TBY talks to Wilson Pástor, Minister of Non-Renewable Natural Resources, on renegotiating oil contracts, refinery upgrade works, and the impact of increasing oil prices.
TBY How have things changed since the oil contracts were renegotiated in 2010?
WILSON PÁSTOR The change is very important at a global level, because there are very few contracts like the ones we have, based on rate per barrel. In the beginning, we encountered some resistance after a relatively difficult set of negotiations. We reached an agreement with 12 out of the 17 companies that work in Ecuador, and these companies are now planning to invest a further $1.4 billion over the next three years. The situation is fine and the companies are happy because the rate means a ceiling for company incomes when the price goes up, and the entire surplus goes to the state. In 2011, we obtained $1.5 billion in net profit from these negotiations. In 2012 the figure could be higher, because prices are rising. The price at the time of negotiation was $72 per barrel, and the companies have a rate of $32. The price rose from $72 to $103, which represented a huge profit for the country. The companies are now very interested in continuing with this model, though with some changes, and these were discussed during the 11th round of negotiations, which opened in May 2012.
What are your perspectives for the exploration and production (E&P) round of negotiations?
We have a dozen national oil companies (NOCs) interested, but we have not opened up discussion yet with private companies. There are Canadian, US, and Argentinian companies. The contracts on offer will be service contracts for the provision of services at a specified rate, and the rate will be determined according to the level of risk. There will be a tender, and the company that takes the lowest level of risk will win. There will be four blocks reserved for NOCs and 10 for private companies.
Regarding EP Petroecuador’s mature fields, are there any new international companies coming in?
So far, we have signed for two fields with consortiums led by Tecpetrol at the Libertador field, and Schlumberger at the Shushufindi field. There are still two fields, Cuyabeno-Sansaguay and Auca, which are still under negotiation with Halliburton. We are negotiating the rates and the legal composition of the consortium that will sign with that company.
How will planned refinery upgrade work progress in 2012?
The Refinery of the Pacific is important. The basic engineering works finished in May 2012, and by October we hope to finalize the project financing. There are several options, but the main one is to find an equity partner for EP Petroecuador and Petroleum of Venezuela (PDVSA) to reduce the capital outlaw of direct investment. At the Esmeraldas Refinery, works will cost around $900 million and should be completed by the end of 2013. The upgrade program basically involves a refurbishing and restructuring of the refinery’s facilities. In addition, we have a project to develop improved products, which involves a further investment of around $600 million. There is also another project to double the capacity of the Shushufindi Refinery. In total, refined capacity will increase to close to 450,000 barrels per day (bbl/d) by the end of 2016.
Regarding mining activities, the government just signed a completely new contract model with EcuaCorriente. How are the negotiations with other mining companies continuing?
Contrary to what happens with oil, where we have extensive experience and capacity and have signed contracts for service provisions with two state companies, we are beginners in the mining sector. We can’t sign contracts that demand maturity. We have a classic contract for mining exploitation rights, where we only request the tax system conditions regarding income, and international standards of mining exploitation are followed in the form of a concession agreement. We have signed with EcuaCorriente, which is the first company, and we hope to reach an agreement with Canadian company Kinross in 2012. Apart from the negotiations, there is an administrative procedure that could take a bit longer, but we hope that by the middle of the year everything will be finalized. And there is a third small contract for the Río Blanco field with another Canadian company, International Minerals. In 2013 we intend to sign two more with EcuaCorriente in Panantza-San Carlos, another copper deposit, and with International Minerals in Quimsacocha. They are now in the advanced exploration phase, and they will move on to the exploitation phase by next year.
You have recently found new offshore gas reserves in Ecuador. Is it a substantial discovery?
We have produced gas in small quantities for over a decade, at a rate of 30 million cubic feet per day, or around 5,000-6,000 bbl/d. However, our exploration activities gave us hope that we could triple this production within a year. The estimated reserves nowadays mean we could produce 10 times more than we do today. However, to achieve that, we need to make certain additional verifications. With SIPEC from Chile and the additional exploration performed by EP Petroecuador, we will probably achieve levels of production equivalent to 50,000 bbl of oil in the medium term.
What impact will increasing oil prices have?
In terms of private production, if the average price is around $100/bbl, it means that we will earn $30 additionally on what was renegotiated in 2010 for every barrel. If we multiply this by 50 million bbl, this is an additional $1.5 billion. According to contracts, we expect to export around 125 million bbl in 2012, totaling $12.5 billion.
How much could mining activities represent for the country’s GDP in the years to come?
EcuaCorriente should start producing by the last quarter of 2013, with 30,000 tons of processing, which is one-third of its total potential, and then start increasing until it reaches 60,000 tons. By the end of 2014, we estimate a benefit in royalties of around $45 million per year plus taxes, meaning around $300 million per year. The same is true regarding Kinross and Río Blanco. So, as a whole, we will receive around $500 million per year by 2014.
What will be the role of the national mining company ENAMI?
ENAMI is becoming very strong in the gold industry. It already has eight concessions in Esmeraldas, and will enter the exploitation area strongly and be a remedy for illegal mining activity. We will start collaborating with companies in mining services that will provide high-tech machinery and working methods. It also has, at this moment, three concessions for non-metallic minerals, which will rise to four in the future. The strategy is to create mixed economy companies, and in the first phase develop ENAMI before it can fly alone, because it demands a lot of resources and time. We hope that within a single generation the company will be able to become what EP Petroecuador or Petroamazonas EP represent in the oil sector.
© The Business Year