For decades, oil-rich Ecuador has proven to be a difficult and unprofitable jurisdiction for foreign corporations seeking to exploit their vast mineral wealth. This culminated in the $9.5 billion court ruling opposed to Chevron, the world’s largest incorporated power company, in 2011. The court alleged that Texaco, which acquired through Chevron in 2000, had pumped oil into the waterways around the Amazon the city of Lake Agrio in northern Ecuador for 3 decades. The ruling, which a US court found as a result of fraud, caused great damage to Ecuador’s reputation as the destination for foreign investment.
This, combined with significant capital controls on maximum income taxes and an opaque regulatory environment, has particularly deterred foreign investment in Ecuador’s raw materials sector. This prevented Quito from completely exploiting and reaping the benefits of the Andean country’s abundant herbal resources. A large typhoon of much weaker oil prices, aging infrastructure and excessive debt is crushing Ecuador’s oil-dependent economy.
By the end of 2019, Ecuador’s financial crisis was so severe that Quito decided to withdraw from OPEC allowing it to avoid the cartel’s mandatory production cuts. Early last month the Andean country’s central bank forecast that Ecuador’s economy will shrink by a worrying 7.3 percent to 9.6 percent during 2020. That along with sharply weaker oil and onerous levels of government debt forced President Lenin Moreno’s administration to negotiate with bondholders to avoid a sovereign debt default.
The most recent collapse in oil costs is a major factor in Ecuador’s dire economic situation. In 2019, oil and mining generated just over 6% of the PETROLEUM-dependent economy’s GDP, up from 12.5% in 2013, when the latest oil boom peaked. Crude oil is the Andean country’s main export, accounting for 35% of its total exports in 2019. The monetary effect of the really large fall in oil costs is amplified through Ecuador’s inability to season production despite vast oil reserves of more than 8 billion barrels.
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In addition to leaving OPEC, Moreno’s administration is focusing on reforming the Andean country’s hydrocarbons sector and reversing the policies of nationalism of resources followed by its predecessor Rafael Correa. It was during Ecuador’s tenure that Ecuador’s reputation was born as a deceptive and unprofitable jurisdiction for foreign power corporations. This can be attributed to Correa’s interventionist technique for managing Ecuador’s abundant herbal resources. During his presidency, onerous taxes and unfavourable contracts were imposed on personal oil corporations, and there were even cases of asset seizures.
Innovations made through the Moreno government are the reintroduction of participation contracts, improved profit-sharing agreements and tax relief for power companies. The recovery of participation contracts is critical because it allows personal oil explorers and manufacturers to reserve oil reserves. This allows them to be more easily evaluated according to the industry method and access to reserve-based loans, making a must-have capital more accessible. These measures signal that Ecuador is open to business and is in a position to undertake more oil exploration and production activities.
This has already sparked an uptick in interest from foreign oil companies. In early 2019, foreign oil companies including Geopark, Frontera and Gran Tierra acquired interests in the Intracampos blocks located in in the Oriente Basin in northeastern Ecuador near the Colombian border.
Source: Ministry of Energy and Non-Renewable Natural Resources of Ecuador.
Quito’s reforms presage larger long-term clients for Ecuador’s economically important oil industry, foreign investment would possibly not occur as temporarily as necessary.
While Moreno’s administration reversed the policy of nationalism of his predecessor’s resources, much remains to be done to convince foreign oil corporations that Ecuador is open to business. This is reflected in the World Bank’s Doing Business 2020 report, in which Ecuador achieved an incredibly low rating, ranking 129th out of 190 countries, indicating that it remains a difficult jurisdiction for foreign power corporations. It is Ecuador’s highest degrees of state interventionism that have become known as a major danger.
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In addition to the increased political risk, Ecuador’s estimated relatively high equilibrium value of $39 consistent with the barrel, only $2 less than the existing market value, discourages additional investment. This scenario is further exacerbated by the fact that The main mixtures of Napo oil and The East of Ecuador are compared to the West Texas intermediary than Brent. This prevents companies pumping crude in Ecuador from profiting from the constant improvement with the value of Brent, which is about $2 consistent with the rise of the WTI-compatible barrel.
Recent severe civil unrest, pipeline ruptures and the heavy impact of the COVID-19 pandemic on Ecuador are also ratcheting up risk for foreign oil companies. These events are all preventing Quito from growing Ecuador’s oil output and achieving its 2020 target of 590,000 barrels daily.
Aging infrastructure is also weighing on Quito’s oil ambitions. Multiple April 2020 pipeline ruptures caused oil production to plunge to a low of 68,000 barrels daily, reducing the monthly total to 225,242 barrels daily or less than half of March’s 539,629 barrels. It took until May 2020 for repairs to be completed and pipelines to reach full operational capacity, which saw that month’s output rise to an average of 333,339 barrels daily. It wasn’t until June when production reached full capacity averaging 514,863 barrels daily which was 3 percent lower than the equivalent period in 2019.
By Matthew Smith for Oilprice.com
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