The route to ruin: Enron snared U.S. support for pipeline
With that pledge of $200 million in U.S. financing, Enron built the natural-gas pipeline directly through South America's largest remaining undeveloped swath of dry tropical forest, a region rich with endangered wildlife and plants.
The pipeline, completed late last year, and its service roads have opened the forest to the kind of damage environmental groups had predicted: Poachers travel service roads to log old-growth trees. Hunters prey on wild game and cattle graze illegally. An abandoned gold mine reopened and its workers camp along the pipeline right of way.
Perhaps most stunning, to many federal employees who reviewed the project, was how Enron persuaded a U.S. agency, the Overseas Private Investment Corp. (OPIC), to support the pipeline, even though the agency was charged with protecting sensitive forests such as the Chiquitano.
"It shouldn't have been done," said Mike Colby, a former Treasury Department senior environmental adviser and now a corporate consultant. "The forest had already been declared by the World Bank ... one of the two most valuable forests in Latin America. And OPIC chose to ignore that ... because they wanted to finance the project at all costs."
The story of the Cuiaba Integrated Energy Project offers a case study of a symbiotic relationship. While Enron was seeking billions in OPIC loans and insurance, the company lobbied Congress to save OPIC from extinction.
Enron needed OPIC's backing for Cuiaba because no commercial bank would finance it. Germany offered $165 million in loans, but the support was contingent on OPIC's pledge.
Juggling the books
Enron also included Cuiaba in a transaction to inflate company revenue and hide debts and losses and enrich several top Enron executives. Enron bookkeepers recorded a $65 million profit from the project before the pipeline had delivered any gas. But the true numbers, not known until now, show that Cuiaba came in three years late and more than 50 percent over budget, ballooning to $750 million from $475 million.
After triumphing in one of OPIC's most contentious financing battles, Enron ultimately lost its loan money in February after missing key funding deadlines.
OPIC is now reviewing its handling of Cuiaba and has asked the U.S. Justice Department to examine all of its dealings with Enron for possible fraud. Separately, OPIC's new president, Peter Watson, wants to overhaul how the agency decides which forests are protected under agency rules, spokesman Larry Spinelli said.
The story begins in the 15 million-acre Chiquitano forest, one of the World Wildlife Fund's 200 most precarious eco-regions. It is the habitat of the endangered marsh deer, hyacinth macaw, maned wolf, jaguar and ocelot.
A 1,900-mile pipeline built by Enron, Royal Dutch/Shell Group and Bolivian partners ran along the Chiquitano's southern border, linking gas fields in Santa Cruz, Bolivia, with a distribution center in Porto Alegre, Brazil.
Enron and Shell wanted to build a spur off the existing pipeline to pump Bolivian natural gas to Enron's 480-megawatt, gas-fired power plant in Cuiaba, Brazil, to help feed that country's skyrocketing energy demand.
The idea was bold and controversial: Enron's plan would bisect the Chiquitano, a prospect that outraged environmentalists.
George Taylor, head of the environment team in Bolivia for the U.S. Agency for International Development, asked Enron Vice President John Hardy Jr. why the company was cutting through forest rather than running a longer line around the sensitive area.
He said Hardy told him Enron wanted to move quickly and keep costs competitive "so the engineers took out their rulers and traced two possible routes that were straight lines." Hardy said recently that Enron selected the most direct route.
By late 1998, environmental opposition mounted. The World Wildlife Fund, Friends of the Earth and Amazon Watch recommended that Enron circumvent the forest.
But Enron refused. The company argued that rerouting would lengthen the pipeline by 70 percent and cost more than $100 million. It stressed that the plan complied with OPIC's strict policy on development in protected forests.
To resolve the conflict, OPIC's longtime environmental director, Harvey Himberg, dispatched two specialists to survey the area in January 1999.
Nancy Dean and Angela Miller flew over the pipeline route and were shocked to see little development and a dense canopy of trees. Later, when Dean met Taylor, "She just gasped and said, there was no way in hell they (OPIC) could fund this," Taylor said.
But Himberg took a novel approach. He decided OPIC would judge the project's environmental impact not on the forest as a whole but on a more limited area: the land immediately adjacent to the pipeline right of way.
On that basis, he determined the project would not be barred under OPIC's forest restrictions.
