Three groups enter Ecuador pipeline bidding contest

Ecuador's Army Corps of Engineers (CIE) was a surprise last-minute entry in what was supposed to be a bidding contest for private companies to build a second major oil export pipeline in that country.

Sam Fletcher
OGJ Online

HOUSTON�Ecuador's Army Corps of Engineers (CIE) was a surprise last-minute entry in what was supposed to be a bidding contest for private companies to build a second major oil export pipeline in that country.

A CIE representative refused to tell reporters the names of that government entity's civilian partners when he submitted a project application in the corps's name to Ecuador's Ministry of Energy just before the deadline Thursday. However, Ecuadorian media later identified those partners as the Brazilian firms Andrade Guti�ez (AG) and Petroleo Brasileiro SA.

"Everyone was surprised," said Stan E. Hooley, an international managing director for the Tulsa-based Williams group, a diversified energy and telecommunications company that is competing to build and operate a pipeline for transportation of heavy oil in Ecuador.

The third applicant in that competition is a Spanish consortium headed by Repsol-YPF SA. Government officials now say two pipelines may be built.

In a telephone interview from Ecuador on Friday, Hooley said the CIE submitted the proposal as its own, with AG listed as technical advisor. It is "identical" to one that AG had previously discussed.

"We were aware that AG was working on a proposal, but there was some question whether their financing would require a government-to-government arrangement," said Hooley.

By submitting the application, the CIE "certainly signals its technical support" for that proposal. "There are things that the corps does very well," Hooley said.

The CIE's involvement raises the question of whether Ecuadorian government officials can fairly evaluate two private industry proposals against a plan submitted by another government entity.

However, Hooley said, "We still think our plan has a lot of advantages. If they evaluate on the basis of what they have said they wanted in the project, I think we have an outstanding proposal."

Corps's proposal
The CIE and its civilian partners are proposing to construct a pipeline with initial capacity of 290,000 b/d at a cost of $470 million. They submitted two possible pipeline routes�one along the northern border and the other parallel to Transecuadorian Pipeline System (SOTE) that currently carries oil from inland fields to a coastal export terminal, providing the main source of export revenue for that country.

Financing for that project would be obtained by AG through a 12-year loan from the Brazilian Bank for Economic and Social Development and the Bank of Brazil. The proposed tariff for that project is $1.50/bbl.

Following amortization of that project over 10-12 years, profits would be divided among the two Brazilian firms, the CIE, and other Ecuadorian government agencies that may become shareholders in a specialized company to be formed.

Williams's proposal
Williams officials talked to OGJ Online about their proposal for a $575 million, 500-km open-access pipeline earlier last week.

About 90% of the proposed Williams pipeline would be built in or closely adjacent to the SOTE right-of-way, "except for one major deviation," said Larry R. Fisher, also a managing director for international operations at Williams.

"Our proposed pipeline goes further south of Quito than the existing line. We've done a fairly detailed route survey and classified areas in terms of difficulty of construction. There is a significant advantage to the southern route that we constructed,� he said.

Routing the pipeline through primarily open farmland to the south, he said, "avoids very congested areas along the existing right-of-way" and bypasses "potential route problems through some bird sanctuaries, national forests, and very pristine areas" to the north.

The proposed Williams pipeline would be constructed of heavy-wall, 28-in. diameter pipe. It would have five pump stations, "mirroring existing pump stations" on the SOTE line, and three pressure-reducing stations, officials said.

A new terminal and export facility at Balao, with tankage and a dual loading system for both big and small ships, also are included in the proposal.

Construction costs for a pipeline with an initial throughput capacity of 310,000 b/d shouldn't exceed $575 million, Fisher said.

The proposed 28-in. diameter is "sort of an odd size," said Fisher, but it provides for "an optimized case for initial capacity" with "readily expandable capability" for a future increase to 378,000 b/d throughput from 310,000 b/d to start. Based on its surveys of area producers, Williams expects at least 300,000 b/d of initial demand from almost the moment the pipeline is completed.

