangement among the inter-community
organizations, the NGO and the company.

These basic differences in the way the initiatives were established and the perceptions
regarding degrees of dependence on or independence from the company have been sources of
tension and dispute between the PMACs and the PVTI-FECONACO.
There also exist differences between the PMACs and the PVTI-FECONACO in the way that
they are organized to carry out the monitoring task. The PMAC-BU has a central
Ccoordinating committee made up of two representatives of the three participating inter-
community organizations. The PMAC-BU has a team of nineteen community monitors who
work in twelve communities. The coordinating committee develops the work plans, makes
the major operational decisions on a daily basis and supervises the monitors who carry out
the work plans. The organizations renew their representatives on the committee every two
years. Under a permanently rotating system, two members of the committee are always on
duty at the headquarters. Together with the personnel from the NGO, they coordinate the
activities and logistic needs for the community monitors.

The organization of the PMAC-Corrientes is similar. It has a coordinating committee, but

unlike its Urubamba counterpart, only one member of that committee acts as a permanent
supervisor. He is elected by representatives of all the participating communities. The
supervisor works closely with the personnel from the NGO ProNaturaleza to develop work
plans, arrange the logistics, prepare reports and supervise the sixteen community monitors
who work in ten communities within the Corrientes valley.
The ground personnel of both PMACs work closely with ProNaturalezas overall PMAC
coordinator based in their Lima headquarters to resolve both administrative and technical
issues. Both PMACs also work closely with the companys community liaison personnel to
resolve issues of transportation and logistics.

The P TVI-FECONACO distinguishes two different groups working within the project. The
local team has a monitoring coordinator, a monitoring tutor and a team of community
monitors that work in eleven communities. The coordinator of the group is selected by
FECONACO for their technical skills and qualities as a leader. The tutor is a member of
FECONACO who acts as a liaison with the organization. The second group is the team of
independent advisors who have been hired by FECONACO to cover the special needs of the
program. This group includes an administrator and several specialists including a lawyer,
forester and an anthropologist.

All three programs highly value the role of training to assure an acceptable level of quality
and rigor in gathering and working with information. Without exception the community
monitors are from the local communities and have only very basic primary-level schooling.
For them, the concept of monitoring, the tasks of documenting and taking measurements as
well as the technology used are all new. Training, then, is a high priority.

Without doubt, the ability to carry out a quality training program for the community
monitors directly depends on two factors: 1. The availability of trainers with the technical
skills required and the willingness to teach those skills to indigenous people under rudimentary
living conditions far from urban settings; and 2. Sufficient funds to cover the fees of these
trainers as well as long-distance transport, food and lodging for weeks at a time.

In the case of the two PMACs, the company has been providing an adequate level of funding
to the programs to cover the costs of their training efforts. The challenge is to find willing
trainers. These two monitoring programs also have the advantage of access to the companys
personnel, technology and means of river transportation. According to interviewees from
both ProNaturaleza and Pluspetrol, the results have been optimal. Nonetheless, a former
overall supervisor for the PMAC-BU observed that, while the technical training has always
been good, his concern has more to do with the educational aspects and ideological
orientation of the training. He suggests that it is also very important to develop among the
community monitors a sense of environmental citizenship, in other words a greater overall
concern for caring for the environment as part of ones duty as a citizen.

In the case of the PVTI-FECONACO, the situation is much more precarious. The funding
available under the Dorissa Agreements is not sufficient to cover the costs of an adequate
training program, obliging the program to seek other sources of outside funding. At the same
time, the programs limited access to both river and air transport in the region make it all the
more difficult to bring in qualified trainers. In an attempt to overcome this limitation, the
last training event, attended by a member of the Panel research team, was held in the city of
Iquitos.

It is clear this program makes an effort to provide both technical training and an education in
environmental citizenship and the rights of indigenous peoples. With interventions from
biologists, environmental engineers, lawyers and an anthropologist, the training was focused
not only on monitoring the activities of Pluspetrol, but on all extractive activitieslogging,
hunting, fishing, etc.within the territories of the indigenous communities.

The community monitors in all three cases work part time. In both PMACs for example,
they work for fifteen days a month on monitoring, and then spend fifteen days doing
domestic chores at home. Such an arrangement is absolutely necessary when working with
community members, whose time is normally dedicated to subsistence level activities such as
small-scale agriculture, hunting and fishing. There is recognition in the three programs that
monitors cannot be asked to work as volunteers, but must receive a decent local-level wage to
ensure they stay. However, just as in any work environment, tensions and grievances do arise
regarding salary levels, permission for days off, use of overtime, punctuality in salary
payments, etc.

In all three cases, salary levels are at or slightly above minimum wage level. Of the three
cases, PMAC-BU pays the highest wages. Both PMACs differentiate between supervisors and
community monitors, paying the latter about thirty percent more. In these two cases, both
the NGO and the company prefer to think of these payments as an incentive for working
in benefit of their communities, rather than a wage. FECONACO differentiates between the
two groups of employees, paying the external group of professional advisors a more or less
competitive salary.

As long as the three programs receive external funding, they will be able to contract and pay
salaries to both community and professional workers. Given the poverty, measured in terms
of cash flow within the communities, it is not realistic to think that community sources can
substitute external funding for the monitoring programs. But neither is it realistic to think
that either the companies or private international funding agencies are willing to assume
those costs during the life of the extractive projects. The panel suggests that, given the
potential benefits of community monitoring programs, the Peruvian government (national,
regional or municipal) should dedicate a minimal percentage of the funds generated by the
gas, crude or mineral projects through royalties and taxes to cover the costs of community
monitoring efforts.

Community Monitoring: Relations Between the Company, the Government and the
Communities

We assume that one of the objectives of a community monitoring effort is to share the
information gathered regarding oil spills, gas leaks, contamination of waterways, or a
deterioration of the local fisheries with officials of both the company and the government
monitoring agencies to assure that the incident is remedied and will not happen again. An
important question that the Panel has been asking since 2010 is what happens to the
information gathered by the community monitoring programs regarding oil spills, gas leaks
and other forms of environment contamination.

According to some informants, in the case of the PMAC, there exists an understanding
between the PMAC and the company that this type of information should only be shared
directly with the company. According to some members of the PMAC Corrientes team, they
always report back to the company first; any complaints regarding environment
contamination are presented directly to the company. The company then decides whether
merits being passed on to the government monitoring agencies.

On the other hand, one of the major sources of conflict between FECONACO and Pluspetrol
arises over the use of the information gathered by their monitors. The PVTI FECONACO
attempts to document all the incidents that endanger the environment with photographs,
GPS coordinates and a description, even when the company also documents the same
incident. According to leaders of FECONACO, given their past experience of company
inaction in the face of the complaints presented by the PVTI, they now make an effort to
send the same information to both the company and the government monitoring agencies
(OSINERGMIN, MINEM, and MINAM) at the same time. The same leaders assert that the
company disagrees with that practice and insists that the PVTI present complaints only to
the company.
Both of Pluspetrols hydrocarbon projects along with the three community monitoring
programs operate in very remote areas of the Peruvian Amazon, at a great distance and
difficult access from Lima and the regional capitals. According to all community
interviewees, the government agencies that should be monitoring the companys compliance
with norms regarding environment and social impacts are virtually unknown in the
communities that have suffered incidents.

These same sources agree that both government and the public only express concern when
the situation has developed into a confrontation or when there is a catastrophe. A member of
the PMAC-BU coordinating committee stated that representatives of the government
agencies arrive at the scene when there is a catastrophe because the company submitted a
report on the incident. However, government agents do not come when there are less
catastrophic events (even when their impact on local communities is quite serious), nor do
they continue their monitoring of the catastrophe.

In an interesting interview with a representative of the Cuzco Regional Government agency

assigned to environmental issues, the Panel was informed that they are carrying out
monitoring visits of their own to the area where the PMAC is working. However, they were
unaware of the role and type of work carried out the PMAC, although they showed interest in
learning more.

