Ecuador presidential election troubles oil sector

Dec. 4, 2006
The Nov. 26 presidential election in Ecuador of leftist economist Rafael Correa in a landslide victory against right-wing tycoon Alvaro Noboa is sounding alarms in the international oil sector.

The Nov. 26 presidential election in Ecuador of leftist economist Rafael Correa in a landslide victory against right-wing tycoon Alvaro Noboa is sounding alarms in the international oil sector.

Although all votes have not been tallied, Ecuador’s Supreme Electoral Tribunal said Correa will be the President-elect even if Noboa wins all of the remaining votes. During the campaign, Correa said he wants to reduce foreign control over Ecuador’s oil and distribute the benefits more broadly.

Ecuador is a former member of the Organization of Oil Petroleum Exporting Countries, and Correa also said he will consider rejoining OPEC.

Except for Venezuela, Ecuador supplies more oil to the US than any other country in the region, according to the US Energy Information Administration. It also supplies oil to Japan and other Asian nations.

The Ecuadorian government, which controls about 75% of oil production through state-owned Petroecuador, had an ambitious plan to double oil production to 700,000 b/d within the next 4-5 years. However, its production has fallen in recent months to 183,000 b/d due to inefficiency and a lack of investment, said Petroecuador.

Oil earnings fund 50% of Ecuador’s national budget, and continued oil exploration and production is thought to be necessary to ensure the country’s wellbeing. It plans to increase production, and it holds auctions to increase foreign investment. Dependence on oil revenue has hindered Ecuador’s environmental enforcement.

Export interruptions

In May 2005, Petroecuador stopped crude oil exports following days of protests from demonstrators in the Amazon region for bigger share of oil revenues. The protesters wanted more money spent on infrastructure and new jobs and complained about the “degradation” of the environment by private oil companies.

Ecuador said it faced an “economic emergency” because of the stoppage, which sent world oil prices higher.

International oil companies agreed to give Ecuador’s oil rich provinces 16% of the 25% in income tax they paid to the central government (OGJ Online, Aug. 30, 2006).

Oil sales account for about a quarter of Ecuador’s GDP. According to the president of Ecuador’s Petroleum Industry Association, oil revenues pay for both state sector salaries and a significant amount of the national debt.

Correa actions

Trained in the US, Correa set off alarm bells as finance minister in 2005, when he introduced a law designed to redirect 30% of Ecuador’s oil revenue away from external debt payments and toward health and education, tripling the amount of revenue used for social-sector spending.

This law drew the ire of the World Bank, whose sister agency, the International Monetary Fund, had designed the Oil Stabilization Fund. Its purpose was to siphon 70% of oil revenues directly to debt repayment. The World Bank responded to the new law by delaying and ultimately canceling $100 million in loans to Ecuador. This led to Correa’s resigning his post.

Recent political developments in Ecuador also have sent shockwaves around the globe. Multinational corporations were put on notice when the government decided to expel Occidental Petroleum Corp. for allegedly violating its contract with the country.

Ecuador has several claims pending at the World Bank’s International Center for Settlement of Investment Disputes in Washington, including one that Oxy filed after Ecuador seized its oil fields last May (OGJ Online, Sept. 29, 2006). Ecuador accused Oxy of selling part of an oil block without government approval. Oxy is seeking the return of its assets and $1 billion in damages.

On Oct. 10, 2006, City Oriente Ltd. filed an arbitration claim against Ecuador, charging the Andean country with breaching its contract after it passed a contested oil law that affects foreign operators, said a company spokesman.

City Oriente, a Panama-based company run by US investors, has an output of around 4,000 b/d of oil in Ecuador.

The company’s representative Jose Paez said the company filed the claim at World Bank arbitration center to force Ecuador to not apply the law. “This law is an unilateral modification of the contract,” Paez said.

The law, approved by Congress last April, forces foreign oil companies to share with the state at least 50% of their extra oil revenues, above a benchmark price agreed in their original contracts.

Petrobras in Ecuador

Brazil’s Petróleo Brasileiro SA (Petrobras) is investing $160 million in the Ecuadorian Amazonia during 2006, and it is a sure bidder should Ecuador seek bids for exploration of the Ishpingo-Tambococha-Tiputini heavy oil area in the Oriente basin field area (OGJ, Mar. 4, 1996, p. 47).

Prior to Correa’s election, Petrobras had also announced planned investments of $500 million in Ecuador during 2005-11 through a strategic alliance with Petroecuador. These investments are almost equal to the total Petrobras has invested in Ecuador since it entered the country in 1988. The funds would cover hydrocarbon exploration, refining, transport, and commercialization.

However, after Correa’s election, Petrobras expressed doubts about future investments and voiced concerns over profits reduction in Ecuador, given its experience in Bolivia, where President Evo Morales’ government confiscated Petrobras’s $2.5 billion operations.

Analysts said that Petrobras’ Bolivian investment decision showed two things:

  • The company does not fear an unstable political environment but thinks it is better to stay away from the possibility of arbitrary, confiscatory decisions such as those taken by Morales, who nationalized Bolivian energy resources.
  • It is willing to join forces with companies such as Petroecuador in precarious financial and managerial conditions by bringing in world-class managerial skills and processes and state-of-the-art technologies.

However, with President Correa now in power-He is known for his close ties with Morales and Chavez-the planned investments might be reviewed, said Brazilian government sources.