Ecuador, Andes Petroleum Likely to Sign New Production Contract

QUITO (Dow Jones Newswires), July 28, 2008

Ecuador's government and China-based oil company Andes Petroleum Ecuador Ltd. will likely sign a new one-year transitory production contract in the first week of August, Ecuadorean Energy Minister Galo Chiriboga said Monday.

"Andes Petroleum agreed to answer our proposal for a new contract today," he told Dow Jones Newswires in an interview. "In 10 days, a delegation from the Chinese government will visit Ecuador to finish the negotiations."

Andes is a joint-venture between two giant Chinese government oil companies, China National Petroleum Corp. and China Petroleum & Chemical Corp. (SNP), known as Sinopec.

Earlier this year, Ecuador began renegotiating with foreign oil companies operating in the country to change their production contracts into service-providing contracts. Under current contracts, the state receives a percentage of profits from oil production. Under the proposed service-providing contracts, all of the recovered crude oil would belong to the state, while companies would be paid a production fee and be reimbursed for investment costs.

While it is negotiating the new service-providing contracts, the government intends to sign temporary one-year contracts, raising the state take on companies' revenue.

The government wants to get a part of the extraordinary revenue caused by high oil prices. It first said it would take 99% of the extraordinary revenue, but then lowered its demand to 70%.

In the case of Andes Petroleum, the original contract stated that windfalls resulting from high oil prices would be evenly divided between the government and the company, Chiriboga said.

He declined to reveal any detail of the proposal sent to Andes Petroleum.

Chiriboga said the government also sent Spain's oil company Repsol YPF SA (REP) a proposal for a one-year transitory contract.

The Spanish company asked the government for "clarifications," he said. "We hope our answers were enough for Repsol and we expect an answer from them this week."

Ecuador is also negotiating with Brazil's state-controlled oil company, Petroleo Brasileiro SA (PBR), or Petrobras, and French-based Perenco.

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