Although the renegotiation of oil contracts with private companies in 2010 to lock in oil profits at a fixed rate of $32 per barrel yielded an additional $1.5 billion for the government in 2011, the drop below $90 a barrel has created further urgency for increased private and state investment. To avoid future budget shortfalls, the nation’s hydrocarbon extraction infrastructure needs attention in order to keep the oil revenues flowing to the government for it to meet its social spending targets. An increase in refining capacity is also a must to ease the stress put on the economy’s current account by the import of refined products, especially gasoline and diesel.
The country’s oil exports were valued at $12.91 billion until December 2011, up 33.5% over the same period in 2010, according to the Central Bank of Ecuador (CBE). The country’s Achilles’ heel, however, has been its lack of refining infrastructure, which saw the country end the year with a trade deficit as imports of fuel and lubricants grew by 25%. To counter the problem, work is underway on the Refinery of the Pacific, as well as an upgrade for two existing refineries that will increase refining capacity to 450,000 barrels per day (bbl/d) by the end of 2016, according to Wilson Pástor, the Minister of Non-Renewable Natural Resources.
EP Petroecuador is the main state-owned oil company, producing around 200,000 bbl/d in 2011, or 55.3 million barrels total. Alongside new areas of production, such as the Drago field with a current production output of 10,000 bbl/d, Petroecuador has signed contracts to expand production with private firms worth $1.7 billion.
EP Petroecuador is also set to undergo a merger with Petroamazons EP in a deal that will see the latter assume responsibility for all upstream activities. “In 2012, we will be the major upstream company in Ecuador, producing over 300,000 barrels per day,” Oswaldo Madrid Barrezueta, General Manager of Petroamazonas EP, told TBY.
Work has also been launched to develop an electricity distribution corridor between Quito and Guayaquil that will eventually form part of a trans-national energy corridor from Chile to Colombia, allowing Ecuador to export its electricity surplus more efficiently. CELEC is the country’s state generation and distribution company working under the National Electricity Council (CONELEC). It generates and supplies 85% of the country’s electricity, and shares the sector with five private developers. Recent years have seen a shift in Ecuador’s energy matrix away from a reliance on fossil fuels for generation. In addition to operating hydroelectric and thermal power plants, the company is constructing eight new hydroelectric plants, wind farms, and more geothermal options.
Ecuador was able to reach an agreement with 12 out of 17 private companies in 2010 on new oil contracts that apply a profit ceiling of $32 dollars per barrel profit for extractors. In 2011, the surplus gifted the government an additional $1.5 billion. The 12 countries that decided to stick with Ecuador “are now planning to invest a further $1.4 billion over the next three years,” according to Pástor. Following further negotiations in early 2012, Petroecuador has signed contracts worth $1.7 billion to expand production at two fields, including a 15-year deal with Schlumberger for the Shushufindi field, and a consortium headed by Tecpetrol for the El Libertador field. Schlumberger is expected to outlay $1.3 billion, while the Tecpetrol consortium, including Sertecpet, Canacaol, and Schlumberger, will invest around $380 million. Petroecuador will remain in charge of operations at both fields.
Total production is estimated to rise to over 500,000 bbl/d in 2012, while national oil consumption of 211,000 bbl/d in 2011 is expected to continue its climb and reach an estimated 260,000 bbl/d by 2016. To keep production on the up, EP Petroecuador has also approved a budget of $3.75 billion, of which $1.82 billion is earmarked for investment in exploration and production (E&P), in addition to refining activities. The Correa administration is also keen to continue attracting foreign investment to the sector, and is looking for an increase of over 50% in 2012 with more concessions set to be offered in 2012 on 21 oil blocks in the country’s southeast.
Repsol is the country’s largest private oil company, with production of 50,000 bbl/d. It is planning to invest $320 million through service provision agreements with the government by 2018. Luís García, E&P Director and Attorney-in-Fact at Repsol, expressed his appetite for investment to TBY, commenting that, “if the government opens up new areas and we are able to obtain them, then it could lead to $50 million or $60 million in additional investment.”
