Working Beautifully

How are contracts with the oil companies delimited today?

Through a ministerial agreement, a single-contract model was designed for the provision of services. Qualified companies compromise with the Hydrocarbons Secretariat of Ecuador (SHE) to use their own economic resources in the exploration and/or exploitation of indicated areas, investing capital and providing the necessary equipment and machinery to fulfill the contract. The contractor that is exploiting a field is thereby entitled to payment. We have new blocks, and when a contracted company discovers oil, it then presents a development plan outlining investment, costs, and expenses.

How did the government come to a consensus with the companies involved?

To agree on a price was very difficult. Oil companies have a variety of operation costs and investments. However, the Secretariat decided upon an average operation cost using references from large oil companies such as Petroamazonas. Additionally, sub-companies have investment costs for drilling, pipeline construction, and production facilities, and those prices had to be negotiated. Moreover, we discussed the increasing production curve, which we determined using the history of reserve behavior. The negotiated average price was $32 per barrel, and we observed that many companies’ benefits were based on the oil price. Currently, the country obtains a share of the benefits and companies are compensated with a fair price.

When will the next round of tenders start?

The 11th oil round is planned to take place in mid-2012. We have all the necessary technical information and the basis of the contracts ready. This round, a new type of contract will be prepared, and a reformed economic model for the round is pending. We continue to study the possible models, as we wait for the Minister of Energy and Mining and President of Ecuador to finish the final analyses and economic evaluation. The round is hosting a bid for exploration; this is the first time that a fully exploratory contest has taken place for participation contracts. The service provision contracts will be given when oil has been discovered and successfully exploited. We are seeking a model that can be adapted to this situation, which will also be unique.

Will the contracts stipulate exploration exclusively, or lead to exploitation carried out by the same company?

Because it is an exploratory round, the 21 blocks we have assigned are based on information gathered from geologists and geophysicists. The contracts specify exploration simply because we have very little information on a number of these blocks in terms of reserves. There are other blocks that have been drilled unsuccessfully, and there are some on which we have no information whatsoever. We are seeking companies that are interested in investing in Ecuador, and if they make their investment during the exploratory stage and are successful, we are open to receive development plans that include further investments and a tentative production curve. Based on these factors, we will negotiate the tariff and compensate the investments made in exploration. This compensation would present an IRR higher than those blocks that have no risk and are already producing oil.

What benefits does the Secretariat expect to obtain from oil activities in 2012?

We expected an income of around $1.6 billion for the government in 2011, and we registered almost $3 billion. This was largely due to the changes in the contract and the rapid increase of oil prices and production. The production of private companies surpassed what we expected by 4%, delivering almost 142,000 barrels more than the average. This demonstrates that the companies are motivated and eager to invest. Our ambition for 2012 is to increase production by 20,000 barrels per day (bbl/d) to reach an average of 520,000 bbl/d. We are working to surpass expectations, which will happen as long as the price of oil stays the same and our relationships with the involved companies continue to work beautifully. We are very strict when it comes to contracts, and we also handle payments very carefully. In fact, 30 days after a company presents its invoice, it will receive compensation from us. In conclusion, I firmly believe that we will continue growing as we did in 2011.