Global Insight Perspective

Significance

The approval last year of a hydrocarbons reform that allows the state to take a 50% share of additional oil revenue and the previous government's termination of U.S.-based Occidental Petroleum Corp.'s contract have already sent out negative signals to investors.

Implications

The new president's plans to renegotiate contracts and increase the role of the state oil company mean that there is more uncertainty ahead.

Outlook

Greater legal stability is one of the main demands of companies operating in the oil sector in the region and will be one of the factors that determine future investments.

Minister Reaffirms Plans to Renegotiate Oil Contracts

Ecuador's new Energy Minister Alberto Acosta on Friday ruled out the possibility of oil nationalisation saying that the new government was not proposing taking a “statist line” or closing the door to the private sector. He even appeared to indicate that there may be some opportunities for further investment. According to a report in El Universo, Acosta said that a possible tender of the Ishpingo-Tambococha-Tuputini (ITT) block would be publicly debated and the tender of marginal fields would be discussed by a licensing committee, while a Reuters report indicated that Acosta supports a proposed tender of offshore gas fields.

Nevertheless, Acosta reaffirmed the government's plans to strengthen the state oil company Petroecuador and halt its decline in production. In addition, Acosta indicated that Ecuador has begun unofficial discussions over the country's return to OPEC—the oil cartel it left in 1992. He also reaffirmed plans to renegotiate contracts with foreign oil companies, but said that the renegotiation would be “friendly” and stated that legal security was very important. Although Acosta gave no details as to what the renegotiation may entail apart from assuring a “fair” share of revenue for the state, the new president of Petroecuador Carlos Pareja had earlier called for a 80% share for the state, according to an Agence France-Presse report.

Acosta on Friday also proposed reviewing Ecuador's electricity purchase agreement with Colombia saying that the price was very high. Since 2003, Ecuador has become increasingly dependent on imports from Colombia to compensate for the fragility of domestic power supplies. According to a report in the local press today Ecuador imported 1,608.63GWh of power from its neighbour in 2006 for US$127.1 million.

State Oil Company Counts Costs of Protests

Petroecuador announced over the weekend that protests in the province of Orellana resulted in a 54,000-barrels fall in crude output in the first 18 days of January and revenue losses of US$2.7 million. The protests were staged by local residents demanding better public services. Petroecuador said that the protests cut its daily production to a low point of 158,000 barrels per day (b/d), but that output exceeded 170,000 b/d by Saturday thanks to the end of the protests.

Outlook and Implications

Acosta's comments on the renegotiation of contracts and the possibility of Ecuador rejoining OPEC reaffirm the campaign pledges of Ecuador's new President Rafael Correa, but he did provide some reassurances to private investors concerned that the tone set by Correa's inauguration last week indicates that he plans to emulate the government of his ally President Hugo Chávez in Venezuela.

However, even though the changes planned for Ecuador's energy sector may not be as radical as those implemented in Bolivia and Venezuela, the operating environment for investors is expected to deteriorate further under the new government. Oil companies operating in Ecuador have already seen an increase in resource nationalism. Ecuador's Congress approved a hydrocarbons reform last April that increased the state's share of production to 50%, when oil prices were higher than the level in the initial contracts. The following month U.S.-based Occidental Petroleum Corp.'s contract was annulled and its assets taken over by the state oil company. Protests in Ecuador's oil sector have also become more frequent in recent years, motivated by concerns about the environmental effect of exploration and the perception among local indigenous groups that higher oil export revenue has not resulted in significant improvements to local services. The latest protests in the province of Orellana are a reminder that the potential for further social conflict in the Amazon Basin remains high.

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