Monday, April 19, 2010

Q+A-What's going on in Ecuador's oil sector?
QUITO, April 19 (Reuters) - President Rafael Correa has threatened to take over the operations of foreign oil companies in Ecuador unless they sign new contracts intended to increase state control over the sector.

How serious is the situation?


The leftist leader, who says he is championing Ecuador's right to handle its resources as it sees fit, says the government is losing money every day contract talks drag on.

The negotiations, aimed at turning private companies into service providers, are moving slowly and the government is hungry for cash since being cut off from the international capital markets after its 2008 global bond default.

While analysts say there remains room for private firms to negotiate before the government expropriates their operations, Correa proved he is willing to play tough with investors when he ordered the $3.2 billion bond default.

"We have seen this strategy before: Elevate the rhetoric and raise the ante before important negotiations only to compromise at a later stage," said Albert Ramos, who analyses Ecuador for Goldman Sachs in New York.

Ramos said he believed the companies should take Correa very seriously this time because of his nationalist policies for oil.

"He would likely have no problem in taking over more assets from the private oil companies," he said. "But that would, in my assessment, be a policy mistake and a recipe for oil production decline, given the known operational, technological, and managerial inefficiencies of state-owned Petroecuador."


Ecuador's feuds with foreign oil companies in recent years include the takeover of local assets of U.S. oil company Occidental Petroleum (OXY.N). The government declared Oxy's contract had expired and its concession should be returned to state control.

Citing a tax dispute, the government last year also took charge of the operations of two oil blocks belonging to French oil company Perenco.

Under a new constitution, Correa has widened authority over key "strategic" sectors like mining and oil. Gold, copper and silver exploration is resuming in the mineral-rich Andean country under a new legal framework.

Mining companies are being allowed to restart exploration, once their operations conform with new rules that strengthen environmental regulations and increase government control. Major exploration was suspended in 2008 while the mining regulations were being drawn up.


Spain's Repsol (REP.MC), Brazil's Petrobras (PETR4.SA) (PBR.N), Chinese consortium Andes Petroleum and Italy's Eni (ENI.MI) are the main foreign players operating in the Andean country.

Foreign companies account for about 40 percent of Ecuador's total daily production, with the rest accounted for by state entities Petroecuador, Petroamazonas and Rio Napo.


Correa said he planned to send a bill to Congress that would allow in principle for the expropriation of oil fields if the companies do not sign the new contracts.

Correa wants foreign oil companies to give up their profit-sharing deals and sign new contracts under which they would become service providers. He also sides with indigenous groups that have brought a $27 billion environmental damages lawsuit against U.S. petroleum company Chevron Corp (CVX.N), which no longer has operations in Ecuador.


Ecuador, which has the rotating presidency of the Organization of the Petroleum Exporting Countries this year, produced an average 486,067 barrels per day last year, marking a 3.7 percent drop compared with 2008.

Foreign investment flows have eased during the renegotiations. Exports from private companies sank 27.6 percent last year from 2008 to 98,869 bpd, while private output fell 14.4 percent to 204,511 bpd.

Oil is Ecuador's chief revenue earner. Reversing a decade-long slide in output is a key challenge for Correa, who started his second term in office last year.

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