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ECUADOR: New Deadline for Renegotiating Oil Contracts

Gonzalo Ortiz

QUITO, May 11 2010 (IPS) - The government of Ecuador hopes to sign new services contracts with foreign oil firms operating in the country, to replace the 34 contracts currently in effect, by the end of the year.

Wilson Pástor, who was named minister of non-renewable resources on Apr. 21, announced the new timeframes at a press conference with foreign correspondents Monday.

Most of the companies are now operating under provisional contracts signed when the government modified the former system, under which the firms directly benefited from up to 80 percent of the oil they pumped.

The 120-day deadline for large countries to renegotiate their production contracts deals and the 180-day timeframe given to small companies tone down the sense of urgency expressed by centre-left President Rafael Correa, who threatened on Apr. 17 to expropriate — with compensation — the oilfields controlled by companies that refuse to replace their profit-sharing deals with service contracts.

As soon as Correa took office in January 2007, the government began to move towards turning private companies into service providers. But only last year were draft contracts sent to the three largest foreign oil companies in Ecuador: Spanish-Argentine energy group Repsol, China’s Andes Petroleum, and Brazil’s Petrobras.

However, no agreements have been reached yet, and Correa said last month that he had “run out of patience.” He added that “The oil companies are playing around with us; in the next few weeks there will be major penalties.”

The president complained that the oil firms are “stretching out” the negotiation of new terms, and said that “every day that goes by means millions (of dollars) that go into the companies’ pockets, when they should be going into government coffers.”

Foreign oil firms account for around 40 percent of this South American country’s total output. The rest is produced by state oil company Petroecuador and its affiliates.

When Pástor took over the ministry of non-renewable resources (formerly the oil ministry), his predecessor Germánico Pinto already had a draft of the new services contracts ready.

“We have moved forward based on calculations of several fixed rates (to be charged the companies) and by the end of the month I should be presenting a final draft,” the minister told the press.

On Monday, Pástor delivered draft reforms of Ecuador’s hydrocarbons and tax laws to the president, who will introduce them to Congress, which will give them fast-track treatment.

Under the new contracts, the government would own the oil and gas produced and would pay the companies fixed monthly fees to cover the costs of production and new investment.

Pástor, a former oil company manager who is described as the first industry insider of the five oil ministers that Correa has named so far, predicted that “by mid-October we should be signing the contracts with the big companies, and by the end of the year with the small firms.”

With the reforms of the hydrocarbons law, the government would retain 25 percent of gross income from the companies’ oil sales, described by Pástor as the “margin of sovereignty,” because “the state is not interested in exploiting whatever does not give us that margin.”

The new contracts will not be based on the concept of “reimbursing” companies for their operational costs and expenses, as under the old system of risk contracts.

“And we will not be reimbursing,” said Pástor, “because we would have to have an army of auditors to review the prices.”

“That is why we are switching to a system of fixed fees, which they will have to manage with,” he added.

Only “if the prices are lower than the fees that are set will we have to share the risks,” he said.

The question of negotiating new terms actually arose before Correa was elected.

In 2006, the government of Alfredo Palacio (2005-2007) cancelled Occidental Petroleum’s operating contract. The U.S. oil company was found guilty of illegal sale of its stock, and the government seized its assets in the northeastern Amazon region, where it was pumping 100,000 barrels a day, around 20 percent of Ecuador’s total output.

To run the oilfields, Correa appointed Pástor to head up Petroamazonas, an affiliate of Petroecuador.

In 2009, the Correa administration took over part of French oil company Perenco’s fields when no agreement was reached in a dispute over back taxes.

Those assets were also handed to Petroamazonas, which according to Pástor has increased their daily output from 21,000 to 23,000 barrels

With respect to the legal dispute with Perenco, Pástor declined comment on the case, merely saying that it “is entering the final stage.”

The minister also explained that Petroecuador would not administer or negotiate contracts with other companies, but that a new national oil agency would do so.

He added that the tax regime for foreign companies would be simplified so that they only paid income taxes.

According to Pástor, “the companies will try to reach an agreement” with the government. And if they fail to do so, “we will proceed to set a fair price” for their assets, he said, when asked whether the threat of expropriation still stood.

In response to a question from IPS about whether the companies’ investments had been repaid, the minister implied that all investments by private firms had already been recovered.

He said that “in general terms, the companies are fortunately open to becoming service providers, so we expect this to come to a successful conclusion.

“But if they find that the contracts based on fees are difficult or onerous, we will pay a fair price,” he added.

The minister said he had already spoken to Repsol-YPF and Petrobrás.