Combined throughput capacity of both the SOTE and the proposed heavy oil pipeline would total about 800,000 b/d, officials said.

The company could increase throughput capacity to 378,000 b/d by adding horsepower to the pumping stations. "You don't want to go back and build a loop in the Andes. So we're putting enough pipe in the ground to give us expandability," Hooley said. "Our approach is going to be open access, so we'll build to accommodate future producers that Ecuador is trying to attract."

"That is one of the distinguishing features of what we're offering," said Fisher. "We�re introducing the concept of an open-access, non-producer-owned pipeline that would set up a midstream sector of business."

It would provide "a level playing field" for other producers to compete with the members of the current consortium. Such competition would "maximize the benefits" of present and future reserves for the government, Fisher said.

As part of Ecuador's move to privatize industry, Hooley said, a recent presidential decree requires that the new pipeline be built by the private sector with no required financial guarantees or commitments by the Ecuadorian government.

The government is putting a high priority on the construction of a second oil pipeline.

"There are now a sufficient number of new concessions that have been awarded and are under development to consider another export pipeline in addition to SOTE. There's enough production to fill it up," Fisher said.

"The SOTE has been really running at capacity for the past 5-6 years. There has been an internal competition between Petroecuador and the other producers on whose crude has been exported," Hooley said.

The proposed pipeline will connect with existing exploration and production blocks, plus additional blocks that will be offered for exploration and development in the 10th round of leasing after the pipeline is built.

"SOTE has just recently been expanded by adding more horsepower to just over 400,000 b/d. But that's only handling about half of the near-term capability of production," said Hooley. "The new pipeline basically will double Ecuador's ability to export crude."

Moreover, Ecuador produces both heavy and light crudes. "With only one pipeline, they have to blend everything down, so there is lost revenue to Ecuador," Hooley said.

Plans call for putting only light oil through SOTE once the new pipeline is built for transportation of heavy oil. Other sources report that the 23.7� gravity oil currently pumped through SOTE will continue for at least the next 2 years until a new pipeline will be ready to transport the heavy crude production (17-22� gravity crudes).

SOTE then will transport only 28� crudes for Petroecuador, either as sole producer or in association with private companies under joint-venture contracts currently being discussed by Congress, sources reported.

Ecuador officials will take "at least 2-3 months" to award a license for the pipeline, Fisher said. If Williams is the winner, it expects to have a pipeline in operation within 18 months of signing an agreement.

The company is already talking to manufacturers about pipe availability. Williams employees experienced in building pipelines through the US Rocky Mountains would work on constructing the proposed heavy oil pipeline in the Andes.

Williams officials see this as the second chapter of their operations in Ecuador, since the company built the SOTE pipeline in the 1970s.

Recent SOTE work
The original consortium of five producers that move their oil through the SOTE system initially had no interest in owning or operating the new heavy oil pipeline. But that changed with a shift of ownership among those companies, said Williams officials.

Alberta Energy Co. Ltd. bought out City Investing; Kerr-McGee Corp. merged with Oryx Energy Co.; Repsol SA took over YPF; and Agip SPA acquired ARCO's interests.

Williams dropped its participation in that consortium in mid-July to submit its own proposal to Ecuadorian officials to build the heavy oil pipeline.

The SOTE pipeline was recently expanded after 19 months of work and many years of expectation. That pipeline is now pumping 390,000 b/d of 27.3� gravity crude from Lago Agrio to Balao, an increase of about 60,000 b/d from the previous pumping rate.

Petroecuador, Agip Oil and Repsol-YPF joined forces to carry out that expansion project. Each company undertook its share of work in various segments of the line. Some equipment had to be specially ordered to fit the old equipment. In other cases, latest-technology equipment was put in place.

Each company financed its share of the SOTE expansion. Total cost of the project amounted to $57 million, plus $6 million by Petroecuador. Agip will be reimbursed its investment over a 20-year period, while Repsol-YPF will be paid back by Petroecuador within 18 months.

The pumping tariff for SOTE was fixed some time ago at $1.62/bbl. The increased pumping capacity will allow each producing company to proportionately increase its production.

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