Members of the PVTI-FECONACO team have a similar perception. An independent advisor

to the program stressed the importance of having representatives of the government
monitoring agencies present at their training events, both to inform about government
methods and standards, and to interact with the community monitors. According to the same
advisor, when personnel of the PVTI have delivered descriptive and statistical reports on
incidents in the Corrientes area, with copies of the evidence attached, the government agents
seem to have no idea what to do with the information.

Proposals And Recom mendations For Improving Community Monitoring

The Panel believes that a community monitoring effort, under favorable conditions, can be a
valuable tool that can help local communities, indigenous or not, to:

become more aware of their responsibility to care for the local environment and its
resources
learn how to exercise greater control over the extraction and use of all natural resources
within their territories
empower themselves to take action when a third party fails to comply with the law or to
live up to its agreements, and
have a greater capacity to negotiate solutions to disagreements that arise when third
parties are awarded specific rights that are superimposed on community rights.

Through the case studies and the critical review of a large body of laws, norms, regulations
and legal principles, the Panel has identified several clusters of ideas for enabling and
improving the community monitoring process.

A. Within Peru, the idea and practice of communities organizing themselves to monitor the
activities of large scale extractive industry is very recent and not widely accepted. Each
experience is still a learning process for the communities and other institutions involved.
Hence each experience and the collective process urgently needs to be institutionalized
and become more transparent.
 1. When the extractive industry itself attempts to resolve this situation by
sponsoring individual community monitoring initiatives, these initiatives receive
important guarantees of both technical and financial sustainability. Nonetheless, as
the study suggests, this solution cannot offer the political guarantee needed to resolve
conflicts that arise around specific cases of oil spills, contamination or negligence
regarding agreements. On the other hand, the communities by themselves do not
have the capacity to resolve these conflicts in the long term for reasons discussed
above.

2. A very clear conclusion that arises from this study regards the absence of the
Peruvian government in this process. The government needs to take on a more
central and balanced role to:
guide this process of citizen participation
ensure that information arising from that process serves the task of environmental
management
ensure that the extractive industries of all types comply with environmental and
social regulations, and
establish the negotiating tables for reaching agreements and resolving conflicts
between local communities and different types of extractive industries.
The report has pointed out the gap between the legal framework, which is positive
and potentially enabling, and the absence of government institutions with the
political will to put that framework to work. The Panel suggests that the role of the
government should be to enforce the law on the environment and citizens
participation, and to assure a greater quality and balance in relations between
extractive companies and local communities.

3. At the regional level, government officials have expressed an interest in

getting involved in and supporting a monitoring effort regarding the negative impacts
of extractive industries. However, these same officials are unaware of the existing
monitoring initiatives and the future possibilities. They insist that the regional
governments have by law no role in these issues, ignoring the fact that the
Framework Law for the National System of Environment Management assigns
important powers to the regional governments. At the provincial and district levels,
the lack of knowledge regarding these issues is overwhelming. Nonetheless, the
environment legislation offers very important legal tools such as those for the Local
System of Environment Management. The Panel suggests that this system could
serve as the political sponsor for the local community monitoring initiatives.

4. In general, the quality and capacity of municipal governments is very low.

These institutions should represent the interests of local people, including all the
communities and non-indigenous people in their jurisdiction. Municipal governments
could promote informed citizen participation and lead local monitoring efforts.

At the level of the communities and their organizations, despite the fact that these
institutions are a relatively new addition to indigenous peoples cultures, the research
team is a witness to the important role they have played in the establishment of the
monitoring experience, and to date, they are an important platform for the
management of the monitoring activities.

B. While direct sponsorship for a community monitoring initiative by either a company or

an NGO is problematic, the important role played by both of these institutions cannot be
ignored. In one way or another, the communities and their organizations, the companies
and the NGOs interact in a common playing field, and that confluence gives rise to the
monitoring initiatives. The way in which these three players interact may vary depending
 on the particular scenario, but the key point here is that multiple players will always be
involved in this activity.

1. So far, the possibilities for improving the technology used, resolving problems
of transport and providing training for the community monitors has been resolved
within this tripartite relation. But the communities and their organizations should
consider the possibility of negotiating an agreement with the government to establish
a fund for community monitoring using resources from royalties and taxes generated
by the extractive activities.

