For the first time in 15 years, Ecuador on November 28 officially called oil companies to bid for exploration of a series of oil blocks. Contractual caveats and opposition from organized indigenous associations however risk undercutting the plan. Interested parties can participate until May 30. The tender aims at exploring and subsequently developing the whole of Ecuadors Amazon southeast, in the provinces of Pastaza and Morona-Santiago. Indigenous groups staunchly oppose the plan in an area still 85% covered in pristine rainforest.
Oil minister Wilson Pastor and president Rafael Correa said the oil round is essential in maintaining Ecuador as an oil producing country. “In an optimistic scenario, we’d like to replace approximately the remaining reserves we have today,” Pastor told an audience of oil industry executives. Optimistic means at least around 1.6 billion barrels under the 4 million hectare area, at the upper end of a ministry study made together with the French Petroleum Institute. The low end is at about 300 million barrels, less than two years of output at the current production rate of around 500,000 barrels per day. Close to half of this is on Sarayacu territory however, with about 120 million barrels, but which the government didn’t tender in this round given that group’s vehement rejection of any oil development (EWR 615). Development of the fields could take daily output up to around 620,000 barrels a day, Pastor said. Ecuador would also need these to start producing to supply the planned, 300,000 barrel-per-day refinery near Manta on the Pacific Coast. Originally, the administration had scheduled the plant to go online next year, with an investment near $12 billion. The joint venture between Petroecuador, which owns 51%, and Petróleo de Venezuela, which holds the remainder, has however failed to secure funding. The government currently hopes to secure Chinese loans to build the project, on whose planning it has already paid a South Korean company some $500 million, according to the oil ministry.
Pastor put remaining reserves at 1.9 billion barrels, a horizon of just over 10 years of production for OPEC’s smallest member. That leaves out the approximately 1 billion barrels of heavy crude under the Yasuní National Park’s eastern Ishpingo-Tambococha-Tiputini (ITT) area. The ITT’s oil is currently off the market due to an environmental scheme, but Correa has said he’s disappointed with the money flowing into pledges for co-financing of alternatives to oil development there. Ecuador aims to collect $3.5 billion through the scheme, but has received less than 5% of that in two years of lobbying.
Preliminary qualification of bids for the southeast blocks is to go ahead by the end of July, with a signing of four-year exploratory contracts planned for the end of 2013. Production contracts would run 20 years, followed by environmental remediation periods. Under the Correa administration, negotiations have run much longer than expected however, even as just 10 of the 21 new blocks are being offered, surrounding Sarayacu. Three other blocks around the edges of the circle will go to Petroecuador, which seeks minority partners to help develop them. One block adjacent to Peru will likely be managed together with Petroperu and, possibly, Colombia’s Ecopetrol. The offer marks a slight step back from the discretional favoring of state-run companies by Ecuador: While they still don’t have to compete in open tenders like their private peers, the government wants to await the results of the tender before signing deals with state-run partners in the hope of improving deal terms thanks to the more market-friendly operations. Even with scaleddown expectations, the success of the round faces significant hurdles.
Among them, the likelihood of finding commercially viable reserves is lower than in Ecuador’s northeast Amazon, where major production started 40 years ago. Only one in three exploratory wells is likely to find oil in the southeast, compared with two out of three further north, according to Pastor. Production contracts will run under the per-barrel payments scheme Correa pushed companies to accept in 2010. At the same time, the model will be flexible for new production going online, guaranteeing returns on capital between 15% and 25% for oil extracted from cretaceous depths and up to 30% for those of pre-cretaceous depths, Pastor said. Tariffs will be scaled for production levels from 10,000-30,000 barrels a day, 30,000-100,000 barrels a day, and above 100,000 barrels a day. For Pastor, “The tariff system covers the uncertainty of reserve discoveries and once a field is discovered covers the certainty that production will decline in time.” Profitability of oil extraction should be easy to maintain given that the estimated high oil prices will continue through the end of the decade and because Ecuador expects the oil to lie at relatively low depths, making them cheaper to exploit than more technologically challenging fields elsewhere, according to Pastor. No point of the area is more than 120 kilometers from existing pipelines, hence investments in new pipelines won’t run above a maximum of $250 million, Pastor said.
Industry analysts questioned the government’s intent to cap returns, limiting the possible upside on company investments. Environmentalists say they doubt that more reputable international companies will be attracted by the contract terms, leaving mainly environmentally less concerned Chinese interest. While they explore the area, companies will have to provide the government with funds to supply indigenous communities with infrastructure and services. The state will however take on legal obligations, protecting companies from lawsuits, Pastor pledged. This may not suffice to convince companies however. A dispute over pollution left over from Texaco’s operations in Ecuador from the early 1970s to the early 1990s has led to a long-running lawsuit against Chevron, which bought Texaco in 2000. A court in Ecuador ordered the company to pay a group of local plaintiffs $19 billion in damages, which they are attempting to have enforced in several countries including Argentina, Brazil, and Canada.
The government and indigenous organizations led by Amazon confederation CONFENIAE continue at loggerheads over the southeast, with the latter bent on derailing the oil round. Correa has complained that one should at least explore the area to know reserves, however downplaying the damage the explosive charges of the indispensable seismic work would inflict. Pastor has continuously emphasized the effort made by civil servants to lay the groundwork for a proper recognition of indigenous rights and for oil production with as little an impact as possible, including exploration via helicopter. Environmental organizations however point to new roads as evidence that these promises may not be kept. A study published by Universidad Andina estimated that, if exploration and production goes ahead as it did in the northeast, some 185,000 hectares face deforestation, threatening a biodiversity every bit as varied as that of the fabled Yasuní National Park to the north. Carlos Larrea, one of the study’s authors, said that the government’s ambitious estimates are unlikely given much lower oil production on the Peruvian side of the border than hoped. Larrea said that the available capacity in the North-Peruvian pipeline, which transports just a third of the 200,000 barrels a day it was designed for, proves that reserves will likely be at the lower end of the estimates. Inside Yasuní lies Ecuador’s biggest unexploited oilfield, Ishpingo-Tambococha-Tiputini (ITT), which the administration has pledged to keep underground to protect the forest and reduce carbon emissions. A fund aimed at collecting $3.6 billion donations for the ITT project is however well below target, Correa has acknowledged. To develop the southeast, which boasts a diversity of flora and fauna at the same extraordinary scale of the Yasuní area, would add to the contradictions that have made donors hesitant, according to environmentalists and indigenous organizations.
As part of winning bids, companies will have to provide around $110 million in funds for government investment in social projects in local communities in affected areas, Pastor said, adding that these have been approached over the past 18 months to inform them of the exploration plans and secure their approval. Organizations that have signed deals however largely include local governments, sidestepping indigenous organizations. In a brief verbal exchange with Franco Viteri, head of the CONFENIAE, Pastor said that they had refused to participate. On their part, indigenous leaders accuse the government of attempting to divide and weaken their organizations and of failing to carry out the consultations in good faith, as the Inter-American Court of Human Rights demanded in a landmark ruling in July (EWR 628) in favor of the Sarayacu community. Viteri warned companies that: “This consultation fails to provide guarantees for investment by private companies, especially oil companies.” Industry executives said that the risk of unrest and legal challenges hampers the outlook for a successful tender. That might make the 2012 tender Ecuador’s second in a row to fail, even 15 years after the previous one. If Ecuador wants to export more oil, it should consider slashing fuel subsidies that have contributed to surging car sales in recent years. Much stronger local demand has reduced exports significantly, according to Larrea.
