Ecuador: Correa Win Threatens E&P Sector Overhaul

Leftist candidate Rafael Correa appears to have won decisively in Ecuador's presidential election, taking 57.1% of the vote compared to banana tycoon Alvaro Noboa's 42.9% with 96% of votes counted, the supreme electoral tribunal reported.

An admirer of Venezuela's leftist leader Hugo Chavez, Correa would assume office January 15 and has planned a variety of energy reforms including following in the footsteps of Bolivia's President Evo Morales by renegotiating contracts with oil companies to give the state a larger take, particularly through state oil company Petroecuador.

Correa would inherit a fiscal surplus with healthy revenues, enabling him to wait for high oil prices to renegotiate contracts. As such, producers might be more willing to accept a higher state take, Eurasia Group analyst Patrick Esteruelas told BNamericas.

"Ultimately, however, I think he's shooting himself in the foot," Esteruelas said.

Renegotiated contracts would only exacerbate already existing investor apprehension that comes as a result of strikes and production stoppages, the threat of expropriation and lack of judicial guarantees. Further, oil contract reforms in March 2006 deeply affected producers.

"I would say Ecuador does not offer enough incentives for private producers to consider operating under tighter terms and I expect that most private producers will balk or play hardball," he said. "As far as new prospects are concerned, frankly they won't touch Ecuador with a ten-foot pole after this," Esteruelas said.

Correa's desire to strengthen Petroecuador through increased participation on the E&P front also may prove to be a false hope. Indeed, the company has struggled to maintain production on block 15, where it cancelled US oil company Occidental's (NYSE: OXY) contract in May.

Correa could strengthen Petroecuador through legal means, the analyst said. The new president could start with the oil trust fund law that would reinvest all revenues from ex-Occidental assets in the oil production sector, mainly Petroecuador. Correa has supported the law, which was approved by congress but is still pending execution.

Second, Correa could back a bill in congress that would grant Petroecuador the right to seek out financing from sources other than the finance ministry, thereby developing financial autonomy.

With such legal developments, the country's congress could prove to be Correa's salvation.

But Correa would be unwise to try and strong-arm congressional opponents into accepting his vision rather than opting for compromise. In that case, impeachment and censure could threaten Correa's ability to serve a full fiscal term, Esteruelas said.

Correa doesn't take office for six weeks, however, so both current and potential investors will just have to wait and see.

To read the full interview with Patrick Esteruelas, in which he also discusses the potential for fuel derivative and power reforms, see this week's Perspectives to be published Friday.

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