Ecuador accelerates oil opening as transition looms

Quito has pushed through reforms allowing state-run fields to be sold off as President Lasso sees the private sector driving his pledge to double oil output, write Alberto Araujo and Patricia Garip

Ecuador is speeding up the opening of its state-run oil industry through rapid-fire reforms designed to get the private sector to tap as much of the resource as possible before the world spurns it.

Under an umbrella tax decree that took effect on 29 November, reforms to hydrocarbons legislation allow the government to tender oil and natural gas fields operated by state-owned PetroEcuador and facilitate the migration of about 20 fee-based service agreements to production-sharing contracts (PSCs). The reforms provide a framework for auctions of two PetroEcuador-operated mature assets — the 65,000 b/d Sacha oil field and the 25mn ft³/d (258mn m³/yr) shallow-water Amistad gas field — in the second half of 2022. Energy minister Juan Carlos Bermeo says five firms are considering Amistad.

President Guillermo Lasso, who took office in May, made an ambitious pledge to double oil production to 1mn b/d during his four-year tenure. Ecuador produces around 485,000 b/d of medium and heavy sour crude. Lasso envisions the private sector at the helm of the oil industry to allow the state to focus on health, education and other social priorities.

PetroEcuador's contractors — including US service giants Halliburton and Schlumberger, China's state-controlled Sinopec, Canadian independent Canacol and domestic firm Sertecpet — have 90 days to notify the company of their intention to convert to PSCs and start negotiations. The contracts, which mostly date back to former president Rafael Correa's resource-nationalist administration of 2007-17, pay a fee of $20-30/bl for incremental output. But over the past six years, PetroEcuador has suspended and renegotiated some of the agreements because of changing global oil prices, sparking conflicts that led to arbitration with Schlumberger and Halliburton last year.

Two firms have already expressed interest in migrating their contracts to PSCs, and negotiations could begin in January, Bermeo says. But it is unclear whether foreign environmental, social and governance-minded service companies are interested in equity stakes. "There is no incentive for private firms to invest under a service contract because the firm receives a fee no matter what it does," Bermeo says. "We want the PSCs to be an incentive to invest. So the more crude a company produces, the more profit it makes." The contracts will be tied to international oil prices, reserves volume, development plans and contract duration, he adds.

Ecuador is opening its downstream market too, with new fuel import contracts and plans to outsource PetroEcuador's 110,000 b/d Esmeraldas refinery.

Amazon primer

Climate-driven efforts to quicken the transition away from fossil fuels — combined with pandemic-era social demands — are spurring oil-dependent countries such as Ecuador to sweeten investment terms. But nationalist reflexes have hardly dissipated. Oil labour unions reject the reforms. And oil contract attorney Luis Calero says they are unconstitutional. But veteran local analyst Walter Spurrier argues that the reforms provide a more robust legal basis for the private investment needed to extract oil. "In a few decades, those crude reserves will be worthless, considering current global policies that favour renewables over fossil fuels."

From abroad, pressure to halt drilling is growing more acute. Environmental groups Stand.earth and Amazon Watch have campaigned successfully to stop some EU banks from providing trade finance for oil from Ecuador's Amazon oil fields. The non-governmental organisations say most of the Amazonian oil goes to California — singling out refiners Marathon, Valero and Chevron — and call for no new oil expansion in the Amazon rainforest, whether in Ecuador, Peru or Colombia.