Ecuador's oil vacillation

Minutes after landing in Quito in early February, I was immersed in a conversation with someone carrying the latest issue of Corporate Counsel magazine. It featured an article about the ChevronTexaco Corp. trial taking place in Lago Agrio, a small frontier town in northern Ecuador.

In addition to this unprecedented trial, Ecuador is under scrutiny after increasing value added tax rates and freezing accounts of Canadian operator EnCana Corp.

Such troubles contrast with recent success in Ecuador's oil sector.

On trial

Texaco Petroleum Co. (a subsidiary of the former Texaco Inc.) engaged in exploration and production activities for 28 years in Ecuador (1964-92) as a minority partner (37.5%) in a consortium controlled by state-owned Petroleos del Ecuador (Petroecuador).

In November 1993, Ecuadorian residents near the former Texaco operations filed class-action lawsuits in New York against the company. The plaintiffs alleged that Texaco dumped toxic waste into open pits, estuaries, and rivers and polluted rainforest along pipelines and at well sites (OGJ, Nov. 17, 2003, p. 37).

During 1995-98, Texaco engaged in a comprehensive $40 million remediation program of the Amazon operations, monitored and certified by Ecuador's Ministry of Energy and Mines. After completion, the government of Ecuador released Texaco from further liability, signing a "Final Release of Claims and Delivery of Equipment."

In May 2001, the US District Court of the Southern District of New York dismissed the consolidated class-action suits against Texaco "in favor of their being pursued in the courts of Ecuador" and found that the "cases have everything to do with Ecuador and nothing to do with the United States."¹

In October 2001, Texaco merged with Chevron Corp.

In a decision issued Aug. 16, 2002, the US Court of Appeals for the Second Circuit upheld the district court decision to dismiss the suit in the US for being an inconvenient venue but stipulated that any financial penalty imposed on ChevronTexaco in Ecuador be recognized in the US. The plaintiffs then brought suit in Ecuador, and proceedings began in the small oil town of Lago Agrio ("sour lake," in Spanish), capital of Sucumbíos province. In May 2003, a three-judge panel in Lago Agrio began hearing claims, followed by testimony in October 2003. In November, a Spanish scientist allied with the Ecuadorian plaintiffs said that Petroecuador, as Texaco's former partner and the majority stakeholder, also should face trial.

On Jan. 7, Efrain Novillo was elected as the new president of the Superior Court of Lago Agrio, replacing Alberto Guerra Bastidas. The next step in the legal proceedings will be judicial inspections of the affected areas, accompanied by technical experts.

Outcry over seizure

Meanwhile, various operators told OGJ that new field development plans are at a standstill and future investment in Ecuador is threatened unless the tax situation is resolved. A dozen operators have sued the government, seeking a rebate for VAT paid since 2000 involving $200 million. The government says only $70 million is in dispute.

Ecuador raised the VAT to 12% from the contractually agreed 10% and has refused to rebate the VAT for oil, unlike other export products. In early January, Ecuador's internal revenue service ordered banks to freeze $7 million in EnCana Corp.'s accounts for taxes. In late January, Ecuador's Supreme Court ruled that EnCana has the right to only a partial rebate (the disputed 2% tax differential). EnCana and Occidental Petroleum Corp. have sought international arbitration over the tax claims.

Ecuador adopted the US dollar as its standard currency in 2000 after a currency crisis and depression in 1999. The International Monetary Fund pressured Ecuador to increase the VAT to 14%, but Ecuador's constitutional court rejected the increase.

The current dispute with foreign operators is ill-timed, given the country's long-awaited relief in oil transportation bottlenecks. Ecuador's new $1.4 billion, privately financed Oleoducto de Crudos Pesados (OCP) heavy oil pipeline started up in October 2003, but its 450,000 b/d capacity remains significantly underutilized. The original SOTE (Sistema Oleoducto TransEcuatoriana) pipeline running from Lago Agrio to Esmeraldas on the coast, has an upgraded capacity of 390,000 b/d.

Some operators have left (US-based Vintage Petroleum Inc.), and others are seeking to curtail operations in Ecuador (Petróleo Brasileiro SA, which acquired its Ecuadorian operations in 2003 from Tecpetrol SA). A Petrobras official told the New York Times in February, "Ecuador is still very attractive to oil companies. There is oil. But the problem is above ground, not below ground."