Can Ecuador’s oil industry finally start to recover?
Former banker Guillermo Lasso surprise victory over left-wing favorite candidate Andres Arauz in the Ecuadorian presidential election last month established a more optimistic outlook for the Ecuadorian oil industry. President Lasso is Ecuador’s first center-right president in nearly two decades, with the Andean country’s top office dominated by left-wing administrations.
Lasso is seen as a business alternative to Arauz, the protégé of former left-wing president Rafael Correa who was convicted for corruption charges and sentenced to eight years in prison last year. It was Correa’s policies centered on resource nationalism and state control over critical assets that were responsible for the decline of Ecuador’s economically crucial oil industry and environmental degradation.
Before the COVID-19 pandemic, Ecuador’s oil production had been down as a shortage of investment in exploration, well development and industrial infrastructure has hit hard. Even the significant reforms made by Lasso’s predecessor, Lenin Moreno, did little to boost oil industry activity and oil production. The dilapidated state of Ecuador’s energy infrastructure is evidenced by the inability of the country’s three oil refineries to process enough crude oil to meet domestic fuel demand.
Data from the Ecuadorian Agency for the Regulation and Control of Energy and Non-Renewable Natural Resources show it The Andean country pumped an average of 461,784 barrels per day in May 2021. This was about 7% less than a month earlier, but a notable increase of 38% from May 2020, when SOTE pipelines ruptured and OCP forced the shutdown of operations for nearly two months, causing production to plummet.
Moreno’s oil industry reforms were expected to attract foreign investment urgently needed by the ailing sector, but this has not happened. Even the exit from OPEC to evade production quotas and the reinstatement of participation contracts in 2018, which allow reserve-based lending, failed to attract the desired level of investment.
There are several reasons for this, including environmental pressures, the sharp drop in oil prices, high equilibrium costs and the deterioration of energy infrastructure, but the main deterrent was the considerable uncertainty triggered by the election. presidential election in Ecuador.
The oil industry feared that Arauz, who before the election was ahead of Lasso in the polls, would implement, by winning the presidency, nationalist policies similar to those of his mentor Correa.
It was Correa’s policies focused on resource nationalism and state control over energy assets as well as extensive corruption that were responsible for the dilapidated state of Ecuador’s oil and gas infrastructure.
In the countryside, Arauz went so far as to declare that he was opposed to the privatization of the Esmeraldas refinery, Ecuador’s largest, and would block the planned award of a contract to private operators.
For these reasons, Lasso’s victory was a relief for an industry that was weighed down by unfavorable government policies for more than a decade. The newly installed president has taken a positive approach to Ecuador’s oil industry and appears ready to continue to build on Moreno’s reforms. He intends to implement policies to attract more foreign energy investment, increase refining production and increase Ecuador’s economically vital oil production. This is especially important as the impoverished Andean country has been hit hard by the COVID-19 pandemic. According to IMF data, Ecuador’s economy shrank 7.5% last year and the national government in Quito reported a budget deficit (Spanish) of $ 7 billion, or about 7% of gross domestic product. The government expects this deficit to fall to $ 3.9 billion, a more manageable amount of 4% of GDP.
Related: High Oil Prices Are Preparing Supermajors For A Promising Profit Season
For this to happen, Ecuador needs to significantly boost economic activity and bolster tax revenue with a focus on the petroleum industry which is responsible for around 30% of government revenue, a third of exports in value. and 7% of GDP. Lasso before his inauguration pledged to double Ecuador’s oil production during his four-year tenure. To achieve this, it will need to increase Ecuador’s oil production from an average of just under 500,000 barrels per day to one million barrels by 2025. This is an important goal that is being pursued. will prove difficult, if not impossible, to achieve. recently appointed The energy minister, former Petroamazonas chief Juan Carlos Bermeo, faces an uphill battle to execute Lasso’s planned expansion of the oil industry.
Any significant increase in oil production is expected to occur in the environmentally sensitive Amazon Basin, where opposition to the energy industry is growing rapidly. Most of Ecuador’s proven oil reserves, totaling eight million barrels, and production are in its part of the Amazon Basin located in the provinces of Sucumbios and Orellana. The rapidly deteriorating social license of the oil industry in the region poses a direct threat to Lasso’s plans to attract investment from the industry to bolster resources and production. Indigenous communities in the Ecuadorian Amazon have long opposed the oil industry, mainly due to serious environmental damage He talks. In a surprise decision from January 2021, the Provincial Court of Sucumbíos found in favor a petition from the local community seeking to end the flaring. The court ruled that energy companies operating in the provinces of Sucumbíos and Orellana cease flaring, an activity that has been going on since Texaco drilled the region’s first well in 1967.
The deterioration of the social license of the petroleum industry in Ecuador is highlighted by Petroecuador being obliged to declare force majeure (Spanish) at block 12 in the province of Orellana. The indigenous community of El Eden is protesting against the exploitation of oil resources near Block 12 demanding that a new agreement be established because, according to protesters, it expired in 2019. Protests prevent Petroecuador from resupplying block operations 12 which, along with concerns about the safety of employees and equipment, prompted Ecuador’s national oil company to shut down. It took 28,462 barrels per day of offline production, impacting Ecuador’s hydrocarbon production, with Petroecuador responsible for around 80% of the oil-dependent nation’s oil production.
The deterioration of the social license of the economically vital industry is accelerating mainly due to last year’s devastating oil spill caused by the rupture of the OCP and SOTE pipelines near the city of Coca and threatening local water supplies. . Land subsidence remains a threat operation of the two pipelines, which means further ruptures could occur during heavy rains, while local communities say the spill was not fully cleaned up despite having occurred there more than a year.
Ecuador’s lack of attractiveness as a destination for foreign investment in energy assets is amplified by the high equilibrium price estimated at towards $ 39 per barrel and grades of heavy sour crude oil produced in the country. The two main members of the former OPEC member oil qualities are medium sour Oriente which has an API density of 24 degrees and a sulfur content of 1.4% and the Napo blend more sour with an API density of 19 degrees and a sulfur content of 2%. The popularity of heavier sour crude oil grades is falling due to increasingly stringent emissions regulations and the increased cost and complexity associated with refining them into high quality fuels, including gasoline and diesel. Both crude oil blends are indexed to the price of WTI, which means that producers do not benefit from the brent premium that drillers enjoy in other South American jurisdictions, due to their acidic and heavy characteristics, they are trading at a lower price than the North American benchmark.
Quito is also crippled by debts established by a series of oil-backed loans from China and Thailand taken out by the Correa administration. Significantly lower oil prices mean the national government is forced to ship larger amounts of crude oil than expected to pay back, leaving less oil available for sale to generate tax revenue. This is exacerbated by the decline in production volumes. It is estimated that almost half (in Spanish) Ecuador’s forecast 2021 oil production of 481,721 barrels per day is needed to meet these obligations, leaving only 260,740 barrels per day available for sale and government revenue. Despite the optimism surrounding the prospects for Ecuador’s oil industry following Lasso’s electoral victory, recent events highlight the considerable difficulties associated with the expansion of oil production in the Andean country. They demonstrate that Lasso will struggle to increase oil production let alone double production before his term ends in 2025.
By Matthew Smith for Oil Octobers
More reads on Oil Octobers: