Ecuador Oil & Gas Report Q2 2013
Published by Business Monitor International
on Feb 7, 2013
, 75 pages
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BMI View: Our forecasts suggest that Ecuador's oil production will peak in 2015 and begin a steady downward trend through the end of our forecast period. Similarly, natural gas production is forecast to peak in 2016, and decline through 2021. As such, the sector is in need of increased foreign investment, but its negative business environment leaves little room for optimism in the near future. The upcoming licensing round for blocks in the country's south east will be a key bellwether for the future trajectory of the sector.
The key trends and developments in Ecuador's oil & gas sector are:
- Our forecasts suggest that proven gas reserves will begin to decline after 2014. As for gas production, we expect an uptick in output through 2016, but then end the forecast period in decline as well.
- Oil exports remain a mainstay of the Ecuadorean economy, yet due to falling production, we forecast a significant reduction in total net oil exports, which includes both crude oil and refined products. An average yearly decline of 2.9% between 2013 and 2017 is expected.
- The Hydrocarbons Secretariat of Ecuador (SHE) is currently holding an oil exploration licensing round, which was first announced in November 2012. The round has on offer 13 new oil blocks for exploration in the relatively underexplored south east, near the border with Peru. A road show was held in the first three months of 2013, and the official bidding process is scheduled to begin in March. According to assessments made during the 1970s, the country's south-east region had preliminary estimates of more than 100mn barrels (bbl) of crude. However, the government hopes that, due to recent technological advances, its real potential could be between 800mn and 1.6bn barrels (bbl). Yet, even the top line estimates of the licensing area's potential are likely to be insufficient to reverse the sector's overall negative trend. This round will be a key test for the country's energy sector, as it will be the first licensing round held since the government changed the country's contract terms from production-sharing contracts (PSCs) to per barrel fees.
- Ecuador's poor business environment and its deterrent effect on foreign investment also weigh considerably on the country's energy sector outlook. In addition to its enduring exclusion from international capital markets following its 2009 sovereign debt default, Ecuador also ranks among the lowest in Latin America in terms of upstream country risk dynamics in BMI's proprietary Risk/Rewards Ratings. Its ratings are largely on par with Argentina and Bolivia, two other countries with particularly poor investment profiles.
- Underscoring the country's poor business environment, an Ecuadorean judge has determined that Chevron must pay US$19.02bn in environmental damages for the actions of Texaco in the country between 1964 and 1992. Chevron acquired Texaco in 2001. Included in this massive penalty is an US $8.6bn fine because Chevron has, to date, refused to apologise for the spill. Chevron's appeal to the US Supreme Court to block the collection of this fine was blocked in October 2012, and a date for the trial set for October 15, 2013. In addition, Ecuador has enlisted Argentina's assistance in extracting the damages from Chevron, including the freezing of its Argentine assets. Chevron is also in the process of contesting that claim.
- In 2012, the Ecuadorean and Peruvian governments signed an agreement to enable the transit of Ecuadorean crude through the Norperuanu Pipeline to the Peruvian Pacific coast port city of Bayovar. Peru will receive a US$10/bbl transportation fee in return for granting Ecuador use of the pipeline.
- There are efforts being made to increase the country's refining capacity, although they have been hampered by delays, cost overruns, and a general lack of funding. It was announced in April 2012 that Chinese state-owned companies are seeking to finance a US$12.5bn greenfield refinery with a 300,000b/ d nameplate capacity. We have been reluctant to account for this project in our refinery capacity forecast, however, as the project has experienced multi-year delays and funding problems amid skyrocketing cost estimates.
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