Pipeline capacity dilemma still hamstrings Ecuadorian producers

Aug. 2, 1999
ARCO Oriente Inc. has taken steps to resolve, at least in the short term, the problem that all operators in Ecuador must contend with: lack of pipeline capacity out of the Oriente region.

ARCO Oriente Inc. has taken steps to resolve, at least in the short term, the problem that all operators in Ecuador must contend with: lack of pipeline capacity out of the Oriente region.

For years, Petroecuador and successive governments in Quito have grappled with this problem, which centers on two solutions: expansion of the Trans-Ecuadorian trunk pipeline (SOTE) and/or construction of a new 250,000 b/d pipeline to take away potentially increasing volumes of heavy oil. For the better part of a decade, this problem has seemed intractable despite a string of proposals and studies. While some hurdles remain, the parties involved may be closer than ever to a solution.

The dilemma
ARCO Oriente Operations Manager Ron Beach put the problem in perspective: "SOTE capacity allocation has been a problem for many years. In order to allocate space on SOTE, DNH (National Hydrocarbons Directorate) has the hydrocarbon law at its disposal: All producers are allocated space on a pro rata basis, on the basis of the well`s proven potential, and each operator must provide test data to support that.

"It is a troublesome aspect of the (Ecuadorian) industry for all operators."

SOTE capacity is about 330,000 b/d, but the combined potential productive capacity of the operators in the Oriente is estimated at more than 600,000 b/d. Currently, expansion plans under consideration could bring total SOTE capacity to about 420,000 b/d.

ARCO`s situation is different from that of the other producers, because its production comes into SOTE at a point on the main trunk line about halfway to the sea.

"We took a look at the (SOTE) line`s hydraulics as to how to increase capacity from Baeza west without affecting negatively the other operators upstream. We offered to make a small investment in that, and an agreement was reached for ARCO to make that investment-kind of a one-off deal."

Theoretically, the project would increase SOTE capacity by 60,000 b/d by installing two new pump stations, one west of Baeza. Beach said that, if construction were to start now, it could probably be completed by March. ARCO`s contribution to project is pegged at about $15 million, Petroecuador`s $20 million.

"With the mini-SOTE expansion, we`re looking at about 40,000 b/d downstream of Baeza," he said. "Under the current scheme, as long as there are no additional investments, if one assumes SOTE is full and we are adding 5,600 b/d, then the other operators have to give up their pro rata portion of that volume. With the expansion, the other operators would get back the 5,600 b/d and maybe a little bit more."

With such an approach to SOTE expansion, because of politics, the Oriente operators may end up trying to "incrementalize" their way to full expansion. Among other opportunities for expansion, YPF SA (now part of Repsol-YPF SA) agreed 18 months ago to add some capacity upstream and has been injecting drag-reducing agents (DRA) into the line for at least 6 months. ARCO also is looking at other DRA injection.

Heavy oil pipeline
Regarding the proposed heavy oil pipeline, ARCO Oriente Pres. Herb Vickers contends the producers are "ellipsemoving along well with the technical studies and the financing analysis, but the financing is going to be difficult to pull off. This is a $500-600 million pipeline, a world-class project in extra-tough terrain. It`s hard to be overly optimistic, but the companies involved are closer together than they have been in the past."

The Ecuadorian government currently is pressing efforts to stimulate exploration and development with a series of initiatives: joint ventures between Petro-ecuador and private companies in declining major fields; private development of marginal fields; and new exploration spurred by new contract terms. If these efforts are successful, then the industry may well need more than 420,000 b/d in SOTE, Vickers notes.

He estimates Oriente operators ultimately could produce as much as 750,000 b/d if the heavy oil pipeline and full SOTE expansion both come to fruition. He doesn`t see them as being in conflict but rather as complementary.

"The mini-expansion is the only one on the books," Vickers noted. "That takes (SOTE) to 390,000 b/d; other expansions are possible as a `patch,` but that can`t take the place of a separate heavy oil pipeline."

Status update
While ARCO is eager to see the pipeline built, the company has no proprietary claim on the project: "We`d just as soon have someone else build it. We have no pride of authorship, no vested interest," Vickers said.

However, some of the earlier outside proposals amounted to attempted profiteering, Vickers said: "The last thing we need is for someone else to build the pipeline and then try to charge us a tariff of $3-5/bbl."We just want to get the pipeline builtellipseWe`re looking for someone to come in and finance and build the pipeline and just have supply contracts. We just want a reasonable tariff and to have it built in time."

For now, the goal is to finish the list of things that constitute preliminary work on technical and financing studies by the end of September, Vickers said: "What`s happening now is what`s necessary to make it happen."

If ARCO and the other operators were to undertake the heavy oil pipeline themselves, they would turn the project over to a typical engineering-construction contractor, which would mean a start-up in early 2001 at the soonest, Vickers said. "That`s why we`re looking at these other proposals for creative solutions, to see if it can be built faster."