Ecuador, Petrobras Agree to Transfer Block 31 to State

QUITO (Dow Jones Newswires), September 22, 2008

The Ecuadorian government and Brazilian state-run oil firm Petrobras agreed to finish the contract for block 31, which will be transferred to the state, President Rafael Correa said Saturday.

"Other good news for Ecuadorians...After hard negotiations with Petrobras and although it has $200 million in investment, we [the government] got the Company [to] transfer the block 31 to Ecuador. It is in Petroecuador's hands," Correa said during his weekly address, but didn't give further details.

Block 31 has 200,000 hectares, some within the Yasuni National Park, which Unesco has declared a world biosphere reserve.

Petrobras hasn't started production in block 31.

Government sources said that Petrobras agreed to transfer block 31 because changes in windfall profit tax rates make its businesses unprofitable.

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

The Company didn't comment about the government's announcement.

Mining and Oil Minister Galo Chiriboga told Dow Jones Newswires on Saturday that the block could be operated by Petroamazonas SA, a unit of Petroecuador that operates the former Occidental Petroleum Co.'s (OXY) blocks. In 2006, Ecuador canceled a contract with Occidental Petroleum after accusing the U.S. oil firm of wrongdoings, among them the unauthorized transfer of a 40% stake in its operations in Ecuador to Canadian oil firm Encana Corp. 

OXY is seeking international arbitration over that decision.

"The government and Petrobras had reached a friendly agreement, without costs for the state," Chiriboga said in a telephone interview from Daule. "The block will come to the state in around 30 or 45 days after some audits are completed."

Government sources told Dow Jones Newswires that as part of the negotiation, the state will buy the Petrobras capacity to transport crude oil through the private, heavy crude Oleoducto de Crudos Pesados, OCP, pipeline.

Petrobras has 11.42% of shares in the OCP.

OCP's shareholders, all of which transport oil along the OCP, operate under take-or-pay contracts, where they must make payments regardless of how much oil is transported.

"We are talking about [a] tariff to use OCP if we need it," Chiriboga said.

The sources said that the tariff could be around $1.436 per barrel transported.

In August 2004, under former President Alfredo Palacio, Ecuador gave Petrobras a license to operate the block. But in July 2005 Environment Minister Ana Alban suspended the license and forbade the Company to enter Yasuni Park, asking Petrobras for a new development plan and a new environmental management plan for the block.

The Company presented the new plans in May 2006.

The Environment and Mining and Oil ministries approved the new plans in December 2006. The Company paid about $800,000 for the new environmental license and other fees. That was in addition to $700,000 that the Company paid originally in 2004.

Petrobras planned to start producing 30,000 barrels of oil a day from the Apaika and Nenke fields in block 31 in 2009. It has invested around $257 million in the block.

Since Ecuador approved the first environmental license for Petrobras to operate in block 31 in 2004, ecological and scientific groups have lobbied against oil exploration in the park, which is considered to contain one of the most biodiverse areas in the world.

Unions and leftist movements also held occasional protests to impede oil exploration in block 31.

Chiriboga said that Petrobras will continue to negotiate changes for its contract in block 18.

Although Chiriboga said a month ago that the company agreed to immediately change its current participation contract, now it is negotiating changes to it.

"The negotiations for block 18 are advancing. I think we can reach an agreement soon to introduce some changes to the participation contract to improve the benefits for the state and in one year we change the contract for one of services," Chiriboga said.

Petrobras currently produces about 32,000 barrels of oil a day from block 18, but it has to hand over 51% of that to Ecuador.

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