Oil companies are having a rough time in Ecuador, whether from the government or the local citizenry.
Indeed, according to Ecuadorean President Alfredo Palacio, it’s high time for the companies to renegotiate their contracts. He told Ecuadorean TV that it is “unfair” for oil companies to keep 80% of their earnings, especially now that crude oil prices are close to $70/bbl.
Palacio told viewers that the current 80-20 revenue split between the companies and the government is unsustainable and will be revised to “at least” 50-50. Palacio even said that the foreign oil companies-including Petroleo Brasileiro SA, Repsol YPF SA, Encana Corp., Occidental Petroleum Corp., Agip SPA, and Perenco-know of his plan and are ready to negotiate a review of their contracts.
We haven’t heard that, but perhaps they are as ready and willing as Palacio says.
Declining credit
Palacio’s interview, however, comes on the heels of a downgrade in Ecuador’s credit status by Fitch Ratings, the international credit rating agency, which revised its outlook on Ecuador’s sovereign ratings to negative from stable. Fitch said Ecuador’s long-term foreign currency rating was affirmed at “B-,” and the country ceiling was affirmed at “B-.” The short-term foreign currency rating is likewise affirmed at “B.”
It said that Ecuador’s sovereign credit risk has increased recently on greater political instability and concerns about “related fiscal pressures.”
In particular, Fitch said changes to laws governing the FEIREP oil stabilization fund and the Fondo de Reservas social security program have effectively reduced the pool of local financing available to the government. Of course, it also said the “oil production interruption” that began in mid-August has left public finances more vulnerable to a decline in oil prices and to spending increases.
Muddling through
Fitch was referring to protests in the oil-rich Amazon provinces of Sucumbios and Orellana that cut production from fields operated by state oil firm Petroecuador to 20,000 b/d during Aug. 15-19 from normal output of about 201,000 b/d. Total losses were estimated at $400 million (OGJ, Sept. 5, 2005, Newsletter).
The protesters demanded that the 13 foreign oil companies operating in the area invest more money in local projects like roads, education, and health. As with the president, the protestors felt this investment could be undertaken due to the sharp rise in international oil prices and oil company profits. But they may need to think again.
According to Fitch Senior Director and lead Ecuador Sovereign analyst Morgan Harting, “There is a plausible ‘muddle through’ scenario in which Ecuador will be able cover its roughly $3 billion in financing needs through end-2006.” He also said this muddle-through scenario will require “reasonable fiscal performance underpinned by oil revenues.” Failing that, things could get even worse, too, especially if “oil production is not fully restored quickly.”
Clearly, it’s high time for Ecuador’s president and protestors to provide incentives for the oil industry to stay in their country-not disincentives.✦