Ecuador Unveils Plans to Extend Control Over Oil Industry

QUITO Oct. 5, 2007 (Dow Jones Newswires)

Ecuador's government surprised private-sector oil companies late Thursday by unveiling dramatic plans to tighten its grip on the oil sector.

President Rafael Correa late Thursday signed an executive decree raising the state's share of oil revenues, while the country's top energy official said the government wants to take back full ownership of oil resources and production.

The government will sit down with oil operators on Monday to begin renegotiating contracts, with a view to transform the relationship. Instead of letting companies produce and sell oil in exchange for a royalty, the government would pay them a fee to extract the oil, which would belong to the state.

"The service provider contract will allow the oil companies to maintain a reasonable range of profits. Indeed, they have been (profitable) up to now and with the change of contract this will improve," Energy and Oil Minister Galo Chiriboga told Dow Jones Newswires on Friday.

The moves by Ecuador's government appear similar to the steps taken by Correa's regional ally, President Hugo Chavez, to take control of Venezuela's oil sector. In recent years, the Chavez administration has forced foreign oil companies to accept higher taxes and royalty payments and, more recently, to hand over majority control of crude oil production projects to the state.

The Ecuadorean decisions are "a complete surprise," said Rene Ortiz, president of the Hydrocarbons Industry Association, which represents private-sector oil companies in Ecuador. "The government had said it would re-negotiate the contracts case-by-case and without any impositions. We don't understand how one day after meeting with (Minister Chiriboga), the situation turns completely against the companies. This is a unilateral decision," Ortiz said.

Thursday's decree hiked the government's share of revenues when oil prices are above the $23 per barrel average price laid down in the companies' operating contracts to 99%, from the previous 50%. Ecuador's crude is currently trading at an average of around $80 per barrel, according the government, which expects to raise an extra $830 million per year in revenues with the measure.

Chiriboga said oil companies won't be able to challenge the decree. "We aren't changing the contract, we are changing the terms of the sharing of the extraordinary revenues that were laid down in the law last year," he contended.

As for the contracts talks, the oil minister said he would meet with all five of the private-sector operators Monday to begin negotiations, and said the operators won't be obliged to change their current status.

"We will negotiate what we can negotiate; if they don't want to negotiate we will continue as we have done until now," Chiriboga said.

Brazil's Petroleo Brasileiro (PBR), or Petrobras, Argentina's Repsol-YPF (REP), France's Perenco, China's Andes Petroleum and U.S.-owned City Oriente have all said they will sit down to talk. A sixth foreign operator, Italy's AGIP, produces oil under the sort of service contract the government wants the other five to adopt.

Ecuador produces around 510,000 barrels per day of crude, of which the private sector operators produce around 50%. Ecuador's state oil company, Petroleos del Ecuador, or Petroecuador, produces the remainder.

Oil companies in Ecuador operated under service contracts until 10 years ago, when the government at the time opted to switch to the participation contracts.

Until Thursday, the government was getting around 80% of the revenues from oil production by private-sector companies through royalties and taxes, according to Ortiz. The figure is disputed by the government, which claims its share is much lower.

Even before the latest hike, oil companies were "on a knife-edge, with losses in their operations," Ortiz said.

The government's decision is "an invitation to the oil companies to leave the country; there are no incentives for them to stay," said Ramiro Crespo, an analyst at the Analytica Securities investment bank in Quito. "Ecuador has a tendency to change the contracts when it's convenient and that (causes) legal uncertainty."

According to Crespo, companies such as Andes Petroleum, which last year bought the local assets of Canada's Encana Corporation (ECA) based on the operating contract with the state and current international oil prices, changing over to become a service provider would be financially damaging.

Andes is a joint-venture of two giant Chinese government oil companies, China National Petroleum Corp. and China Petroleum & Chemical Corp. (SNP). In 2005, they paid $1.42 billion to buy up Encana's assets, which include oil production and a stake in the OCP pipeline which delivers heavy crude from the Amazon region to Ecuador's coast.

Crespo said he believes the changes to the oil industry are a precursor to many more changes planned by the government once a new Constituent Assembly, elected on Sept. 30, begins work. Final results of the elections are expected at the end of the month but initial indications are that Correa's PAIS party won a clear majority.

"Difficult days for the country lie ahead," said Crespo. "The economy, which is already decelerating, will begin to suffer the consequences, we already see a lack of investment not just by foreigners but also by nationals, as various local businessmen have begun to migrate their businesses to Colombia and Peru because of the uncertainty of the Constituent Assembly."

Copyright (c) 2007 Dow Jones & Company, Inc.