Nationalization Bug Prepares to Bite in Ecuador

Ecuador could arrive at an agreement with U.S-owned City Oriente to end its contract to produce crude oil in the Andean nation, Ecuador's Energy Minister Galo Chiriboga said Monday.

"It won't be possible to renew the contract because it is non-viable from technical and financial factors. We are analyzing the possibility of ending the contract by mutual agreement ..." Chiriboga told reporters.

President Rafael Correa in January gave a term of 45 days to finish renegotiations with five private oil companies, included City Oriente.

Correa's government aims to turn existing participation contracts, in which the state receives a percentage from oil production, into service-provider contracts through which companies would be paid a production fee and reimbursed for investment costs.

The previous administration of President Alfredo Palacio mandated that when oil prices rose above those laid down in operating contracts, the government's share of the excess would be 50%. The new administration of President Rafael Correa raised that to 99% in October 2007.

The companies have said these decrees make their businesses unprofitable, and some have started legal proceedings.

City Oriente, based in Panama and backed by U.S. investors, started in 2006 an arbitration process at the World Bank's International Center for the Settlement of Investment Disputes, or ICSID, against the Ecuadorian government, claiming that the new royalty breaks the terms of its operating contract.

City Oriente operates block 27 in Ecuador's Amazon region, producing around 3,000 barrels per day.

Chiriboga has said the government is willing to temporarily maintain current deals with foreign oil companies while talks take place to reach new agreements.

Spanish-Argentine energy group Repsol-YPF (REP), France's Perenco, Brazil's Petroleo Brasileiro SA, (PBR) and the Chinese-owned Andes Petroleum are the others companies in contract talks with the government.

Chiriboga said the new contracts will be for five years and could be extended further according to the investments of each company.

According to Chiriboga, the talks are progressing, and some companies have submitted proposals for investments and production levels under new service contracts.

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