Ecuador: a nation of oil no longer


By Milhojas Foundation

In 1972, the military Government of General Guillermo Rodríguez Lara instigated a mini oil boom. In Quito, his regime exhibited the first barrel of oil produced by a consortium between transnational Texaco and the fledgling Ecuadoran State Petroleum Corporation (CEPE for its Spanish acronym). Nearly half a century later, the Government of Rafael Correa Delgado ends the extractive cycle, squeezing the last drops of black gold from the earth. The depletion of Ecuador’s crude reserves, combined with the collapse in oil prices, spells economic tragedy for a country that has tied its fate to hydrocarbons.

The price of oil is a factor outside the Government’s control, but it was Correa’s exclusive responsibility to define production costs in oil contracts. In 1972, Rodriguez Lara amended the contract with Texaco to establish an 87% stake for the State. In 2010, when Correa renegotiated contracts for oil exploration and exploitation with foreign companies, he established rates of $35 and $41 per barrel in those blocks with highest production. Meanwhile, in areas under state control, managed by Petroecuador and Petroamazonas, contracts were signed for specific services, with the aim of increasing production. As a result, production costs shot up from $9 to $27, as confirmed by the Manager of Petroamazonas, Osvaldo Madrid.

In 2014, Ecuador generated as much from oil exports as it did from the sale of oil derivatives: a total of $15.367 billion, at an average price per barrel of $80. That year, net contribution to the state budget was just $3.6 billion.

In 2015, at an average price of $50 per barrel, the situation is catastrophic. The country expects to make $9.942 billion from oil exports and derivatives, but production and import costs of $10.145 billion leave a shortfall of $226 million.

End of the black gold dream

In the oil world, neither governments nor corporations can change the geology of the Earth; they can only accept that Ecuador’s natural oil reserves are dwindling. During the last half century, oil became the main agent of transformation in Ecuador, but also greased the wheels one of the largest corruption machines in national history; a machine from whose workings powerful groups have emerged.

One of the best kept secrets of any government is its hydrocarbon reserves, which are categorized as proven, probable or possible. According to the latest public report prepared by the Ministry of Natural Resources in 2010, proven oil reserves in Ecuador stood at 3.4071 billion barrels.

US fracking shatters producers

Rafael Correa’s government has enjoyed unprecedented luck over the last eight years, during which oil prices have remained high; averaging $70 a barrel, but at times reaching peaks of up to $140.

Only in 2009 was a sudden but short-lived fall in oil prices experienced. Certainly the 2014 price collapse, which continues without possibility of short term recovery, is a lethal blow to the Ecuadoran economy. The collapse appeared on the agenda of the global economy in 2010, when the weakening of the European economy led to a decreased demand for derivative products. At the same time, a shift towards hydraulic fracturing in the US led to increased oil production there. Also known as fracking, hydraulic fracturing extracts hydrocarbons trapped between rocks.

The US fracking revolution not only shattered geological formations but, by collapsing oil prices, impacted the oil-dependent economies of regimes currently identified as authoritarian. Thus, Vladimir Putin (Russia), Nicolas Maduro (Venezuela) and Rafael Correa (Ecuador), are experiencing serious impacts on their economies. The economy is a bad advisor; a lack of money makes warlords unpopular. Thus, the US is exhibiting a new strategy, not only to influence the global economy, but also to “fracture” governments such as Putin’s, Maduro’s and Correa’s, leaving questionable interventionism behind.

There is no excuse. The government of Ecuador was warned of falling oil prices and should have taken steps to address the impacts on the economy; such as creating a reserve of oil resources that exceed the budgeted price. In fact, policies established in the hydrocarbon sector since 2007 have been heading in the opposite direction. The transfer of Petroecuador’s management to the Navy was a move which favored State political objectives, rather than defining a sovereign energy policy. The results were clear: decreased production; increased corruption; a push towards million dollar investments in non-sustainable projects, such as the Pacific refinery; the exploitation of the ITT oil block within the protected area of Yasuní National Park; the construction of a gas plant in Monteverde, despite plans to replace domestic gas; and the questionable deals with China, such as the onerous debt secured by oil.

