By Matthew Smith
Ecuador, which left OPEC in January 2020 to avoid production quotas, has embarked on an ambitious plan to double its oil output. The Andean nation with a population of about 17 million, has struggled for years to grow its hydrocarbon sector as a means of bolstering a fragile economy that has been hit hard by the Covid-19 pandemic.
The country has struggled to boost oil production with heavy-handed regulation, frequent environmental catastrophes, and endemic corruption weighing heavily on industry operations. After a surprise electoral victory, where wealthy banker Guillermo Lasso defeated socialist candidate Andres Arauz, energy analysts say the outlook for Ecuador’s petroleum sector is the brightest it has been in years. The recent increase in oil prices adds to the optimism.
Last month, Lasso signed an executive decree authorizing various actions to expand oil industry production. This forms part of the president’s plan to rebuild Ecuador’s shattered economy by doubling the country’s crude oil output, although he has a number of obstacles to overcome.
During June 2021 Ecuador pumped on average 473,555 barrels of crude oil per day which was 8% lower than the same period a year earlier and significantly less than the one million barrels per day targeted by Lasso. Ecuador’s petroleum output has essentially been stagnant for decades with its June 2021 production not much higher than the 420,000 barrels per day pumped during 2003.
Ecuador’s proven crude oil reserves have also flatlined, remaining stuck at around eight billion barrels since 2016, due to a lack of new studies. Experts believe, however, that actual reserves may be as much as 30 billion barrels.
The key to significantly increasing Ecuador’s petroleum output is attracting urgently needed investment. Under the changes implemented by Lasso’s predecessor Moreno, state-owned petroleum companies Petroamazonas and Petroecuador merged to simplify operations as part of the effort to rationalize the hydrocarbon sector. Moreno also embarked on a series of industry reforms aimed at attracting greater private investment.
Among the most important developments was the reintroduction of production sharing contracts to replace the flat fee service agreements that former President Rafael Correa ushered in during 2010 to replace them. This was because production sharing agreements allow oil companies to access reserve-based lending, thereby giving them greater capital to develop their operations. Correa’s fee-based contracts were a major deterrent to petroleum investment causing it to fall by a whopping 44% between 2010 and 2017 according to government numbers.
Lasso announced the introduction of risk-sharing agreements which will allow petroleum companies to recoup a portion of the capital invested to develop energy assets from oil sales. Those contracts also offer greater operational independence and financial upside than existing agreements. This decision, Ecuador’s national government in Quito hopes, will act as a powerful incentive to attract urgently needed private investment in Ecuador’s beaten-down hydrocarbon sector. Lasso also proposed creating a new crude oil grade for export aimed at attracting new customers.
A serious problem is that Ecuador’s two main export crude oil varieties Napo and Oriente are heavy and sour which is makes them increasingly unpopular among refiners, particularly in Asia, because they are more difficult and costly to process. The per-barrel is $7 to $8 below the benchmark price of West Texas crude.
Quito is also working on boosting production from existing oilfields operated by national oil company Petroecuador. The state-controlled energy company is drilling wells in the Sacha oilfield, one of Ecuador’s most important, to bolster petroleum output by around 3,000 barrels per day which will see the field on average pump over 640,000 barrels each day. Petroecuador is also subject to a series of reviews aimed at identifying how to improve operations and eliminate corruption with the company embroiled in a series of bribery scandals over the last decade.
To reduce community dissent, notably within Ecuador’s Amazon Basin where most oil reserves and industry operations are located, Lasso announced the introduction of a sustainability fund. The fund, he claims, would see some petroleum revenue spent on social programs within the communities close to Ecuador’s oilfields which are some of the Andean country’s poorest. Those communities have also been subject to significant environmental degradation with oil spills and flaring regular occurrences in Ecuador’s Amazon.
Credit: Oil Price