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Page added on December 8, 2009

Ecuador issues a warning to foreign oil companies

Ecuador’s President Rafael Correa has given foreign oil companies operating in the country a March 2010 deadline to sign new contracts, before he will change the ‘rules of the game and the relationship between the companies and the state’.

Since coming to power, the Ecuadorian president has nationalised the country’s hydrocarbon resources. Consequently, private investment in the oil industry has plummeted, with the consequence of causing a fall in national output. Oil production in October stood at 455,000 barrels per day (bpd), down from a 2008 average of 514,000 bpd.

President Correa is aiming to enact a new Hydrocarbons Law, which will limit foreign oil companies’ role to that of service providers. This comes as part of a wider ploy by the government to gain greater control of the country’s energy industry. The new law, should it be passed, will dictate that rather than receiving a share of oil output under the original production sharing agreements, the companies will be paid a fixed fee for their work on the concessions.

Until now it had seemed that Correa had wanted to start negotiations on new service contracts with each company following the passage of the new law, which is expected by year-end. At present it remains unclear whether the new law will have to be passed before the renegotiations start. However, Correa’s rhetoric has toughened as the negotiation of contracts approaches. But he apparently does not want to go so far as to choke off the private investment that his OPEC member country needs to bolster its key oil sector.

There is an increasing level of risk associated with Ecuador’s oil production, thanks to the nationalisation of international oil companies’ assets, the failure to stimulate investment from the few remaining companies’ partners and the limited financial resources of the state operators.