Energy & Mining

Extract or Bust?


With a budget reliant on hydrocarbon proceeds, the administration is seeking to increase extraction, while banking on strong international oil prices.

Having built a platform on robust public investment, the Correa administration has hedged its bets on high oil prices. To keep the black stuff flowing long term, Ecuador is opening up new areas for extraction and working to encourage foreign investment.

The oil sector accounts for 14% of Ecuadorean GDP and over 50% of its export earnings, which were worth $14 billion in 2012. More significantly, it typically represents between 30% and 40% of state revenues, with the government drafting its 2013 budget of $32.37 billion assuming an average crude oil price of $84.90, up from $79.70 in the 2012 fiscal budget. Since 2010, when Ecuador’s government renegotiated oil contracts with the country’s foreign investors, imposing a profit ceiling of $32 per barrel, revenues have been even higher, with an additional $1.5 billion flowing into government coffers in 2011. Despite many foreign investors abandoning activities in Ecuador due to the less favorable terms, 12 of 17 private companies recommitted themselves, with investment pledges of $1.4 billion made until 2014. Another significant development in recent months has been the merging of state-owned Petroecuador’s upstream activities into those of fellow public company Petroamazonas, with Petroecuador remaining in charge of downstream operations. In terms of extraction, focus is now shifting to the southeast region, as well as Yasuní­ National Park, which, despite a government-led campaign to raise funds to suspend drilling plans, is now set for exploitation following an announcement by President Correa in August 2013. The country’s proven oil reserves currently stand at 8.24 billion barrels, with Petroamazonas anticipating production of 325,000 barrels per day (bbl/d) in 2013, around 65% of the country’s total. Proven gas reserves stand at 7 billion cubic meters, and production is at around 240 million cubic meters per year.

In per capita energy consumption terms, Ecuador reached 0.9 tons of oil equivalent (toe) in 2012, moving it closer to the South American average of 1 toe. Approximately 1,090 kWh of electricity is consumed per person in the country every year, with an annual rise of around 5%. The country’s growing hunger for energy means Ecuador faces supply issues. To counter this challenge, the government is pushing the development of hydroelectricity infrastructure, which already represents 64% of the country’s generation matrix. The largest such project is the Coca Codo Sinclair hydroelectric facility, being constructed by Chinese firm Sinohydro Ecuador at a cost of $2 billion. When completed, in 2016, it will produce an average of 8.63 GWh and supply 44% of the country’s electricity needs.


Ecuador currently produces around 500,000 bbl/d, with total proven reserves of 8.24 billion barrels, the fourth highest in Latin America. In the short term, production is likely to increase; however, a drop off is expected after a peak in 2015. “Due to the status of our reserves, we estimate that the country will experience a decline in production,” said the country’s Secretary of Hydrocarbons, Andrés Donoso Fabara. With an eye on a long-term production forecast, attention has now switched to the relatively unexplored southeastern region of Ecuador, with 13 blocks out of 21 in the area up for bidding in 2013. During the first round of studies, as much as 1.6 billion barrels of oil were discovered, adding to the excitement that the future of the industry could lie in the region. Following two extensions, the deadline to submit offers is now set for November 28, 2013, with Petroamazonas also stating that it will look to jointly develop three of the remaining eight blocks with foreign state-owned companies. This round of bidding is the first since the government renegotiated oil contracts in 2010 to establish a profit ceiling of $32 per barrel, and is seen as a test of how welcoming the business environment is for foreign investors under the Correa administration.

The sector has also undergone a major restructuring following the transfer of Petroecuador’s upstream operations to Petroamazonas, leaving Petroecuador to focus on downstream activities. Petroamazonas represents 65% of the country’s total production, or around 320,000 bbl/d, following its takeover of Petroecuador’s activities, while Rio Napo, established as a joint venture between Petroecuador and Venezuela’s PDVSA, produces just over 70,000 bbl/d at the Sacha oil field in the Amazon region, a figure that could increase to 100,000 bbl/d by 2014. Overall, the two companies represent over 70% of national production, with private firms pumping out just over 135,000 bbl/d. One such firm is Repsol YPF, which produces around 45,000 bbl/d at Block 16, in the Amazon region, and at the Tivacuno field, in a contract with Petroecaudor. “I have to say the national companies here in Ecuador are very willing to cooperate with their foreign counterparts as a way of contributing to the transfer of knowledge, expertise, and technology,” said Luis Garcí­a Sánchez, Director E&P & General Representative at Repsol YPF. Increased production in other fields could see Ecuador’s production reach 546,000 bbl/d by 2014, before it reaches a plateau in 2015. It is with this in mind that Ecuador hopes bidding on the southeastern blocks will be successful, while also opening up Yasuní­ National Park to exploitation.


The Yasuní­ National Park, in the Amazon region of Ecuador, covers 10,000 square kilometers and is one of the most bio-diverse regions of the world. It is also estimated to contain 846 million barrels of oil, or around 10% of the country’s reserves. While oil exploitation has been taking place in small parts of the park since the 1970s, a UN-backed scheme was launched in 2010 by the Ecuadorean government in order to raise international donations to forego major drilling, which conservationists believe could reap irreparable damage to the environment, as well as native populations. A total of $3.6 billion was to be raised, which represents 50% of the value of the reserves in the park’s Ishpingo-Tambococha-Tiputini (ITT) oil field. In August 2013, however, with only $13 million donated, President Correa announced the end of the initiative, with exploitation in the area set to begin in the coming months. According to the President, as much as $18.2 billion could be earned through concessions in the area, with only 0.1% of forested area being destroyed. But, with one hectare in Yasuní­ National Park containing more tree species than are native to the whole of North America, the eyes of the world will be on Ecuador as it seeks to promote an image of environmental responsibility.


Ecuador currently has three oil refineries with an overall processing capacity of 175,000 bbl/d. The aging facilities, however, are insufficient for the country’s needs, with $4 billion worth of oil-related goods imported every year. To take the challenge head on, President Correa has spearheaded the Pacific Refinery initiative. The project, the engineering works of which have been completed, is expected to be online in 2017 with an initial capacity of 200,000 bbl/d, which will increase to 300,000 bbl/d. “Right now, we are holding talks with several companies to secure the financial resources to develop the project, and we expect to close a deal very soon with the China National Petroleum Corporation (CNPC),” said Wilson Pástor, Former Minister of Non-Renewable Natural Resources. The Chinese firm is anticipated to take a 30% stake, with 51% belonging to Petroecuador, now solely focused on downstream activities, while the remainder of the shares are owned by PDVSA. The refinery, with significant capacity for petrochemicals, will be Ecuador’s first for processing crude oil into petroleum derivatives. The country, for the first time, will be able to manufacture products including high- and low-octane fuels, diesel, lubricants, polypropylene, benzene, xylene, and alcohol. Located in Manabí­, in the west of the country, the project is set to cost $12 billion and create 25,000 short-term jobs. Construction will be financed by the Industrial and Commercial Bank of China.


According to the 2013 BP Statistical Survey, Ecuador produced at 22.78 TWh of electricity in 2012, up 10.6% from 2011. Six state-owned firms dominate the country’s generation sector, while a single state-owned company, Transelectric, operates the transmission system. One municipal-owned and 10 state-owned companies populate the distribution sector.

Hydroelectricity plants dominate the generation scene, with 63% of the country’s electricity produced through hydro resources. With 1,090 kWh of electricity consumed per capita every year, the country runs a surplus. However, shortages are faced during the October-March dry season due to a reliance on hydroelectricity. In addition to plans to boost production, the administration is also seeking to establish a connection to Peru, affording the country another option to alleviate its seasonal power shortages than imports from Colombia. The additional connection will also provide an export outlet once new generation capacity comes online. The largest upcoming project is the Coca Codo Sinclair hydroelectric facility, which is being built by Chinese firm Sinohydro. Once completed, by late 2015, the $2.8 billion project will add 1,500 MW of generation capacity to Ecuador’s matrix, supplying 44% of the country’s electricity needs.

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