Watching the World - Ecuador tries on a fig leaf

May 22, 2006
Fig leaves are all the rage these days, especially in Latin America. But the one being tried on by Ecuador over its seizure of Occidental Petroleum Corp.

Fig leaves are all the rage these days, especially in Latin America. But the one being tried on by Ecuador over its seizure of Occidental Petroleum Corp.’s assets just doesn’t fit. In fact, the bigger it gets, the less it hides.

Last week, Ecuador President Alfredo Palacio sent troops to guard facilities seized from Oxy as they were being transferred to state control (OGJ Online, May 16, 2006).

The office of the US Trade Representative, which had been in talks about a trade agreement with Ecuador, said the move “appears to constitute a seizure of the assets of a US company” and said there would be no more discussions on a trade deal. Occidental had its own take on the move.

Uncharted waters

“We’re just trying to feel (our way) through this. We’re in uncharted waters. This is the largest expropriation of assets in this hemisphere in the last 30 years,” said Larry Meriage, Oxy’s vice-president of communications and public affairs. “When they take over your assets without remuneration it is tantamount to an expropriation.”

But cancellation of Oxy’s operating contracts and the seizure of its assets were not what they seemed and did not mean the Andean nation is nationalizing its oil industry, Ecuadorian officials purred.

Ecuador, with oil reserves of 4.6 billion bbl, the third-largest in South America, argues that Oxy failed to obtain government approval for transferring part of an oil block to EnCana Corp. in 2000.

In revoking the agreement with Oxy, Ecuador’s Energy Minister Ivan Rodriguez told reporters: “We accept the demand and petition of Petroecuador and the country’s attorney general and declare the annulment of the contract.”

Trying it on

That’s the fig leaf, at least, and it was left to Fernando Gonzalez, president of state-run Petroecuador, to try it on first.

“The state awarded Occidental the development of a resource, but now it must leave the country for having failed to meet its contract and violated the laws,” he said.

“From today, Petroecuador is taking effective possession of the fields,” Gonzalez said May 16 from the steps of Oxy’s local offices, where he arrived with a team of auditors to begin work on the takeover.

That certainly is going to make Petroecuador’s numbers look better in the local press.

During 2001-05 Ecuador’s oil production increased 31%, but Petroecuador’s output as a share of the total declined from 56% to 38%. Occidental produces 100,000 b/d of Ecuador’s 538,000 b/d. The company’s economic interest in what it produces is about 42,000 b/d.

“The government has appealed to us for cooperation and for an orderly transition, which is an interesting development in itself,” said Oxy’s Meriage. “They’re telling you they’re throwing you out, but they want you to help them. We’re going to try to be cooperative, up to a point.”

Point taken: It’s time to turn over a new leaf in Ecuador.