Petroecuador Board to Decide on Contracts by Early June

The board of Ecuador's state oil company Petroecuador will decide by early June on what type of exploration and production contract to offer private companies for its five main oil producing fields; Sacha, Libertador, Auca, Lago Agrio and Shushufindi, a Petroecuador source told BNamericas.

The energy ministry has proposed an association contract structure, which would give private companies 20-year contracts and a 60% stake in the production of the field, while the state receives 40%. However, a report commissioned by Petroecuador's board says that the high return on investment in the fields mean that private companies could earn huge profits during the duration of the contract, and deplete the country's oil reserves.

The ministry's proposals mean that Sacha, Libertador and Auca offer a return on investment of 180%, 109% and 73% respectively, while the company's Lago Agrio and Shushufindi fields yield returns of 28% and 22%, the report said.

The association contract gives the private company a higher percentage of profits because of supposed risk in exploring the block, but "there is no risk on these fields because they are already producing and there is infrastructure in place," the source said. Petroecuador's report says operating alliance contracts would still manage to attract private investment, without giving away the family jewels.

Under an operating alliance, the private company would receive payment of 30-50% of the market price, depending on the price of Ecuador's Oriente crude. The contract's duration would be equal to the time it takes for the company to pay its investment and receive a "reasonable" profit level, the report said.

Petroecuador already has an operating alliance contract in force; with the Sipetrol international operations subsidiary of Chile's state oil company Enap. Sipetrol operates four fields - Mauro Davalos Cordero (MDC), Paraiso, Huachito and Biguno, in Sucumbios province - and according to the source will be able to pay off its US$90mn investment in five years.

"We have experience with this type of arrangement, and if companies with a 30% incremental stake in fields with higher risk can pay their investment in five years, why would we give them 60% for 20 years?" the source asked. The association contracts proposed by the energy ministry would give away the country's 2 billion barrels of reserves to private interests, the source said. The Petroecuador report calculated that to obtain production of 45,000b/d, a company would have to invest about US$127mn, yielding total annual production of 16.2 million barrels, which at an average price of US$18 a barrel would generate US$290mn income every year. It follows that the company, with a 60% stake in the production revenues, would obtain revenues of US$3.5bn during the 20-year lifetime of the contract. Companies that have shown interest in refurbishing Petroecuador's oil fields and/or upgrading its refineries are Anglo-Dutch conglomerate Shell, the Canadian Commercial Corporation (CCC), China Petroleum Technology & Development Corporation, Russia's Yukos and Transneft, and Japan's Mitsui, local newspaper El Comercio reported.

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