2. Several of those interviewed from the monitoring programs and the NGOs
expressed concern that the companies do not allow the community monitors access
to certain areas where the company is working, even through those areas may be
within community territories or in the headwaters of important water sources for the
community. The Panel feels it must ask the question to what extent limits should be
imposed on the monitors in terms of either access or the type of activities carried
out.

C. The Panel agrees with several of the interviewees that, without losing sight of the
concrete objective of monitoring negative impacts caused by the extractive industry, it is
important to think of the monitoring initiative in broader terms than that of the
technical task at hand.

1. The suggestion of the past supervisor of the PMAC-BU that the technical
tasks of monitoring should be seen as a step in creating a consciousness of
environmental citizenship seems reasonable. The monitoring initiatives provide an
excellent springboard for working on issues of environmental education and
management.

2. According to several of the interviews, the monitoring experience has

produced an important social change in some communities. This is observable, for
example in the PMAC-BU, where a number of communities are more aware of the
environmental issues within their community territories and have undertaken other
activities to resolve them. The members of PVTI-FECONACO are witnesses to a
greater awareness of the problems of environmental contamination, especially that
of the waterways and sources.
ANNEX

(i) A description of the Panel, reproduced from last years report,

(ii) A description of the Peru LNG project and its area of influence (Baseline),
reproduced from last years report.
(iii) Acronyms Used.

I. THE INDEPENDENT ADVISORY PANEL ON DEVELOPMENT ISSUES IN

S OUTH-CENTRAL PERU

The Independent Advisory Panel on Development Issues in South-Central Peru (The Panel)
was formally established at the end of 2009 in the context of the Peru LNG Project. The
Panel was formed to advise the Export-Import Bank of the United States (Ex-Im Bank), and
other interested parties, on the environmental and social effects of development in south-
central Peru. The Panel is based in Lima.

Ex-Im Bank made the creation of the Panel a condition for the Banks approval of financial
support for the Peru LNG Project. In early 2008 the Bank approved a $458.6 million long-
term loan guarantee to support U.S. exports for this project, which became operational in
mid 2010. The recent development of south-central Peru is driven largely by new energy
projects, including Peru LNG.

The Panel was selected by Ex-Im Bank in 2009. The Panel is chaired by Dr. Gonzalo Castro
de la Mata, former head of the Biodiversity Unit of the Global Environmental Facility, and
currently the Chairman of Ecosystem Services, LLC, a company specialized in the
development and marketing of environmental services. The Panel also includes Dr. Patricia
Majluf, a recognized marine biologist and Director of the Center for Environmental
Sustainability of the Cayetano Heredia University in Lima; Dr. Richard Chase Smith, an
anthropologist and Executive Director of the non-governmental organization Instituto del
Bien Comun, which focuses on land rights, management of shared resources and cultural
diversity among Peruvian people; and Dr. Glenn Shepard, anthropologist with twenty years
of fieldwork experience and indigenous language proficiency in the Peruvian Amazon and
curator of ethnological collections at the Goeldi Museum in Belm do Par, Brazil. Dr.
Richard Korswagen, who recently retired as director of Environmental Studies for the
Universidad Catolica in Lima, is a Member Emeritus. The Panel members serve Ad-honorem.

The Panel acts independently of the Ex-Im Bank or any other public or private institution or
government. In view of its independence, the Panel has the ability to define the scope of its
work, including both its thematic and geographic areas of study. In that regard, the first
decision of the Panel was to extend the scope of its deliberations beyond the Peru LNG
project alone, and to include the larger south-central region of Peru, encompassing the
Departments of Madre de Dios, Cuzco, Puno, Huancavelica, Apurimac, Ayacucho, Lima, and
Ica.

