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ECUADOR: Oil Shake-Up Means Flat Fees for Foreign Companies

Gonzalo Ortiz

QUITO, Dec 1 2010 (IPS) - As the dust settles following contract negotiations with foreign oil companies, Ecuador is looking at a new map for its petroleum industry and trying to determine what it will mean in economic terms for this OPEC-member nation.

Though details and smaller deals continued in talks this week, four foreign companies failed to reach an agreement with the government last week about services contracts, while five others did agree to the requirements established by a new Ecuadorian law.

The fields exploited by Brazil’s Petrobrás, South Korea’s Canada Grande, the U.S. Energy Development Company (EDC), and the China National Petroleum Company will be turned over to the Ecuadorian government “in an orderly process,” announced Wilson Pastor, minister of non-renewable natural resources.

Ecuador’s state-owned oil company Petroamazonas took control Nov. 25 of the Petrobrás fields, and will have to pay the Brazilian giant 163 million dollars for unrecovered investments. A sum that “is quite attractive,” said economic analyst Walter Spurrier.

Meanwhile, in the name of the Ecuadorian government, the oil ministry signed eight services contracts with the five oil companies that accepted the new rules established in July by a reform of the Law on Hydrocarbons.

The five are Chile’s Enap-Sipec, China’s Andes Petroleum Ecuador and PetroOriental, Spain’s Repsol, and Italy’s Agip Oil.


Minister Pastor said the eight petroleum blocks exploited by these five companies represent 86 percent of Ecuador’s private-sector oil production.

The new contract model created by the reform establishes the government as owner of oil drilled in Ecuador, and the private contract-holders will receive a fixed payment for each barrel produced. This means that Ecuador also keeps the benefits associated with increasing oil prices.

The flat rate per barrel will be 35 to 41 dollars, said Pastor, depending on the company, and was a key point in the negotiations that took place behind closed doors at a luxury hotel in Quito over the last four months.

“These are exorbitant rates given that the production costs of a barrel of oil by Petroecuador and Petroamazonas in 2009 were five and seven dollars, respectively,” said Henry Llanes, former union leader at Petroecuador.

The agreed payments “surpass Petroecuador’s costs (per barrel) by 700 to 800 percent. In other words, the petroleum reforms spurred by the Correa administration’s ‘socialist revolution’ ended up benefiting the oil companies,” said Llanes, who is also a former lawmaker.

“Such an analysis is simplistic,” an executive from one of the oil companies that participated in the talks told IPS. Due to the confidentiality clause of the negotiations, the executive asked not to be identified.

The costs that Llanes spoke of “do not include the recouping of investments made, or the calculation of the payments we have committed to make,” said the source.

The renegotiated deal will bring Ecuador investments of more than 1.2 billion dollars for production and exploration. This comes as a relief after facing a declining curve in fresh capital in the hydrocarbons sector — the country’s main source of revenues.

It is also a boon to the gross added value of the petroleum industry, which the Central Bank reported had been falling at a quarterly rate of about four percent since 2008.

According to Pastor, if the companies fail to meet their commitments in their annual investment plans, the government will begin withholding those sums from the per-barrel payments.

He noted that the government’s share in the petroleum contracts is increasing, on average, from 70 to 80 percent.

In a look at who is staying and who is leaving, analyst Spurrier said, “Sipec, affiliate of the Chilean state-owned Enap company, has only small fields, which have to be developed. Chile seeks to strengthen relations with Ecuador, in the context of its maritime disputes with Peru. This oil agreement was never in doubt.”

Spurrier sees EDC’s departure as more complicated: “It was in charge of block 3 in the Gulf of Guayaquil, where the Amistad gas field is located, and which feeds a thermoelectric plant owned by Machala Power, a subsidiary of EDC.”

Petroecuador does not have experience operating in offshore natural gas fields, he pointed out.

Minister Pastor asserted that the transfer of that company “is going well,” and that EDC’s decision to leave Ecuador includes selling the gas-fired electrical plant to the Ecuadorian government, though he did not disclose the value of that transaction.

He said that everything will be in the government’s hands within 120 days, however, he did not specify which entity would take over operations.

The government will have to look for a new operator, said Spurrier, who believes it could be Chile’s Enap, “which has natural gas fields in the Strait of Magellan, and has developed its own technology.”

The oil executive who took part in the negotiations stressed that the companies “were not pleased with the change in the contract model, but it was quite unlikely that the government would let China go, because it is Ecuador’s main creditor and the biggest investor in petroleum and in the not- yet-finalised plans in mining.”

“The companies, especially Repsol, could not be leaving Ecuador happy, because they have major investments, including the heavy crude pipeline,” said the executive. The pipeline system was built earlier this decade by a consortium of private firms.

According to analyst Spurrier, it isn’t that the left-wing administration of President Rafael Correa has forced the countries “to accept draconian conditions,” because the official information itself “suggests that there are indeed compensations” included in the agreements.

Compensation could be, apart from the payments, time extensions for operating rights and the incorporation of new drilling areas.

For example, he said, “Agip could receive the Oglan heavy crude field, discovered in the early 1970s, which is once again attractive because of current prices and thanks to the secondary pipeline that the Italian company built to exploit Villano,” a nearby field.

Repsol, which reached an agreement at the last minute, was reportedly offered block 31, currently in hands of the state. The new law gives the Ecuadorian government greater flexibility to hand over blocks without going through a bidding process.

Now what is left for the government is to renegotiate the contracts for marginal fields, which IPS found out began in secret on Monday, Nov. 29. In this case, the law authorises a period of 60 days more.

Those contracts protect the fields under special conditions, especially for secondary recovery after drilling by Petroecuador. These fields represent less than 10 percent of Ecuador’s daily oil output of about 481,000 barrels.

These contracts will also have to shift to a fixed rate, or, in the words of President Correa, the foreign companies will have to go, like the four leaving now, wishing them “a fare thee well.”

 
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