For the first time in Ecuador’s oil history, crude oil export was sold without competitive bidding and at discounted prices, to Petrochina (China), PDVSA (Venezuela), Petrovietnam (Vietnam) and Ancap (Uruguay). These state enterprises served as screens, transferring the oil to private middlemen, who in turn made million dollar deals reselling it, primarily to the US market.

In terms of oil contracts, Correa’s Government pushed a proposal to retain a greater share of oil revenues and endorse energy sovereignty: a change in the contractual form of service delivery. Participation Agreements were replaced by ‘revolutionary’ Service Delivery contracts designed by former Minister Wilson Pastor. In fact, the new contract was a superficially modernized version of an old model used by Pastor himself during the Christian Socialist Government of Leon Febres Cordero, in a deal with US company Maxus (Block 16).

The key difference between a Participation Agreement and a Service Delivery contract is that, with the former, the company receives a direct share in oil production; whereas, with the latter, the State pays the contractor a fee per extracted barrel. As a result, foreign companies operating in Ecuador secured a permanent income, whereas State income was still determined by international oil prices. With a Service Delivery contract, 100% of the oil is owned by the State, but in practice the fees are paid with oil.

Over the five-year duration of the contracts, proven reserves did not increase in oil blocks operated by transnationals. In fact, production initially fell before settling at 120,000 barrels per day in 2014. The oil fields operated by foreign companies are nearly dry.

The ‘crown jewels’ go to foreign companies

Between 2012 and 2014, with the aim of increasing production in mature fields known as “crown jewels,” the government signed contracts for specific services with foreign companies. Previously, oil fields in Auca, Shushufindi, Cuyabeno, Libertador and Aguarico had been operated by State oil company CEPE-Petroecuador. Now, new service contracts were signed with Halliburton, Schlumberger, Tecpetrol, Sinopec and Sertecpet. The Sacha field, one of the largest in the country, was awarded to the joint venture Rio Napo (Petroecuador-PDVSA) at a rate of $17.06 per barrel.

With these contracts, the public company Petroamazonas is obliged to acquire from foreign private companies, directly and over 15 years, the equipment and services it needs to maintain and increase production. In addition, the contracts include the application of improved oil recovery technologies, at a rate of $39 a barrel. The existence of these contracts, and the growth in public investment, helps to explain Petroamazonas’ increased production costs, from $9 to $27 per barrel. In less than three years, costs have tripled.

During seven years of the Citizen’s Revolution (2007 – 2014), investment in oil exploration and exploitation by Petroecuador and Petroamazonas reached $13.03701 billion. Despite this being one of the highest investments in oil history, the results, particularly with regard to the discovery and incorporation of new proven reserves, have been negligible.

Rafael Correa was aware

In his presidential public address on Saturday December 5, 2009, an angry Rafael Correa Delgado condemned the first phase of contract renegotiation with foreign oil companies, calling it “an offense, a crime against the country and a betrayal.”

The accused, though not visibly exposed, stared and hung their heads, waiting for the moment when their names would be revealed. The president’s words sounded like gunfire, but the names never left his mouth. Apparently they were too close to home to be left as evidence: the negotiating teams were formed by Galo Chiriboga, Minister of Mines & Petroleum; Admiral Luis Jaramillo Arias, President of Petroecuador; plus a raft of old and new-style technicians.

Beyond public words and accusations, official information indicates that this phase of negotiation was decided and handled directly by Rafael Correa, his minister Galo Chiriboga and an advisory group appointed by Chiriboga. The first President of Petroecuador appointed by the Navy, Admiral Fernando Zurita, questioned the negotiation process and predicted the damage it would cause. For this, and other reasons, he was removed from office.

President Correa was aware of studies submitted by the consultancy Curtis Mallet. He also had the criteria outlined by former Petroecuador President Fernando Zurita, stating that the renegotiation of contracts using the stated terms was inconvenient and detrimental to the interests of the State.


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