Ecuador Govt. Reaches Contract Deal with Petrobras

QUITO (Dow Jones Newswires), August 7, 2008

The government of Ecuador and Petroleo Brasileiro SA (PBR) have reached a deal that will allow Petrobras to maintain its contracts in the Andean country, Mining and Oil Minister Galo Chiriboga and company officials said Thursday.

"We have reached an agreement that is good for both the state and the company," Chiriboga said in an interview with Dow Jones Newswires.

The agreement was reached after meetings between Ecuadorean government officials, including President Rafael Correa, and high-level Petrobras officials.

Chiriboga said later at a press conference that Petrobras had agreed to change its participation contracts to service contracts.

He said details of the new arrangement would be worked out by a negotiating team made up of officials from both Petrobras and state-owned Petroecuador.

The arrangement will be for Block 18 and the unified oil field Palo Azul, which together produce some 32,000 barrels a day of oil.

The deal doesn't cover Block 31, which the government is studying how to manage as it's located in a national park.

A high-level Petrobras executive said at the press conference that it's in the company's interest to arrive at a deal for the new contract as soon as possible.

The executive said there are hopes that the negotiations can start next week.

In October, the Correa administration increased the state's take of windfall oil profits to 99% from 50%.

Oil companies said the measures make operating in Ecuador unprofitable and several companies filed for arbitration at the World Bank's International Center for Settlement of Investment Disputes, or ICSID, and with other organizations.

The government has offered to reduce the tax on oil windfall profits from 99% to 70% temporarily for one year.

The offer, however, depends on the companies withdrawing arbitration claims at the ICSID or other organizations, increasing investment and output levels, and increasing the production that the companies give to the state.

After that, the companies would have to change their participation contracts for service contracts.

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 reimbursed for investment costs, although all of the recovered crude oil will belong to the state.

On July 18, Petrobras informed the Solicitor General's Office and state oil company Petroecuador that it would file a suit at the London Court of International Arbitration if it wasn't able to reach an agreement with the state.

The company currently produces about 36,000 barrels a day of oil in Ecuador.

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