ENVIRONMENTAL COSTS AND BENEFITS IN THE INTERNATIONAL RESOURCE DEVELOPMENT CONTEXT

• Jurisdiction: United States

International Environmental Law for Natural Resources Practitioners
(Mar 1997)
CHAPTER 3A
ENVIRONMENTAL COSTS AND BENEFITS IN THE INTERNATIONAL RESOURCE DEVELOPMENT CONTEXT
Henry J. Sandri
Behre Dolbear & Company
Denver, Colorado

I. Introduction

Natural resource firms use a cost — benefit approach to evaluating the merits of investing in, expanding, or divesting a natural resource investment. This is most frequently done in a purely financial context, usually resulting in a financial decision to proceed or not to proceed. For example, the decision to proceed with an acquisition will be a function of a number of criteria, but ultimately the decision will be based on a series of financial calculations weighing the benefits of the purchase (future revenues, operational synergies, increased market share, greater profitability, etc.) against that of the costs (purchase price, anti-trust issues, negative market perception, senior executive egos, etc.). If the assessment is done correctly, the analysis will provide the firm with sufficient information to make the correct decision.

Assuming the firm proceeds with its analysis in a logical and systematic manner, each of the areas affected by the acquisition will also have been evaluated in a cost — benefit manner. For example, labor will be considered in terms of salary and benefit costs, union verses non-union operations, potential reductions due to duplication, potential increases in order to enhance specific functional areas, such as sales, pension funds, benefit packages, hiring and firing practices, worker liabilities, etc. Based on a review of these factors, a financial cost or savings (benefit) will be attributed to the labor component and it will be combined with the other items being evaluated in the acquisition analysis.

Similarly, environmental issues will be evaluated in a cost — benefit analysis.

The scope of the environmental analysis will determined by the activity being pursued by the company, i.e. a new investment, an acquisition, an expansion or a sale of a property or company. For new operations, the costs — benefit analysis that is undertaken can be simply combined in the following two questions:

1. "Do the environmental costs associated with the exploration, development, operation and closure of this projects outweigh financial returns and other benefits to the company?", and

2. "Do the environmental costs, combined with all other costs associated with the exploration, development, operation and closure of this projects outweigh the financial returns and other benefits to the company?"

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If the answer to the first question is no, then the company should pursue another project. If the answer to the second question is yes, then an opportunity exists where the company can proceed with an investment.

The determination of the environmental cost for a project is a combination of the direct cash costs, such as the environmental assessment and baseline study, the Environmental Impact Statement, research, engineering, design, permitting costs, monitoring costs, closure, etc., opportunity costs associated with not pursuing alternative projects or alternative approaches to environmental compliance, and timing costs associated with the permitting and approval process.

These costs can very significantly from one jurisdiction to another based on the various environmental requirements and the timing associated with the permitting and approval process. Because of this, companies are evaluating the environmental criteria, along with other factors, when determining where to invest.

II. Cost Of Initial Environmental Permitting

The United States has one of the most developed sets of legal requirements, policies and laws regarding the permitting of a natural resource operation. This is partially a consequence of the long term historical development of environmental laws and regulations in the United States. It is also a consequence of the outspoken nature of the various potential interested parties associated with resource development activities, including environmental groups and the public-at-large.

This is further evidenced by the fact that a number of countries, especially those in Latin American (Mexico, Brazil, Venezuela, Argentina, etc.), have re-written their mining codes in the past five years. As part of the new mining codes, new environmental regulations have been written covering the mineral project development and operation. Many of these countries have considered the United States approach to the drafting their new regulations, including the sections that apply to environmental permitting and compliance.

Additionally, many of the same nations have also simplified their systems by stating that any and all projects, especially those being pursued by foreign companies, must meet the regulations and requirements set out by various international development organizations, specifically the The World Bank Group (World Bank), The United Nations Environmental Programme (UNEP), and/or The United Nations Development Programme (UNDP).

However, while the environmental programs and compliance are being added to the operating rules in foreign regimes, there are significant differences between the programs in the United States and those being considered and implemented abroad.

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In general, it would be stated by most natural resource executives that environmental rules and regulations in the United States and other selected developed nations are different from foreign programs in the following areas:

• The required time in analysis and permitting is longer in developed nations;

• The cost of analysis and permitting is higher in developed nations;

• The "certainty" of outcome is less in developed nations;

• The ability to "negotiate" a site specific program is less in developed nations, including the ability to proceed in parallel with the development of a project and its environmental assessment;

• There are more vocal independent stakeholders in developing nations, such as the Sierra Club; and

• There are a significant number of additional national interests that complicate the decision making for developing nations over that of developed countries.

These differences have led to an "ad hoc" approach in most developing countries, compared to the more regimented systems in the United States and other developed nations. In fact, in a study conducted in 1993 of 121 developing nations, only 19 had requirements for formal Environmental Impact Assessments as part of their regulations for the development of projects, including natural resource projects. The remainder worked principally on an as required or as needed basis.

This has led to an interesting question as to the impact of environmental regulations and compliance on the decision making process of both the company contemplating investing in, developing and operating natural resource projects abroad, and the impact on the host government.

III. Company Cost and Benefit Analysis

Traditionally...