Thematically, and in the context of this Report, it is not possible to objectively separate the
Peru LNG Project from the larger context in which it operates. Peru LNG is part of a much
larger series of hydrocarbon-based projects centered in blocks No 56 and 88, known generally
as Camisea. Because these projects are so closely interlinked and interdependent, it is difficult
to separate out the broader social and environmental impacts of one from the others.
Combined, these projects directly impact areas within the Departments of Cuzco, Ayacucho,
Huancavelica, Ica and Lima.
At an even broader level, our choice and analysis is driven by the enormous natural resource
reserves that exist in south-central Peru, which includes important reservoirs of oil, gas,
minerals, hydropower, lands, and timber. As a result of a favorable policy environment over
the past decade, there is currently an investment boom in natural resource extraction and
infrastructure development in the region, of which Peru LNG is just one among many
players. In this context, investments in resource extraction are driving new investments in
major infrastructure such as new roads and hydropower generation. In turn, new public
infrastructure encourages additional investments in natural resource extraction, in a cycle
that accelerates dramatically. Therefore, the Panel has chosen to take a broad thematic view
of the region, addressing multidisciplinary and cross-cutting issues related to the economic,
financial, social, environmental, ecological, and ethnic consequences triggered by these
events.

The geographic areas covered by the Panel closely match ecological realities and historical
events that have shaped the social characteristics of the people living there, as well as their
interactions with the environment and natural resources. For these reasons, we believe that
defining the scope of the Panel as South-Central Peru is not arbitrary but rather, it reflects
a distinctive on-the-ground environmental, political, economic, and social reality. With the
exception of Ica, the departments of south-central Peru differ dramatically from the
Peruvian socio-economic national averages in many respects as explained in section III.

Among the populations of the Amazonian portion of this region affected directly or
indirectly by the project are a number of indigenous groups including the Matsigenka, Nanti,
Ashaninka (Campa), Piro (Yine), Mashco-Piro, Nahua (Yora), Huachipaeri and Amarakaeri,
many of which entered into sustained contact with Peruvian national society only since the
second half of the 20th century, and some of which continue to remain isolated. Many
people in these communities still depend directly on their traditional knowledge of the
regions rich flora and fauna to satisfy most of their basic needs. Throughout much of the
20th century, these peoples and their territories were viewed as a demographic, political and
economic void in the Peru, a vast emptiness to be conquered and exploited for natural
resources.

Amazonian native peoples and their life ways are perceived by many Peruvians as being
backwards, even savage. In the mid-1970s limited rights were extended to these Amazonian
peoples regarding their territories and traditional livelihoods. The recent attempt by the
central government of Peru to modify aspects of these laws sparked the tragic events at
Bagua in 2009. Similar to the relatively marginalized, Quechua-speaking indigenous peasants
living in communities in the rural Andean part of the region, lowland nativos are viewed
and treated as being at the bottom of the social ladder.

In summary, the people living in the area of influence of the Peru LNG Project, and more
broadly in south- central Peru, represent an objectively distinct segment of Peruvian society,
a segment that historically has been not only excluded, but also seen as inimical to the
cultural and economic development of the Peruvian nation in general.

II. BASELINE INFORMATION

Peru LNG and Camisea:

With a total investment of approximately US$ 3.8 billion, (including financing costs), the
Peru Liquefied Natural Gas Project (PERU LNG, also known as Camisea II) is the largest
foreign direct investment in Perus history and the first LNG export project in Latin
America.
PERU LNG is a Peruvian registered company created in 2003 for the purpose of exporting
excess Camisea reserves, as liquefied natural gas (LNG), to markets in Central and North
America. Its majority shareholder and operator is Hunt Oil Company (50 percent), a
company headquartered in Texas, United States and one of the worlds largest independent oil
and natural gas companies. Its partners are SK Energy of South Korea (20 percent), Repsol
YPF of Spain (20 percent), and Marubeni of Japan (10 percent).

The PERU LNG Project includes three parts: (i) A gas liquefaction plant located on the coast
between Caete and Chincha, at km. 170 of the Pan-American Highway south of Lima; (ii)
an adjoining Marine Terminal from which LNG is shipped overseas; and (iii) a 408 km length
pipeline, connected to the existing TGP (Transportadora de Gas del Peru) pipeline at a point
in the mountains of Ayacucho, connecting Camisea to the LNG Plant.

A first examination of the PERU LNG Project shows that it was carried out with extreme
attention for cutting- edge environmental engineering, minimal ecological impact, sensitivity
to cultural patrimony, efficiency in redressing needs and complaints of communities along
the direct line of impact, and a treatment and shipping facility that meets the highest
international standards.

