Ecuador reaches deal with most oil companies

November 24, 2010

Source: Financial Times

By Naomi Mapstone in Lima

Petrobras, Brazil’s national oil company, was the only major foreign oil company holding out on a new contract with Ecuador on Tuesday night, paving the way for a possible exit from the Andean nation.

Repsol of Spain, Eni of Italy, Andes Petroleum and PetroOriental of China and Enap of Chile will remain in the country, investing $1.27bn in the oil sector, according to Wilson Pastor, Ecuador’s minister of oil policy.

Noble Energy of the US, will leave Ecuador after its contract was cancelled, handing over some $59m in assets to the state.

Rafael Correa, Ecuador’s president, has repeatedly threatened to expropriate the assets of foreign companies that did not agree to new contracts by midnight on Tuesday, although he has promised compensation.

With hours to go before the midnight deadline, a spokesman for Petrobras refused to confirm the company would exit Ecuador, telling the FT it would make a full statement on Wednesday.

However, Wilson Pastor, Ecuador’s oil policy minister, told reporters in Quito on Tuesday night that state-owned Petroecuador would begin the takeover of Petrobras and Noble Energy assets from Wednesday.

Petrobras has an output of about 19,300 barrels per day from a bloc in the Ecuadorean Amazon and a stake in a heavy crude pipeline.

The new agreements, which will see the companies paid a flat fee for oil production, will increase Ecuador’s share in oil profits from 70 per cent to 80 per cent, providing a welcome boost for Mr Correa’s leftist administration, which has invested heavily in social programmes since he came to power in 2007.

During a fraught negotiation period, Andes Petroleum and PetroOriental had complained to Ecuadorean officials about a lack of transparency in proceedings and threatened to seek international arbitration.

There was also strong speculation that Repsol would pull out over disagreements in the level of service fee, fuelled further by Mr Correa’s announcement over the weekend that two unnamed companies had pulled out.

Ramiro Crespo, head of Quito-based Analytica Securities, told the FT the lengthy negotiations had seriously damaged investment in the oil sector.

“Oil production has come down because the companies over the past two or three years have, of course, not invested anything but the minimum required to keep the fields working. They have done no long-term investment because they were afraid they would have to leave,” he said.