The Americas
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Ecuador's oil industry
If it ain't broke...
Nov 29th 2010, 23:21 by S.K. | QUITO
FOR four years Rafael Correa, Ecuador’s populist president, has sought to renegotiate the country’s contracts with foreign energy companies, who he says have been earning far too much for the oil they extract from beneath its Amazon forests. Once his officials reached new terms with the firms this year, however, Mr Correa skipped the signing ceremony, held on November 23rd. He had good reason not to draw attention to the new agreement: Ecuador would have fared far better if it had simply kept the previous scheme in place.
Under the old contracts, signed in the mid-1990s, the state took 17-27% of the first $15-$17 in revenue for each barrel sold. The companies kept the remainder and any proceeds above the $15-$17 cutoff, a highly favourable arrangement for them. In 2006, after the world oil price reached $70 a barrel, Mr Correa’s predecessor, Alfredo Palacio, imposed an additional 50% tax on the firms’ revenues, ensuring that the state would receive a healthy share of the windfall. The companies continued to produce oil in spite of the new levy, although some of them also sued the government before international arbitrators.
After taking office in 2006, Mr Correa announced he was unsatisfied with the system he inherited, and that he hoped to move to a fee-for-service system like Mexico’s, in which the government would pay the companies a fixed amount for their work and keep all revenues from oil sales for itself. His government never made a formal proposal to the companies along these lines until August of this year. But in the meantime, he increased the windfall-profits tax to 99%, and seized the assets of Perenco, a French energy company, while threatening to do the same to the other firms. In response, the companies began cutting back on their business in Ecuador. Since Mr Correa took office in January 2007, private oil production in the country has fallen from 255,700 barrels per day to 162,000—a gap worth $2.3 billion a year, or 4% of GDP, at current prices.
Once the government unveiled its plans this year, negotiations with the companies took just a few months. Firms representing more than 80% of current foreign-produced oil have now signed new deals, which will increase the state’s share of the profits from production from 70% to 80%. But in exchange for this extra revenue, the government had to accept that the companies would only invest a paltry $1.2 billion in Ecuador over the next four years—the same amount they invested in 2006 alone, and a figure far too small to stop production from declining. The country’s oil-industry trade group says that if firms were given more incentive to invest, they could double production in just a few years. A handful of companies, including Brazil’s Petrobras, are leaving the country entirely.
Mr Correa insists that the renegotiation was worth it, calling the new agreements “very beneficial to the country”. His treasurers will be hard-pressed to agree.
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haha oops. guess he took too much advice from chavez.
Who's the greedy one?
255,700 barrels per day at 27% of $17 (the maximum under the original scheme), would have produced royalties of $428.4 million dollars per year - significantly less than government royalties under the new plan. The fact that an extra $2.3 billion in oil might have been extracted isn't much solace if the vast bulk of that money goes straight into the pockets of multinational oil firms.
True, there is the cost of lost investment to contend with as well as the fact that Ecuador's new scheme is arguably suboptimal (his predecessor's scheme may have been superior). Still, the original royalty regime (like that in so many other countries including the US) was arguably a joke that fleeced the Ecuadorian public to the benefit of multinational corporations.
Despite a shrunken GDP, Ecuador will now receive a higher cut of the profits, and they will prolong the life of their oil reserves. In the future as oil becomes more scarce, the price of oil will rise. This could bode well for Ecuador.
I agree with Sir Bill - the value of the millions of barrels of reserves that remain in the ground are not a dead weight loss either. They certainly leave open the potential of subsequent development at royalty rates that make sense to investors.
Correa appears to be one of the most inept leaders in S.America.
His knowledge of theoretical economics has not brought any common sense to his business dealings. Ecuador is not bananas but rather oil.First,he hands the oil company to navy admirals to ruin it.The recent loan made by China, is collaterized by a large percentage of the daily oil production {thus reducing his daily output for export even further}. The negotiations/deal worked-out with the remaining oil companies is a travesty.If foreign capital does not return, the oil will remain underground. The refinery promised by Chavez {and badly needed} was just a pipe-dream.His "GREEN DREAM" of getting a lump sum for reserves not exploited, did not materialize.The future of Ecuador looks grim.
I agree with Forsize, that Correa has been listening too much to Chavez. Production will decrease, leaving Ecuador is a similar "Slum" situation as Venezuela. When will South American politicians realize that the 1960's are over, free love has gone, and it is the international markets and international oil companies that control the oil markets, logistics, and more importantly the money. Mr. Correa has listened to Chavez and Castro too much, and thinks that he has stuck it to the "Yankees". But as they will all realize, money received now is much more than money's received later. In regards to Sir Bill Bill's comment that Ecuador will have money later, just how much oil does Ecuador have- is the same as Saudi Arabia, Iran, or Russia. Maybe we are giving too much credit to the pundits, and not looking at the economics of the matter. If anything, Ecuador has ensured that in 5-10 years time, foreign companies will be invited to come and bid on state assets, because the state has screwed up the situation once again.