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The appointment of Halliburton veteran Carlos Pérez as the new minister of hydrocarbons brings hope for change, experts say. (Photo: Ecuador Hydrocarbons Ministry)
Wednesday, June 28, 2017

Ecuador Energy: New Course?

Will Ecuador’s new president change course on energy?

Inter-American Dialogue

Rafael Correa concluded a decade in office as Ecuador’s president when his former vice president, Lenín Moreno, succeeded him last month. During his presidency, Correa increased state control of the country’s oil and gas sector, restructured state energy companies, struggled with the massive Eloy Alfaro Refinery of the Pacific project, and launched the failed Yasuní-ITT initiative, which would have had wealthier countries pay Ecuador in exchange for it forgoing the extraction of oil in the Yasuní National Park in order to preserve biodiversity and limit carbon emissions, among other measures. What will be Correa’s legacy for the country’s energy sector? How will Moreno seek to revitalize output in the sector, which has been hard-hit by low oil prices in recent years? What should Moreno prioritize for the energy sector, both in the short and long term?

Mario Alejandro Flor, partner at Bustamante & Bustamante in Quito, Ecuador: Rafael Correa will be remembered for having invested in renewable energy sources, particularly in hydroelectricity. Thanks to the investments made in the past decade, more than 80 percent of the energy Ecuador consumes comes from hydroelectric power. This means cheaper energy, less environmental contamination (as compared to thermoelectric generation), and energy exported to neighboring countries. Nonetheless, and specifically with regard to oil matters, President Lenín Moreno has the challenge of improving confidence in the country for the big global players and making Ecuador attractive for huge projects. For this purpose, he might have to analyze what type of upstream contract with private oil companies is most convenient for the interests of both parties. Moreno could face certain budgetary restraints. Petroleum pre-sales, OPEC agreements and keeping domestic production up are significant issues that the new president will have to bear in mind. Furthermore, in light of the somewhat bleak outlook for the petroleum industry, Moreno will focus on other areas of natural resources extraction. Certainly, mining will be a prevailing option for the new government’s development strategies.

Ramiro Crespo, president of Analytica Securities in Quito: Correa’s legacy is a disappointment for the energy sector. He assumed that high oil prices would continue indefinitely when he changed the production-sharing agreements to service contracts. He expelled first-rate international operators in favor of little-known companies that are now making a considerable profit despite low oil prices. Service contracts provide an incentive to overproduce and manage reserves poorly. The Yasuní-ITT project was a complete façade and resulted in the area neither being protected, nor the project being developed according to plan. The country doesn’t have the funds to invest, and low oil prices mean the fields will have to produce more than twice the amount planned in order to achieve the same returns. Correa fostered an environment where corruption ran wild. The Petroecuador scandals resulted in hundreds of millions of dollars leaving the country through suspect contracts. High costs, too many employees and little strategic direction have resulted in debts to suppliers of more than $2 billion. Now the foreign debt-to-GDP ratio is ludicrously high, and the country’s future shipments of oil have been sold to China in opaque deals. There is much doubt that Moreno will bring significant change if Correa continues as a shadow president. However, there is hope with the appointment of Halliburton veteran Carlos Pérez as the new minister of hydrocarbons. The country’s priorities should be to leave OPEC and increase production in an environmentally conscious fashion, and to list the national oil company’s shares locally and abroad to force them to be more competitive, accountable and transparent, as there is currently no independent auditing firm that is willing to give an audit opinion for these companies.

Jose L. Valera, partner at Mayer Brown: Correa’s legacy for Ecuador’s energy sector is poor. When oil prices were high, he strong-armed all the foreign oil companies into giving up their profit-sharing contracts and signing new contracts under which they would become service providers. Under the service arrangements, all production belongs to the state, and the company is paid a fixed fee per unit of production delivered to the state, plus reimbursement of certain costs. Correa sought to keep all the upside of rising prices for the state. He put Ecuador firmly on the side of resource nationalism and state control in the oil sector. Correa made a choice: instead of ensuring through competitive contracts that Ecuador’s population is adequately and efficiently supplied, and that exportable surpluses increase, he instead opted to maximize short-term rent to spend more while completely disregarding the long-term development of a diversified, stable and strong economy. Ecuador’s oil production has been stagnant for many years, and as a result of increased domestic demand, the exportable surpluses are ever lower. The drop in oil prices for a country that relies heavily on revenue from crude oil exports has been devastating. Ecuador is not currently creating the conditions necessary for the private sector to help meet its challenges. Moreno has all the legal tools necessary to revitalize output in the sector if he implements pragmatic policies, instead of being driven by ideology and short-term opportunism. Many countries are attracting capital for exploration and development of their hydrocarbon resources. All Ecuador needs is changed policies. Oil is in the ground, waiting to be extracted.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor


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