Follow the Salmon

Ecuador’s National Energy Agenda 2016-2040, published in October 2016, foretells a diversified energy matrix, both renewable and sustainable, that will ensure energy sovereignty and efficiency. Yet before that, the sector must recover from past transgressions and secure investor input for future revenue flows. Ecuador has South America’s third-largest oil reserves after Venezuela and Brazil, as of January 2017, at 8.3 billion bbl of proven crude oil reserves.

Facing the realities

Despite the numbers, Ecuador’s oil business has been a slippery proposition. For one, the national oil company Petroecuador has seen its ninth chief executive in under four years. Skeptics may well wonder whether peak oil might not be reached before he reaches retirement. Put simply, the lucrative black stuff has led to a crude operational environment where, as Ecuador has discovered to its cost, reputations can fall and investors baulk at sector opacity.

New approach, new department

A key early step to optimize the oil ecosystem was the 2012 merger of Petroecuador with the state Exploration and Production Company (E&P). Fast forward to 2018 and Ecuador’s reform-oriented government under the instruction of president Lení­n Moreno has made overtures towards a more transparent and investor-friendly upstream environment. To galvanize change through rationalized administration and shed its reputation for irregularity (around a hundred individuals from Petroecuador have been under investigation), August saw the absorption of the mining and energy ministries into the hydrocarbons ministry. Its immediate task is to distribute licenses for profit-sharing contracts to bidders deemed worthy.

How sweet the deal?

The idea now is to observe a formal tender process rather than opt for the familiar state-owned oil and gas companies’ involvement or the less appealing ‘service contract.’ In short, production and profit sharing are seen as the route to generating investment revenues and narrowing capacity gaps, notably in refining. The idea is that producers under production sharing agreements (PSAs) be paid in oil, which can either be exported or sold to Ecuador’s three refineries. The new model involves direct sharing of gross production between contractor and state based upon the Oriente Crude oil price, plus the volume and quality of crude produced from any given asset. Under the latest terms, the contractor’s stake in gross production is between 40-87.5%. In September 2018, this new model accompanied the launch of the XII Intracampos Licensing Round. Ecuador clocked investments of USD1 billion from that round, comprising eight onshore blocks of the Oriente Basin. Four subsequent licensing rounds have been planned for between 4Q2018 and 2020: Intracampos 2, Subandino, Suroriente, and the Litoral. The Litoral Licensing Round is deemed a frontier affair of higher risk, and features large offshore areas.

Good for the books

These forthcoming agreements foretell a production rise of 89 million bbl of oil over the coming 15 years, amounting to estimated revenues of USD1.80 billion until 2032. Official data indicates that in 2018 Petroamazonas oil has secured private investment of USD2.34 billion in rounds for smaller fields where service contracts will apply.
The government intends for state-owned Petroamazonas to sink around 300 wells and build nine platforms in the southern-most section of the Ishpingo-Tambococha-Tiputini (ITT) fields, known in shorthand as Block 43, Ecuador’s flagship project. By 2022, the three fields of Block 43 are envisaged to be producing 300,000bpd. Yet this scheme overlaps the would-be untouchable zone of the Yasuni National Park. A mid-2018 referendum saw 67.5% opposition to an extension into the protected area, whereby drilling, set to commence in mid-2018, was postponed.

Fortune cookies

China is an insatiable presence on the continent, and since 2009, Ecuador has leveraged this fact through numerous oil-for-loan deals with it. A sweetener has been the state’s commitment to reinvest a share of the loans into projects featuring Chinese companies, notably in the energy sector. Yet some of the 912.7 million barrels of oil are pledged by erstwhile president Rafael Correa and related loans under scrutiny by the incumbent administration, causing more unwelcome noise in the investor community. Ecuador’s hydrocarbon landscape has clear potential in terms of availability and the government’s investor-friendly intentions. Now the challenge is to lure foreign investment without selling the irreplaceable family jewel, the Amazon, in the process.