However when we pull back to focus on the impacts to the broader region as defined here, a
much more complex picture emerges. In the first place, the LNG pipeline through the Andes
draws gas off the Camisea pipeline that is located in one of the worlds most remote,
culturally sensitive and bio-diverse regions. Due to these environmental and cultural
sensitivities, and an assessment of the environmental and social risks associated with the
Project, the Ex-Im Bank withheld financial support for the earlier Camisea I Phase. In fact,
it has been widely reported that this first phase has caused serious environmental impacts.
Several pipeline ruptures were acknowledged during the first 30 months of operation. Poor
management of community relations led to numerous complaints filed by local communities
and NGOs from local to national levels.

The Camisea fields are located in the Urubamba Valley, district of Echarate, Department of
Cuzco, where the production phase takes place. It includes gas extraction from blocks 88 and
56 and gas processing in the Malvinas plant on the Urubamba riverside, where natural gas and
liquids are separated and water and impurities eliminated. The process of separation includes a
gas reinjection system that helps to maximize the extraction of liquids. Once natural gas and
the liquids gas have been separated, they are transported in two separate pipelines, which run
parallel for much of the route from the Malvinas plant passing through rainforest, over
Andean highlands, ending in two facilities in the coastal region. The natural gas liquids are
transported to the Loberia fractionation Plant in Pisco, Ica (located 290 Km south from
Lima). The natural gas is piped north along the coast for a total of 710 kilometers to the
City Gate distribution facility in Lurin (Lima) (Map 4).

Map 4. Camisea fields and pipelines / Area of Influence of Camisea Project

 The Region:

The broader Camisea Project extends over a large, diverse and sensitive area characterized by
a considerable variation in terms of geography, climate, flora and fauna, as well as of socio-
cultural and economic configurations. The Camisea gas production infrastructure and pipeline
physically impact five Departments (Cuzco, Ayacucho, Huancavelica, Ica and Lima), three
of which are among the poorest in Peru (Table 1). The direct and indirect area of influence
of the project includes three main ecosystems: the tropical rainforest- covered Urubamba and
Apurimac river valleys of the Peruvian Amazon (rainforest - selva); the intermontane
valleys on both the eastern and western flanks as well as the alpine tundra-like grasslands of
the Andean Mountain range; and the rural and urban low-lying desert areas of the coastal
segment.
1
Table 5. Selected Socio-Economic Indicators for the South-Central Peru Region
Numbers in Bold Show Indicators that are Below the National Average

Departme Huancave Madre de

Peru Ayacucho Cuzco Ica Puno
nts lica Dios
Adult illiteracy rate (%
aged 15 and above)(%) 2008 (1) 10.4 21.5 18.0 26.0 5.8 6.6 19.6

1
Sources:
1. INEI. Encuesta Nacional de Hogares. Lima: INEI; 2008.
2. INEI. Mapa de Estimaciones y Proyecciones Departamentales de Poblacin 1995-2025.
3. INEI. Mortalidad infantil y sus diferencias por Departamento, provincia y Distrito, 2007.
4. INEI. Indicadores de Resultados Identificados en los Programas Estratgicos/ENDES 2009.
5. INEI. Informe Tcnico: Situacin de la Pobreza en el 2008.
(http://censos.inei.gob.pe/DocumentosPublicos/Pobreza/2008/Informe_Tec
nico.pdf).
Population using
improved drinking-water
sources (%) 2008 (1) 68.6 65.6 68.7 34.7 80.5 46.2 42.1
Population using
improved sanitation (%) 2008 (1) 82.4 75.4 72.4 58.3 87.6 86.6 72.5
Population with access to
electricity (%) 2008 (1) 81.2 64.3 73.5 76.2 92.7 71.4 76.1
2005
Life expectancy at birth
to
(years)
2010 (2) 73.1 69.6 69.2 68.6 76.3 71.0 69.2
Infant mortality rate
(probability of dying by
age 1 per 1000 live births)
(%) 2007 (3) 18.5 25.6 26.1 29.0 10.8 23.2 34.2
Prevalence of chronic
malnutrition (stunting)
(children under five years)
(%) 2009 (4) 19.2 25.9 23.8 34.6 8.3 10.7 21.4
Poverty rate (%) 2008 (5) 36.2 64.8 58.4 82.1 17.3 17.4 62.8
Extreme poverty rate (%) 2008 (5) 12.6 30.7 29.0 60.5 0.6 3.9 27.4

