Ecuador: reforms in the oil industry would be the route to economic stability

Ecuador, the sixth producer of Petroleum of South America recently surpassed by Guyana, faces a crucial moment for its oil industrywhere the Government and the private sector point to a return to participation contracts as the most suitable formula to strengthen one of the great pillars that support the national economy.

From 560,000 barrels per day in 2014, the production of Ecuador It has fallen to 486,000 currently, which may soon worsen after the plebiscite where Ecuadorians voted overwhelmingly to close and dismantle Block 43-ITT, the fourth most productive field in the country with about 55,000 barrels per day.

That vote set a negative precedent for the industry, in a scenario where 80% of the National Production is in the hands of the state company Petroecuador and the remaining 20% ​​in private companies that operate through service contracts signed with the State, through which they receive an agreed and agreed rate for each barrel produced and delivered.

In the current delicate scenario, participation contracts have once again gained strength between international investors and the Government, especially with the deficit of US$ 4.8 billion in public accounts in 2023, equivalent to almost 5% of the gross domestic product ( GDP).

The oil exports and derivatives were around $9 billion, but only $1.3 billion financed the 2024 state budgets, 3.6% of the total budgeted and, in a report published this Thursday, the World Bank (WB) recommended Ecuador diversify its productive matrix and release the rigidities introduced in past years to the private sector.

The State, the main beneficiary

Thus, the return to participation contracts is seen as an option for the State to continue receiving oil income without investing in exploration and exploitation. This model, current and approved by the State, will be applied in the new bidding processes for fields in Ecuadoras in the so-called Intracampos round.

With the new regulations of the Hydrocarbons Law, the Ministry of Energy can delegate to private initiative those fields that require investments to increase production, carry out exploration or apply special technologies.

In the case of fields operated by Petroecuador, the regulation opens the door to participation contracts when the required investment exceeds the state’s financing capacity. In that case, the fields would be reverted to the Ministry to seek to delegate them to a private partner.

This contractual model, which is the most common internationally, makes the private operator assume all the costs and risks in exchange for receiving a part of the benefits of production, which will always be less than the benefits received by the State, since the law establishes that the State must keep at least 50% of the profits.

In a contract where the State would take 70.40% of the benefits and the private company 29.60%, a barrel sold at US$60, and whose production cost (investments, operating expenses, and reversal) was outside US $24 would give US$36 in benefits, of which 25.30 would go to the State and 10.67 to the contractor, which could reinvest them in increasing production under strict environmental protocols.

Better financing and efficiency

Private companies also have better access to external financing by incorporating the oil reserves in its books, which does not mean that these are privatized, since it only assumes their exploitation during the period agreed with the State for greater efficiency.

In some fields that have gone from being operated by private companies to being in charge of the public company A gradual decrease in production has been seen, as in blocks 16 and 67.

In these fields, production with a private operator reached 14,000 barrels per day in 2022, as EFE was able to verify in a visit thanks to a collaboration agreement with Petroliawhile from 2023 the two deposits became Petroecuador and currently they register a production of 10,000 barrels, resented by the maturity of the field, the lack of investment and by social conflicts with the surrounding indigenous communities.

The International Energy Agency (IEA) predicts that global oil demand will continue to increase in the coming months and by 2025 it estimates consumption of 106 million barrels of crude oil per day.