Counting Out Crude

After a decade and a half break, Ecuador rejoined the Organization of the Petroleum Exporting Countries (OPEC) in 2007, and currently stands as its smallest member. Under its relatively small territory lies considerable reserves of oil and gas, though much of this has not yet been exploited. The country produces approximately 500,000 bbl/d, and crude petroleum makes up 50% of exports. In 2012, revenue generated by the trading of this commodity, primarily with the west coast of the US, reached $12.7 billion, while refined petroleum represented just a fraction of this at $960 million. This relatively low level of production makes it the fifth largest producer in Latin America; however, the income garnered from its sale has funded much of the present administration’s political activities and improved the lives of many Ecuadoreans through the construction of new infrastructure and social facilities.

With a 2014 budget of $34.3 billion, a government price of around $86 per barrel was set. Since 2010, when the Correa administration renegotiated hydrocarbon contracts with the 17 firms that were present in the country, a profit limit of $32 a barrel has been in place. Though this initially discouraged operators, the majority have remained, accepting the state’s policy of resource nationalism and the full sovereignty of the state over national resources. However, the gradual diminishing of the reserves being processed has necessitated a search for other forms of revenue, and Ecuador’s return to international bond markets. For the energy sector, this has led to an expanded exploration in more remote provinces for their untapped potential, and the pursuit of advanced technologies to bolster the refining segment.

In the regions of Morona Santiago and Pastaza in the heavily forested southeast of the country, areas have been designated for exploration, while substantial reserves are present in the Ishpingo-Tambococha-Tiputini (ITT) fields in Yasuní­ National Park, an estimated 900 million barrels of oil. However, the exploitation of many of these new areas is fraught with difficulties concerning the protection of the environment and the various indigenous communities scattered throughout the area. Far from insensitive to the issue, the government in fact imposed a ban on extraction and exploration in the area during its first six years in power. In 3Q2013, this was overturned, and efforts are being undertaken to minimize any potential environmental impact from the new search for reserves. Nonetheless, the situation has triggered protests in support of the local populations who argue that they receive too little in exchange for the construction of processing facilities on their land.

REFINED TASTES

The Pacific Refinery, targeted for completion in 2017, should correct Ecuador’s reliance on imported petroleum derivatives, and reposition the country as a supplier of petrochemical products, rather than a consumer. The Pacific Refinery is expected to process 300,000 bbl/d at maximum capacity. Whereas the country historically imported more complex petroleum products, the Pacific Refinery will allow it to sell to China, and process a significant part of Venezuela’s crude output from the Orinco Oil Belt. Under this scenario, Ecuador will add value to its economy, while simultaneously reducing its trade deficit. Rather than selling crude, the refinery will process crude into petroleum derivatives including high and low octane fuels, diesel, lubricants, polypropylene, benzene, xylene, and ethanol.

The refinery will come at a cost however. A group of Chinese banks, led by the Industrial & Commercial Bank of China disbursed $2 billion in loans in mid-2014, with another $7 billion expected to follow. This financing will go towards the construction of the refinery, which is expected to cost around $13 billion upon completion in 2017. In return, China is guaranteed preferential sales of Ecuadorean petrochemical products and partial ownership. As part of the financing deal, the China National Petroleum Corp. will take a 30% stake in the refinery, and Petróleos de Venezuela will reduce its stake to 19% from 49%. Petroecuador will retain its 51% controlling stake. Upon the completion of the Pacific Refinery, Ecuador’s total refining capacity will reach approximately 500,000 bbl/d. Around 45% of this output is expected to supply the domestic market with petrochemical feedstock and transportation fuels, and the remainder will be absorbed by China.

TRANSPORT OPTIONS

The national pipeline infrastructure has for a long time been working at full capacity. The OCP pipeline transports crude oil from the northeast of the country to the Esmereldas refinery and port, and is the primary link from the interior to the coast. Completed in 2003 after four years of work, it transformed the segment by facilitating the movement of heavy crude oil.

For now, petroleum products imported from abroad meet the bulk of domestic energy demand. Hydroelectric generation represents over half of national energy production, though this is still far from sufficient. Ultimately, hydroelectric power is envisaged to account for 90% of electricity produced nationally within the current administration’s term. Blessed with over 2,000 rivers or waterways starting in its high-altitude mountain ranges, Ecuador has long been seeking to exploit its topography to generate low-cost, non-polluting energy sources. Of the facilities in operation at present, the largest is the 1.1GW Paute-Molino plant. This will be overtaken by the Coca Codo Sinclair plant, which has been under construction since 2010. Though initially proposed decades ago, the project is seen as a clear success of Correa’s government. At a cost of $2.6 billion, the project is expected to be complete by 2016, and will add an additional 1.5 GW of capacity to the current 5.3 GW. Eight other hydropower projects are in progress at present.

Coca Codo is representative of the influence of foreign capital—particularly from China—in the Ecuadorean energy sector. Since the 2008 global financial crisis, the government had limited options for accessing foreign capital, and eventually accepted heavy investment from across the Pacific. Though Cocasinclair EP is a fully state-owned company, the project is funded primarily by the Export-Import Bank of China. Also, its engineering, construction, and procurement (EPC) contract is mainly the business of Sinohydro, a Chinese corporation, while additional Chinese firms and companies from Mexico and Ecuador control other contracting interests. Most crude petroleum shipped from Esmereldas and Guayaquil is sold to Petrochina. However, Russia also has considerable interest in the energy sector, with state-giants Gazprom and Rosneft conducting business directly with Petroamazonas. An announcement in late 2013 confirmed that Gazprom will invest $1.5 billion into energy projects.