There are four noteworthy environmental and social aspects within the influence area of the
Camisea Project: (1) the rainforest of the lower Urubamba valley in the Urubamba Basin,
recognized as an important global biodiversity hotspot because of its biological richness,
high number of endemic species and the presence of threatened species; (2) the
approximately 22 native indigenous community settlements of the lower Urubamba area, in
the direct area of influence of the project and the non-contacted groups that live in a
territory reserved by the Government of Peru in benefit of the Nahua Kugapakori peoples;
(3) the highlands area (Provinces of Huaytara, Cangallo, Huamanga, and La Mar in the
Departments of Huancavelica and Ayacucho, respectively) in terms of the peasant
communities that live in extreme poverty, with very poor infrastructure, health services and
economic opportunities, and whose indigenous population have suffered decades of conflict
and violence; and (4) the Paracas National Reserve located on the coast south of Pisco,
which is Perus only marine reserve, with part of Paracas Bay listed as a RAMSAR site (1971
Convention on Wetlands of International Importance Especially as Waterfowl Habitat and
Reserve) and considered of ecological importance because it contains representative samples
of natural formations and biological diversity (mostly fauna) found only in the Subtropical
Pacific Deserts and the Warm Temperate Pacific Deserts of Chile and Peru.
The region is also home to a large diversity of indigenous peoples, at various degrees of
integration with or isolation from the national and global economy. For these reasons, the
region is notable for the presence of some of Perus largest and most important natural
protected areas and indigenous-occupied territories, including Manu Biosphere Reserve, Otishi
National Park and adjacent Matsigenka and Ashaninka Communal Reserves, the Upper Purus
National Park, the Kogapakori-Nahua Indigenous Reserve and a large block of approximately
1 million Ha of titled indigenous communities along the Urubamba, Madre de Dios, and upper
Ucayali basins.

As mentioned earlier, and with the exception of the Department of Ica, the region covered
by the Panel shows socio-economic indicators that are for the most part below national
averages for Peru (Table 1).

Gas i n Peru:

Any discussion about the issues covered by the Panel must start with a proper understanding
of the magnitude of the gas present in the region. Nevertheless, properly identifying the
actual reserves has proven difficult given the various interpretations and opinions surrounding
this issue. Table 2 below summarizes the proven, probable, and possible gas reserves estimates
for the Camisea fields by two separate sources.
2
Table 6. Estimates of Camisea Gas Reserves (TCF = trillion cubic feet)

Proven +
Blocks 56 Proven Proven + Probable
Probable
and 88 Reserves + Possible Reserves
Reserves

NSAI GCA NSAI GCA NSAI GCA

11.2 8.8 15.9 11.0 18.5 12.1

Regardless of the actual numbers, however, three conclusions emerge:

- More than 90 percent of Perus gas production originates in these fields (Figure 1).
- Total gas production has skyrocketed in the last 5 years as a result of Camisea production
(Figure 2), and
- Several US$ billions have been received by the Peruvian State for the Concept of Licenses
3
and Services (Figure 3).

Figure 9. Total National Natural Gas Production 2009-2010 (MMSCFD)

4
Figure 10. Total Gas Production 1994 - 2010 (MMSCFD)

2
NSAAI is Netherland, Sewell, and Associates Inc. on behalf of the Ministry of Energy and Mines of Peru. GCA is Gaffney,
Cline and Associates on behalf of Pluspetrol.