Soon afterward, both Dean and Miller left OPIC, and colleagues say they were uneasy about OPIC's handling of the matter. When contacted, both declined to comment in detail, saying they left for better jobs.
During the process, Enron's Hardy visited OPIC so often that workers joked that he had moved into Himberg's Washington office, according to a former OPIC employee. Longtime OPIC employees also believed that George Munoz, OPIC's president and chief executive, took an unusual interest in Cuiaba and exerted intense pressure on Himberg.
Asked if he felt pressured by Munoz, Himberg said, "I really can't comment on that."
Some inside OPIC saw Munoz as an ambitious political appointee trying to make a mark. A prominent Chicago Democrat, he began cultivating Houston-based Enron as soon as he arrived at OPIC in 1997.
Two months after taking charge, Munoz invited Enron then-Chief Executive Kenneth Lay to speak to an OPIC employee retreat about "the kind of investment support you will need from international agencies like OPIC," according to the invitation letter.
Enron increasingly turned to OPIC to fund risky projects in developing countries. With $3 billion in OPIC loan pledges, Enron was the agency's largest customer in the 1990s.
At the same time, Enron battled a congressional coalition seeking to cut "corporate welfare" by killing OPIC during its 1997 and 1999 reauthorization votes.
In 1999, Hardy, Enron's Cuiaba lobbyist, led industry groups working Congress to save OPIC. Lay wrote every member of Congress in April seeking votes for OPIC reauthorization. The effort paid off, and to celebrate, Enron executives joined trade groups to fete OPIC employees at a posh holiday party.
When Cuiaba came up for a vote by OPIC's 15-member board, there was no clear consensus.
Seven members came from government agencies, and three important ones — Undersecretary of Treasury Timothy Geithner, Undersecretary of State Stuart Eizenstat and U.S. AID Administrator J. Brian Atwood — were deeply skeptical. A single "no" vote from any one of them could have swayed the rest of the board.
The three members, and particularly their environmental advisers, believed the project violated OPIC environmental policy.
That policy had been shaped after President Clinton in 1997 at the United Nations General Assembly "Earth Summit" prohibited U.S. lending agencies, including OPIC, from supporting "infrastructure projects located in primary tropical forests and other ecologically fragile areas."
Two years after Clinton's mandate, OPIC enacted its definition of a "primary forest" as a "relatively intact forest that has been essentially unmodified by human activity for the past 60 to 80 years." It was characterized by an abundance of mature trees and limited "artisanal," or subsistence, levels of hunting, fishing, logging and migratory farming.
The nuances of OPIC's definition fueled the Cuiaba battle.
Enron presented evidence of human activity that it said exceeded the "artisanal" level. Environmental groups countered that Enron was exaggerating.
The groups also harbored suspicions that Enron had helped to write the definition, which was drafted in 1998, to exempt the Chiquitano from OPIC's forest-protection policy. Enron's Hardy was among those who lobbied OPIC on its environmental policies. Hardy and Himberg deny that Enron had a hand in writing the policy.
Over the past three years, Himberg and OPIC repeatedly have attributed the agency's forest definition to similar language used by the World Bank. But when The Washington Post pointed out significant differences in the two, Himberg revised his statements. He said OPIC in 1999 adopted a definition from the Forest Stewardship Council, a sustainable-forestry group.
Hank Cauley, the council's U.S. director, said the group dropped that definition as antiquated in January 1999. "You have to think about conserving the forest as a whole," Cauley said. "They have interpreted that too narrowly."
The World Bank's then-chief biodiversity adviser also found fault with OPIC's definition. Thomas Lovejoy, now the president of the Heinz Center for Science, Economics and the Environment, said he told OPIC its definition was so narrow that no forest in the world would fall under its protection. He said he told OPIC that the World Bank would not have funded Cuiaba.
OPIC board members said they were unaware of Lovejoy's views. They said Himberg simply told them OPIC's definition was in keeping with the World Bank's.
OPIC board members were so concerned about Cuiaba that their vote was postponed in March 1999 and again at a June 2, 1999, meeting.
Munoz took the unusual step of scheduling another board meeting for June 15. Unhappy with the delays, Enron pressed for a decision.
Meanwhile, Munoz had been pushing Enron to reconcile with the environmental groups. The company began negotiations with five groups, including the WWF, but the groups wanted the pipeline rerouted. As a fallback, they insisted the company put up $50 million to reimburse indigenous groups and protect the rest of the forest.
