Ecuador Plans to Nix Exploitation of 1B Bbl Oil Deposit

Ecuador, the newest member of the Organization of Petroleum Exporting Countries, comes this week with an unusual proposition in hand for an oil-producing cartel: a proposal not to extract oil from the ground.

While the bulk of OPEC's 13 members are pumping at full throttle with plans to expand capacity in the years ahead, Ecuador - OPEC's smallest producer with 500,000 barrels a day in output - is touting a plan that would block the development of its most promising oil deposit in return for international financial aid.

The area in question is a crude-rich block lying in the heart of Ecuador's Yasuni National Park, which is estimated to hold some 1 billion barrels of oil.

"The idea is that Ecuador would be willing not to exploit this immense block and, in return, the international community would contribute for its non-exploitation," Ecuador's Oil Minister Galo Chiriboga said in an interview.

Chiriboga said Ecuador wasn't necessarily seeking funds from other OPEC members, but it wanted to "find allies at the international level."

Ecuador has managed to include the proposal on OPEC's official agenda Wednesday, when the group meets to decide whether to change its current level of oil production or maintain output as is.

The 9,000 square kilometer Yasuni Amazon reserve in northern Ecuador is considered one of the world's most ecologically diverse regions and was declared a UNESCO World Biosphere Reserve in 1989.

Petroleo Brasileiro SA's (PBR), or Petrobras's, contract in block 31, is 70% inside the Yasuni National Park. Spain's Repsol YPF (REP) also has a concession partly within the area, as does China's Andes Petroleum and Ecuador's state oil company Petroecuador.

Ecuador President Rafael Correa declared a one-year moratorium on oil exploration in the reserve last year, while his government sought funds from the international community to compensate Ecuador for at least half of the revenues it estimates it would forego by not developing the area. The government estimated that figure at about $350 million a year.

Developing nations struggling to balance the need for revenues with conservation have launched similar proposals in the past, known as "debt-for-nature" swaps, in which a portion of the country's foreign debt is forgiven on the condition that the financing that is freed up will be used for local conservation activities. Proponents argue the swaps help relieve crushing debt burdens and promote conservation at the same time, saying environment protection programs are often the first to go when governments are under pressure to cut spending.

A five-year, $25 million deal was struck between Cameroon and France in 2006 to protect part of the world's second-largest rainforest in the Central African country. Similar deals to protect forests in Bolivia, Guyana, as well as Ecuador have also been negotiated or are under consideration.

However, this may be the first such swap involving an oil deposit.

While Ecuador's move is likely to be applauded by conservationists, it may raise concerns about the country's future oil production capacity, as well as its development prospects if it foregoes a major source of revenues.

Patrick Esteruelas, a New York-based analyst with Eurasia Group, said blocking off the Yasuni Reserve from production will make the already struggling producer even less likely to attract the foreign investment it desperately needs in its oil sector, which is the main driver of the country's economy.

"Ecuador faces some hard choices," he said. "It has very limited reserves, somewhere in the range of 4 billion barrels...its crown jewel is the Yasuni, which accounts for 25% of that.

"Unless they open that up to investors it faces the prospect of limited reserves and sluggish production," he said, noting moves by Ecuador's President Correa to draw up tighter terms in the oil industry has already dampened the investment climate.

"With the Yasuni closed for business, there is essentially little room for profit," Esteruelas said.

Copyright (c) 2008 Dow Jones & Company, Inc.


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