Ecuador to Receive 60% of Oil Produced By Petrobras' Block 18

Ecuador, South America
(Click to Enlarge)

QUITO (Dow Jones Newswires), October 20, 2008

Ecuador will receive an average of 60% of oil production for block 18, operated by Brazilian state-run oil company Petroleo Brasileiro SA, up from the current 51%, Mining and Oil Minister Derlis Palacios, told Dow Jones Newswires.

President Rafael Correa said over the weekend that Petrobras has agreed to sign a new temporary oil participation deal for block 18.

The temporary deal will be changed in one year to a service contract.

Under the current participation contracts, the state receives a percentage of profits from oil production.

Under the new service provider contracts, companies would be paid a production fee and be reimbursed for investment costs, although all of the recovered crude oil will belong to the state.

Petrobras currently produces about 32,000 barrels of oil a day from block 18.

"According the agreement signed on Friday, the state will increase its participation in the block oil production to 60%. In exchange, the windfall tax for the company will be reduced from the current 99% to 70%," Palacios said in an interview.

Palacios added that although the temporary contract is for a year, he hopes to sign a service contract quickly, "maybe in around three months" because it could benefit both the government and the company.

Last month Ecuador and Petrobras agreed to finish the contract for block 31, another block operated by the Brazilian company, and transfer it to the state.

Block 31, with an area of 200,000-hectares, lies partly within Yasuni National Park, which the United Nations Educational, Scientific and Cultural Organization has declared a World Biosphere Reserve. Petrobras hasn't started production in block 31.

Palacios said block 31 will be operated by Petroamazonas SA, a unit of Petroecuador which operates blocks formerly owned by Occidental Petroleum Co.'s.

In 2006, Ecuador canceled a contract with Occidental. The government accused the company of violating the terms of its contract, particularly in transferring without proper authorization a 40% stake to Canada's EnCana Corp. Occidental Petroleum is seeking international arbitration over that decision.

Correa's government wants to change all private participation contracts to service contracts, in which the state would control the fields and reimburse companies operating them.

In Ecuador's negotiations with Spanish-Argentine oil company Repsol YPF SA, Palacios said there is a preliminary agreement for a temporary contract, which would be changed to a service contract in one year.

After the government signs temporary contracts with Petrobras and Repsol, it will start negotiations with Chinese oil company Andes Petroleum Ecuador Ltd. for the Tarapoa block.

Andes Petroleum is a joint venture between Chinese state-run oil companies China National Petroleum Corp. and China Petroleum & Chemical Corp., known as Sinopec.

Tarapoa produces around 45,000 barrels per day.

According to Palacios, there is a possibility the government will sign a service contract for Tarapoa without a temporary agreement, "but it will depend of the negotiation process."

The government has also reached a preliminary agreement with Paris-based Perenco SA.

The new service contracts will prohibit foreign companies from seeking international arbitration claims at the World Bank's International Center for Settlement of Investment Disputes, instead requiring them to rely on Latin American courts to settle any disputes.  

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

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