Ecuador Takes Tough Stance in Fee Negotiations with Big Oil

Ecuador is the smallest producing member of OPEC, but is engaging in tough talks with the foreign oil companies that produce oil in the South American nation. President Rafael Correa and his government are in the last stages of negotiating new contracts with the seven largest foreign oil companies currently operating in Ecuador. The government is requiring new flat-fee service contracts to replace old profit-sharing agreements, and negotiations over the price of the fees may cause some big companies to leave Ecuador.

Companies that do not sign new agreements will be compensated for investments and forced to turn over operations to the state. Correa acknowledged, “We have lost a pair of companies,” due to the difficult negotiations. Two oil companies controlled by China’s CNPC, that country’s largest oil and gas company, have turned down initial fee offerings. Brazil’s Petrobras is also working very hard to raise the fee originally offered by the Ecuador government.

Ecuador’s minister for oil policy, Wilson Pastor, said a resolution would not come until “the final 100 meter sprint.” He said there were still last minute holdouts, but most agreements would be signed by the deadline Tuesday at midnight.

The Chinese holdouts, PetroOriental and Andes Petroleum have threatened arbitration, claiming “a lack of transparency in terms of ‘take it or leave it,’ confiscatory measures and pressure to accept conditions.”  Oil executives are shunning the press while they remain engrossed in negotiations with government officials in Quito. A number of countries are represented in the talks. Spain’s Repsol-YPF and Italy’s Eni join the Chinese and Brazilian companies in negotiating new agreements.

President Correa was elected in 2006 by running a campaign that promised a “citizens’ revolution” to increase state control of Ecuador’s natural resources, including oil, and limit the control given to an elite few, often corrupt, players. Correa is a U.S. educated economist and he supported a rewriting of Ecuador’s constitution to shift more power to the executive branch. His tough stance on foreign oil companies is a fulfillment of his pledge to bring control of oil production back to the government and away from foreign companies.

Oil is a key component in Correa’s agenda to boost state revenues. Ecuador has had limited access to international capital markets after a 2008 debt default. The country has relied on bilateral loans, mainly from China, for financing. Ecuador had a 0.36 percent growth rate in 2009. That percentage is expected to jump to 3.7 percent for 2010, helped greatly by increased oil prices. The government predicts crude output for this year to average about 490,000 barrels per day.