3
Source: PeruPetro 2010

4
Source: INEI 2010
 Figure 11. Historical Revenues for Natural Gas and Natural Gas Liquids Licenses and
Services
5
1993 2009(US$)

III. GLOSSARY OF ACR ONYMS AND ABBREVIATIONS*

5
Source: Perupetro 2010
BMAP* Biodiversity Monitoring and Assessment Plan
DAR* Law, Environment and Natural Resources
EIA Environmental Impact Assessment
Ex-Im Bank Export-Import Bank of the United States
FECONACO* Federation of Native Communities of the Corrientes Valley
GDP Gross Domestic Product
GPS Global Positioning System
IAHRC Inter-American Human Rights Commission
ILO International Labour Organization
INDEPA* National Institute for the Development of Andean, Amazonian and Afro
Peruvian Peoples
INEI* The National Institute of Statistics and Informatics
LEAP Long-range Energy Alternatives Planning
LNG Liquefied Natural Gas
MINAM * Ministry of the Environment
MINEM * Ministry of Energy and Mines
MMSCFD Millions of Standard Cubic Feet per Day
MW Megawatts
NGO Non-Governmental Organization
NUMES * New Sustainable Energy Matrix
OEFA* Environmental Assessment and Supervision Agency
OSINERGMIN* The Energy and Mining Investment Supervisory Board
PDHIBU* Hydrocarbon Activities Development Program in the Lower Urubamba
PMAC* Community Environmental Monitoring Programme
PMAC-BU* Community Environmental Monitoring Program in the Lower Urubamba
Valley
PMAC-Corrientes* Community Environmental Monitoring Program in the Corrientes
River
PPP Policies, Plans and Programs
PVTI* Independent Territorial Monitoring Program
SEA Strategic Environmental Assessment
SEIA* National System of Environmental Impact Assessment
SINEFA* National System of Environmental Assessment and Control
SLGA* Local System of Environmental Management
SNGA* National Environmental Management System
TGP Transportadora de Gas del Per
UNOPS The United Nations Office for Project Services

* Initials for name in Spanish

LITERATURE CITED AND BACKGROUND PAPERS

Caldern J., Bravo M. and Cabrera A. 2012. Monitoreo ambiental comunitario y proyectos
de extraccin de gas y petrleo: Anlisis desde tres estudios de caso. Paper Comissioned by
the South Peru Panel. Lima, Peru. http://www.southperupanel.org/
Castro de la Mata G., Majluf P., Shepard G.H. and Smith R.Ch. 2010. Independent Advisory
Panel on Development Issues in South-Central Peru - 2010 Report. CSA-UPCH, Av.
Armendriz 445, Lima 18, Peru. http://www.southperupanel.org/

DAR. 2011. Anlisis Del Sub Sector Gasfero En El Per. Paper Comissioned by the South
Peru Panel. Lima, Peru. http://www.southperupanel.org/

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ACKNOWLDEGMENTS

The Panel was supported by a Secretariat based at the Center for Environmental
Sustainability (CSA) at Cayetano Heredia University and coordinated by Lucia Sato, without
whose support this report would not have been possible. We are very grateful to both Lucia
and the CSA.

The Panel thanks Michael Valqui, Pedro Gamio, Henry Garca, Mireya Bravo, Jorge
Caldern, Carlos Soria, Andrea Cabrera, Alejandro Smith and DAR, specially Csar Gamboa,
Jimpson Dvila, Vanessa Cueto and Pilar Camero for support with research, mapping and data
collection tasks and for their excellent work as consultants of the project.

The Panel also thanks the following individuals and organizations for their support and
advice:

James Mahoney (Ex-Im Bank), Stephen Parsons (Ex-Im Bank), Pablo Taborga (COLP
Per LNG), Nelson Ricardo Soto Fuentes (Pluspetrol Peru Corporation S. A.), Betzabe R.
Rodriguez Valencia (Pluspetrol Peru Corporation S. A.), Jacinta Luci Medina De La Cruz
(Pluspetrol Peru Corporation S. A), Oscar Rada (Pro Naturaleza), PMAC-BU, PMAC
Corrientes, FECONACO, SHINAI, and Pro Naturaleza.

Thanks to COMARU and CECONAMA for logistical support on the trip, and to the
communities and community leaders and members who received Dr. Shepard, and to the
Departamento de Desarrollo Social, Region Cuzco, and Departamento de Recursos Naturales,
Region Cuzco.