Key renegotiation of oil contracts with China, which puts $500 million at stake, would be discussed in President Lasso’s next visit

The renegotiation of oil contracts would be one of the most challenging challenges that President Guillermo Lasso would face during his next visit to China scheduled for the first days of February. Although Ecuador signed with China, between 2009 and 2016, at least 13 crude sales contracts associated with credit lines with Asian state governments, which to date have represented the delivery of 1,174 million barrels, still to be delivered 156 million barrels to be delivered until 2024.

To understand its size, it is the equivalent of a little more than the total export of crude oil made by Ecuador in a year.

However, the payment conditions for crude oil for this type of contract are detrimental to the country. At least that’s how ratifies a Petroecuador report addressed to President Guillermo Lasso, to which this newspaper had access, and which indicates that after making a series of comparisons with the prices of crude oil for spot sale versus the price of long-term contracts with Asian companies, there is a detriment of $3.69 per barrel for Oriente crude, and $3.61 per barrel for Napo crude.

The manager of Petroecuador, Italo Cedeño, He already commented this week in his first press conference on the international trade strategy of his management. What you will be looking for is revalue Ecuadorian crude and this, he considers, can be done by periodically maintaining spot sales. This means complying with the 10% annual crude oil spot sales, which guarantees that the true differential with respect to WTI is considered: “We are going to do it with Oriente crude and with Napo,” he said. He also assured that the use of the Balao and Punta Gorda (OCP) terminals will be encouraged. The latter allows the use of deep draft ships which, in turn, reduces transportation costs by volume. The idea is that the Ecuadorian crude that is desired by high-conversion refineries worldwide, be recognized for its exact market value.

further He assured that the long-term contracts will be fulfilled and added that if there is any problem in those contracts, we will solve them, and if there was any corruption, it will be the justice that decides. “If there are culprits, they must pay a penalty,” he said, while assuring no “they are not going to protect anyone.” He also spoke of renegotiating contracts to achieve the best benefit of the State.

It is that according to the cited report, the final price of the barrel for these contracts is fixed by a formula which determines a “crude price much lower than the market price”. This, together with the condition of “free destiny” of the crude it has facilitated resale to intermediary companies such as Gunvor, Core Petroleum, Taurus Castor and Ursa Shipping.

In addition, considering that 80% of Ecuadorian crude is destined to fulfill contracts with Asian companies, under a formula that generates a lower price than the market, the regional market is also affected, since it is being marketed at a lower price. which is really worth it. Freight prices also affect.

Among the recommendations that Petroecuador makes to President Lasso is precisely the carry out amending contracts in which the price according to WTI minus the differential of spot processes is considered for the volumes pending delivery between 2022 and 2024. At the moment, four contracts are in force until 2024 (two with Petrochincha, one with Unipec and a fourth with PTT, which is a Thai company).

This reformulation it would mean additional income for the State of $500 million. At the same time it would mean eliminating intermediation, strengthening transparency and recovering Ecuadorian crude in the regional market.

Former Minister of Energy Fernando Santos considered that regarding the oil issue, it would be feasible for Ecuador to request that they recognize a payment for crude oil, similar to the one paid by the Shell company and that is based on the WTI and the Platts indicator and that even sets a premium. He agrees that the formula established in the contracts with China harms the country.

However, he considers that with China there would be another delicate problem to deal with and that is the risk faced by Central Coca Codo Sinclair. A possible way out, says Santos, would be that since the construction company ensures that the plant is well built, proposes to deliver it to its builders and that they in turn return the invested value with a reduction for the time used.

Meanwhile, José Orellana, business advisor, considers that there may be room for negotiation with China, but he is a bit cautious about its possible success, with respect to oil contracts. He assures that in terms of debts and oil contracts, it is necessary to take into account, on the one hand, the debt of oil pre-sales that are already practically covered, but in which commercial commitments to deliver crude still persist. On the other hand, there is the credit debt for projects, which would reach more than $5,000 million.

For Orellana, credits in projects could have greater acceptance in the Chinese Government to extend terms and lower rates. On the other hand, the issue of oil commitments would be somewhat more difficult, this because already in the administration of former Minister Carlos Pérez García a renegotiation of contracts has already been made.

In any case, he considers that Ecuador could have a kind of “carrot” or incentive for negotiation that would be a possible trade agreement with China, which is attractive to the Asian country. Another issue that could be of interest to Chinese companies is to be actors in several participation contracts, now that at least 22 fields will be tendered to the private company. He considers that Chinese companies will show greater interest than European or North American companies, which are in the line of going towards cleaner energies. (I)