Ecuador: Ecuador Is Looking For Investors For Its Oil Projects

Last Updated: 29 May 2018
Article by Alberto Peña Moscoso

After nearly a decade in which Ecuador changed the way it invites investors to its oil exploration, exploitation and refining projects, preferring relations with state-owned companies selected directly without the sieve of competition and, after most of its conflicts with foreign companies have been resolved (in some cases at high cost to the country), Ecuador is seeking to modify its methods to generate attraction towards the most important source of income for its economy.

As a result of the State's organizational measures and in order to reduce its size, in line with the austerity announced, on May 15, 2018 the President of the Republic issued Executive Decree N° 399, which provided for the merger of the Ministry of Electricity and Renewable Energy, the Ministry of Mining and the Secretariat of Hydrocarbons into the Ministry of Hydrocarbons, to be renamed the "Ministry of Energy and Non-Renewable Natural Resources"1. These mergers shall be completed within 90 days.

As a result of this presidential decision, the Ministry of Energy and Non-Renewable Natural Resources and its minister, Carlos Pérez-García, will have important responsibilities in the future development of Ecuador.

Among these responsibilities, the Ministry is committed to recovering the space lost by Ecuador in its capacity to attract direct private investment in the oil exploration, exploitation and refining sector and, to this end, is seeking to ensure that the selection processes for investors are once again formalized through the tender process and that they allow for free competition on equal terms.

In order to understand the potential of the oil industry in Ecuador, we present some figures from the brief presentation made by the Minister of Energy and Non-Renewable Natural Resources at a panel discussion held in Quito on May 13, 2018:

Figures on Ecuador's oil potential:

  • The accumulated production since the 1950s is 5,864 million barrels of oil.2
  • Proven reserves, i.e. those for which there is reasonable certainty of recovery, amount to 1,703 million barrels of oil.
  • Total reserves that include proven, probable, and possible reserves amount to 4,398 million barrels of oil.
  • Contingent resources corresponding to the "volume of oil that has been discovered and which, due to some contingency, has not been classified as a reserve until the date of closure" represent 1,464 million barrels of oil.
  • Finally, the prospective resources, which are "the volume of hydrocarbons probabilistically estimated and not yet discovered at the date of closure," amount to 4,819 million barrels of oil.

Figures on the installed capacity of the industry in Ecuador:

  • The current refining capacity is 175 MBPD3 .
  • The average production has reached 516 MBPD.
  • The average production of natural gas is 36 MMSCFD4.
  • In April 2018, the price per barrel was approximately $66.33 and the differential received for spot sales in several cases does not exceed one United States dollar.
  • Until March 2018, the export volume of EP PETROECUADOR was 5,880 MMBP5 of Oriente Crude oil and 3,880 MMBP of Napo Crude oil.
  • The production cost of each barrel of oil from EP PETROAMAZONAS is USD 17.53.
  • Ecuador's crude oil pipelines have the capacity to increase the volume of oil transportation.
  • The refining capacity of the three plants amounts to 175,000 BPD, which is still in deficit, as demand reaches 237,150 BPD. For this reason, Ecuador continues to import petroleum products to cover its domestic consumption needs.

Investment projects:

With the objective of increasing production and attracting capital and technology to the oil sector, there are several projects underway that place Ecuador as an attractive recipient of investments, the most representative of which are as follows:

ITT Block 43:

At present, it has a production of 6,000 BPPD and its objective is to reach a production of 50,500 BPPD by using an area of 120 hectares within the Yasuní National Park. Therefore, the investments must have a high technological component to allow for compliance with environmental management requirements.

The reserves for this field are 1,674 MMBP.

Minor Fields:

The approximate needed investment is USD 800 million to develop four smaller fields: Drago - CPVEN (Sucumbíos), Guanta Dureno - CPVEN (Sucumbíos), Parahuacu - CNPC (Sucumbíos) and Paka Norte - Vinccler C.A. (Orellana).

The juridical device to be applied is that of the "contract for the provision of specific integrated services with financing from the contractor, for the execution of drilling and completion of wells, reactivation of closed wells; and, construction and expansion of required facilities."