Gas output was just 0.34 billion cubic meters (bcm) in 2011, and is set to rise yet remain below the 1 bcm mark. Gas produced domestically is currently used to meet local demand. In the long-term, the country could also become part of a trans-Andean gas corridor that would see the country gain a reliable supply of gas from Colombia and Venezuela.
While any drop in oil prices could worry policymakers in Ecuador, an estimated export total of 125 million barrels in 2012, according to Pástor, will continue to be a key source of revenue for the state budget.
As 50% of the country’s refined products are imported, including gasoline, lubricants, and diesel, there has been a push of late to develop national production in order to reduce strain on the current account. In 2011, fuel imports were worth $7.23 billion, or 22.3% of total imports, up from $5.92 billion in 2010.
While Ecuador’s refining capacity has hung around 175,000 bbl/d, significant investments, including the long-awaited Refinery of the Pacific, are expected to boost that number to 450,000. While basic engineering works on the Refinery of the Pacific are expected to come to an end in mid-2012, the financing of the project has yet to be finalized, with the main option to “to find an equity partner for EP Petroecuador and Petroleum of Venezuela (PDVSA) to reduce the capital outlaw of direct investment,” according to the Ministry of Non-Renewable Natural Resources. When complete, however, it will have a refining capability of 300,000 bbl/d. The current largest refinery, producing over 100,000 bbl/d, is the Esmeraldas Refinery, also undergoing an upgrade worth $900 million and set to be complete by 2013. A further $600 million will also be invested there to develop improved products. The Shushufindi Refinery is also in line for refurbishment, and the Amazonas Refinery, which experienced a drop in production from 20,000 bbl/d to 10,000 bbl/d due to an electrical fault, is due to be back to full capacity before the year’s end. Overall capacity, by 2016, is thus estimated to be close to 450,000 bbl/d, eliminating the country’s reliance on imports.
Ecuador is looking to diversify its energy generation matrix toward renewables sources, boosting capacity while developing export routes and national distribution infrastructure, which has been historically inefficient. With generation capacity reaching over 21,000 MW, 50.1% of the country’s energy supply comes from hydroelectric sources.
Currently, state-owned CELEC, which has an 85% market share in generation and distribution, is at the center of a $5 billion government investment plan to double generation capacity by the end of 2012. Central to plans are eight new hydroelectric plants, worth $605 million. Ecuador is working closely with state-owned Chinese firms on the development of the plants, financed mainly by loans from Chinese banks. “The vision by 2016 is that 93% of energy sources in the matrix will be hydroelectric,” says Jorge Glas Espinel, Minister of Coordination of the Strategic Sectors, who is betting on the development of renewable energies “not only for the sovereignty of Ecuador in renewable energy, but also to be able to export energy.” To that end, CELEC is currently reinforcing the Quito-Guayaquil energy corridor, which will later form part of a regional integration chain from Chile to Colombia, opening up Ecuador to export markets. “We estimate the cost of infrastructure for Ecuador to be $400 million, and we expect it to be ready in about two years,” Eduardo Barredo, General Manager of CELEC, told TBY. CELEC is also looking to invest in geothermal power plants, with the first installation expected to come online in 2017. Among the prospects for the plants are Alcedo (150 MW), Chacana (318 MW), Chachimbiro (113 MW), Chalupas (283 MW), and Tufiño (138 MW). It is also planning a wind farm in the southern Loja province with a capacity of 16.5 MW, and a project is being developed with Chinese Goldwind Global worth $36 million.
Demand is also on the up, increasing by almost 6% in 2011, a trend that made brownouts and blackouts a regular occurrence over 2009 and 2010, prompting the current investment campaign. It is also expected new trends toward electric vehicle could further affect the sector. “In this regard, we expect a steep rise in consumption levels in the future, something we are capable of dealing with,” Barredo of CELEC said to TBY.
© The Business Year