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Last Updated: Tuesday, 3 October 2006, 00:17 GMT 01:17 UK
Ecuador oil policy upsets private firms
By Jane Monahan
Quito, Ecuador

As campaigning for general elections in Ecuador gathers momentum, issues relating to the oil sector, which has for long had a dominant role in the country's politics and economy, are more to the fore than ever before.

Petroecuador oil tanks
Petroecuador insists it is merely arguing about price

Despite recent high world oil prices and the fact that Ecuador is the second largest Latin American supplier of crude to the US, the country still has onerous foreign debt obligations and a persistently high 60% rate of poverty.

Exceptional factors are affecting the country's oil production.

The most dramatic by far is President Alfredo Palacios government's recent decision to cancel the operating contract of the US company, Occidental Petroleum.

Occidental operated oil fields in the north eastern Amazon that produce almost 100,000 barrels of oil per day, about 20% of the country's total output in 2005.

Global price rises

The takeover of Occidental's operations was supported by oil workers unions and indigenous organisations.

Poor children in Quito.
Many in Ecuador believe oil wealth can help the poor

It represents the most serious clash between a government and a private oil company in Ecuador in years.

Adding to foreign oil companies' uncertainties, a month earlier Congress raised the windfall tax on private oil producers from 20% to 50%.

Not surprisingly, critics of President Palacios' government - including the National Oil Companies' Association - reacted strongly.

They portrayed the measures as politically motivated and another example of a developing world country that does not respect contracts.

Critics insist that Ecuador has moved into the camp of leftist governments in Latin America, alongside Hugo Chavez of Venezuela and Evo Morales' of Bolivia.

Officials at state oil company Petroecuador say the new oil law will not replace existing contracts, but merely modify them to reflect recent world oil price increases.

"Our argument with the foreign oil companies is that as prices have increased a great deal and we are the owners of the resource we want to make sure the people of Ecuador will benefit," says Fernando Gonzalez, who until recently was the president of Petroecuador.

Rene Ortiz, the head of the oil companies association in the capital Quito, says that while foreign energy companies are prepared to accept 50/50 production-splitting contracts in Venezuela - because economies of scale are possible as millions of barrels of oil a day are at stake - the case is not the same in Ecuador.

"Such high costs [in Ecuador] are not worth it," he says, predicting that "the new law will be scrapped by the next government".

New contracts

However, so far no candidate in Ecuador's forthcoming elections has suggested that they will change the new oil law, and none has indicated that they will reverse the government's decision concerning Occidental Petroleum's contract either.

Quito's main square in the historic district with various colonial churches and domes
Ecuador is keen to get a greater share of its oil wealth

Ecuador's finance and energy ministers have emphasised that the takeover is neither a confiscation nor a nationalisation, but simply related to a contract violation and upholding of the law.

Against this background, in August the International Centre for the Settlement of Investment Disputes, an arbitration arm of the World Bank, rejected a request by Occidental to stop Petroecuador seizing its assets in Ecuador.

As a consequence, the government is now free to draw up contracts with other companies that are interested in the concession.

They include Spain's Repsol, Brazil's Petrobras, Mexico's Pemex and the Chinese National Petroleum Corporation.

Declining share

That still does not resolve the issue of how an expected $2bn in extra income over the next 12 months - from the new oil law and crude oil sold from the oilfields seized from Occidental - will be spent.

Nor does it answer how other revenues from the country's oil - which make up 40% of export earnings and a third of taxes - will be allocated.

International investment banks and multilateral organisations, like the World Bank, argue that Ecuador should continue paying down its $10.7bn foreign debt, which now absorbs more than a third of annual budget spending in debt repayments.

But all of Ecuador's presidential candidates, from conservatives to the leftist former economy minister, Rafael Correa - now the frontrunner according to opinion polls - want the foreign debt to be renegotiated so that more money can be spent on health, education and technological development.

There is also a conflict of interest in the government between a desire to maximise the income from oil, and the need for Petroecuador to increase its investments, production and areas of drilling.

Indeed, while Ecuador's crude oil production increased by 31% between 2001 and 2005, reflecting increased output by private companies, Petroecuador's share of the output fell from 58% to 38% because of its ageing fields, budget cuts and a lack of investment in maintenance.

"Petroecuador has become a cash-cow for the government," says Eduardo Naranjo, who deals with Petroecuador's institutional investor relations.

"The company doesn't even get what it is meant to receive in the national annual budget."

Chavez calls for new Opec members
01 Jun 06 |  Business
Occidental offers Ecuador $1bn
20 Mar 06 |  Business
Country profile: Ecuador
21 Jun 06 |  Country profiles

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