The model contract transfers the risk of the investments and results to the contractor, who will bill a variable rate indexed to the WTI Crude marker.

With the negotiations of these Minor Fields, an estimated increase in production of 90.8 MMBP is expected during the 10-year term of the contracts.

Oil & Gas 2018 Fields:

This process is underway and is intended to attract private investment for the Cuyabeno-Sansahuari, Oso, Yuralpa, Blanca-Vinita and Amistad fields, located in the provinces of Orellana, Sucumbíos, Napo and El Oro.

A total of 68 letters with an expression of interest were received from 25 private companies.

The model contract to be applied is the one for the provision of specific services with financing from the contractor. The investment is approximately USD 800 million, during the 10-year term of the contracts.

Sacha Field:

The current production of the field by EP PETROAMAZONAS is 66 MBPD and it has estimated reserves of 435 MMBP.

They are looking to hire services with financing for drilling within a plan for 10 wells, new tanks, and replacement of flow lines.

Intra-fields Round:

The goal is to achieve revenues of around USD 960 million in 13 years of production with the implementation of Production Sharing Agreements ("PSA").

Southeast Round:

The objectives are to validate the regional geological and oil information and integrate information from the Marañon-Peru Basin. It is expected that Ecuador's and Peru's (Situche) are continuous reservoirs.

Strategic alliances with public or private companies are sought after for the two blocks assigned to Petroamazonas.

The contractual device is the Production Sharing Agreement ("PSA").

Monteverde Maritime Project:

The onshore gas storage project in Monteverde did not achieve any practical application. Today it is being converted into an international hub for the storage and distribution of clean derivatives for the South Pacific and Asia, taking advantage of the current infrastructure and privileged geographical situation.

The budgeted investment for this objective is USD 606.7 million.

Refinery of Manabí:

This refinery is planned as a high-conversion refinery. As the petrochemical component was eliminated, the amount of the investment was adjusted.

It has been planned for 300 MBP of Ecuadorian crude oil (13-18 API) to obtain products under the Euro 5 standard.

The proposal envisages for a private company to develop the project and receive its compensation. There are currently more than 40 companies interested in the project, after a technical-financial presentation of the project to investment companies from China, the United States, England, Russia, Spain, South Korea, among others, was made on January 30 and 31, 2018.

The project is expected to be tendered under the Build-Operate-and-Transfer (BOT) arrangement.

The concession period would be 20 years, after which the private company shall transfer ownership to the Ecuadorian State without additional costs.

Other Projects of Interest:

Future sales contracts: Negotiations are underway between the National Government and the foreign companies Unipec, Petrotailandia and Petrochina, aimed at modifying the contractual terms and conditions, to allow Ecuador to regain control of the processes of sale of the crude oil committed, since it has been successful in the spot sales carried out recently.

Spot Sales: The commercialization of crude oil carried out in 2017 with spot sales of 2,160,000 barrels of Oriente Crude oil achieved a price that allowed it to receive a premium over WTI of USD 0.51 per barrel.

In January 2018, 3.6 million barrels of Oriente Crude oil was offered for sale on the spot market and a price differential of -0.18 per barrel was achieved.

These negotiations have been advantageous for the Ecuadorian State, and it is expected that they will continue as long as the country's production and commitments allow.

Ecuador's expectations of international market responses are high and government authorities are aware that they must take measures to change the perception of complexity and lack of transparency in oil transactions and contracts to achieve this. Along these lines, specific practices and codes of conduct that attack corruption and seek its elimination will be implemented.

Expertise believes that Ecuador offers a space of unparalleled conditions for investors to evaluate local projects in the oil industry and urges public and private companies to do so, offering close and professional support in the initiatives they wish to implement.

Footnotes

1. The contents of the decree may be downloaded from the website: https://minka.presidencia.gob.ec/portal/usuarios_externos.jsf

2. This data is calculated up to the last year of production closure validated by the Secretariat of Hydrocarbons (SH) in the Reserves reports of the operating companies.

3. MBPD as the generic of thousands of barrels of oil per day.

4. MMSCFD: million standard cubic feet per day.

5. MMBP: million barrels of oil.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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