Oxy: Ecuador's New Hydrocarbons Law Will Curb Profits

Ecuador's new hydrocarbons law that increased the state take on hydrocarbons production to 50% is "unconstitutional" and will reduce companies' profits in the country, Dan Almaguer, VP of legal affairs for US oil firm Oxy's Ecuador operations, told BNamericas.

Oxy's main complaint regarding the new law is that the state will take a share of gross revenue rather than net profits, meaning the law does not take investment, operating costs, or capital expenditures into account.

Congress passed a reform in the hydrocarbons law stipulating a 60% state share in oil income in late March, but President Alfredo Palacio vetoed that part of the bill in early April and suggested a 50% take instead.

The government aims to renegotiate oil contracts within 45 days of passing the law, which Almaguer described as an "extremely aggressive" deadline.

Although the law does not modify the text of E&P contracts themselves, the extra-contractual modifications change the economic reality of operating conditions in the country, Almaguer said.

"The country is trying to sell the new hydrocarbon's law as legal and constitutional. Part of the spin on this PR effort is to describe the law as not having an impact on the contracts and thus not unilaterally modifying them, but rather changing something else, something extra-contractual, which drastically affects profitability," according to Almaguer.

The government considers oil profits earned by companies over the past few years on the back of high international prices to be exorbitant and hopes the law will work toward re-establishing an equitable economic relationship between the state and oil companies, he said.

The government passed the law as a means to bring oil companies to the contract renegotiating table, which the government believes might not have happened otherwise, he added.

Oil companies are now more than willing to renegotiate their contracts with the government to "claw back some of the value taken away by the law," he said.

It is rumored Oxy was not invited to meet with the country's energy ministry along with other companies last week because it is currently being threatened with the unilateral termination of its block 15 contract in a separate dispute.

Oxy is accused of transferring a 40% stake in block 15 to Canadian oil firm EnCana in 2000 without government permission in addition to overproducing on some wells and not complying with its investment plan in the block.

However, Oxy asked Ecuador's state prosecutor Jose Maria Borja on Monday morning to authorize a meeting with state oil company Petroecuador to discuss its contract, a Petroecuador spokesperson told BNamericas.

The new law could cut Oxy's cash flow from its block 15 operations by about half, Oxy's western hemisphere president of oil and gas John Morgan said in the company's first quarter earnings conference call on Tuesday.

In addition to being unconstitutional and violating Oxy's participation contract, Oxy believes the new legislation violates the US-Ecuador bilateral investment treaty, Morgan said.

"It's certainly not a great atmosphere in which to be renegotiating our contract because there's so little left on the table," Almaguer said.

Nevertheless, Oxy is willing to renegotiate its contract and the government could use the talks as a basis for negotiations with other oil companies, Almaguer said.

"What we would like to do is sit down and discuss with the government the price-sharing rule and include some sort of mechanism [in the contract] to give us credit for investments we have made over the past five years, which are fairly significant, and investments going forward," he said.

Oxy has reinvested 100% of its profits from Ecuadorian operations into increasing production and local facilities, thereby benefiting the state, he added.

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