Environmentalists OK deal
Two days before the June 15 OPIC vote, Enron agreed to invest $10 million in a conservation fund over five years and find $10 million in matching funds. The environmentalists accepted the deal.
The agreement proved important as OPIC's board began deliberations. Enron touted the agreement as a sign that environmental groups had been appeased.
But the WWF now says that, despite the agreement, it never abandoned its steadfast opposition to the project. It said it was simply outsmarted and that Enron distorted the WWF's position.
"We were clear that we had never approved a pipeline," said former WWF vice president Twig Johnson, now a project director at the National Academies of Science. We were misrepresented in their lobbying efforts."
At the June 15 meeting, OPIC's Himberg presented his case that Chiquitano was not a primary forest. The environmental specialists from U.S. AID and Treasury were appalled.
"It was really extraordinary. Tim Geithner kept calling me up to sit behind him to explain," Colby said. "I remember saying, 'Tim, he's lying."
But others were swayed.
"Harvey Himberg recommended approval," Munoz said. "He recommended it after making sure extra steps were taken that we go as far as we could to make this project as environmentally sound as possible."
Eizenstat remembers it as a compromise. Atwood said he believed Enron was ready to secure private financing that would have offered no environmental protections. With OPIC involvement, he said, the environmental groups won a conservation fund and other concessions.
The project passed unanimously, with certain conditions attached. Enron was required to limit forest access, monitor the environment, slightly alter the pipeline route, though it would still bisect the forest, and create the $20 million conservation fund.
"The (environmental groups) were not happy," Munoz said. "But it was a deal that was struck that was a good one and had some protective measures on it. And we carried a big stick."
Just after OPIC's vote, Cuiaba became enmeshed in a byzantine financial program that now is under investigation by the U.S. Justice Department.
In September 1999, Enron sold a 13 percent stake in the pipeline for $11.3 million to LJM1, a partnership controlled by Enron's then-chief financial officer, Andrew Fastow. Enron then booked a $65 million profit for a 20-year gas-supply contract with its own power plant.
Enron contended that its sale of 13 percent of the project relieved it of majority control and of the obligation to include Cuiaba's debts on its balance sheet. It also allowed Enron's accountants to count projected revenues from the gas-supply contract as profits in the year's final two earnings reports.
In Enron's heyday, the quarterly earning reports fueled Enron's ballooning stock price. The Cuiaba revenues were a significant chunk, almost 15 percent, of Enron's late 1999 earnings reports.
"If they didn't show up with these sort of schemes every quarter, they would lose their step-ladder earnings," analyst Robert McCullough said.
But behind the rosy numbers, the project was in serious trouble. During 2000, environmental problems caused delays and cost overruns that required millions in additional funding, according to internal Enron board minutes.
The delays in OPIC approval meant construction could not begin until Bolivia's rainy season. Then, when crews crossed into Brazil, they ran into a series of ridges over caves with endangered bats, and authorities required special procedures.
These problems likely caused Cuiaba's value to decline sharply, according to an internal report produced for Enron's board after its bankruptcy filing. Nevertheless, Enron bought back LJM1's interest in Cuiaba on Aug. 15, 2000, for $14.4 million, a $2.1 million gain for Fastow and his fellow investors.
Running into trouble
Enron's internal investigators concluded that Cuiaba and other similar deals "call into question the legitimacy of the sales themselves and the manner in which Enron accounted for the transactions." The repurchase of Cuiaba at a price above its value gave the appearance that Enron had always intended to buy back Cuiaba.
The conservation fund quickly ran into trouble. Within a month of the OPIC board vote, the WWF backed out, saying indigenous groups had been left out and Enron and Shell were insisting on fund board seats.
The pipeline was completed last year and is delivering natural gas to the Brazil power plant. The company continues to run both the pipeline and the power plant. In September, OPIC had sent a six-page letter detailing how Enron had failed to accomplish some of the environmental measures included in the deal. In February, OPIC canceled Enron's $200 million loan before the funds were released; Enron could not produce financial documents because of contract disputes with Brazilian authorities.
"I feel just as frustrated as anyone else that Enron was not able to comply with any of these things," said Munoz, who is now in private practice in Arlington, Va. "But OPIC did not pay one red cent for this project."