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Ecuador 2014 | ENERGY | FOCUS

TBY talks to Yvonne Fabara Arias, Secretary of Hydrocarbons, on the energy production matrix, the domestic tariff system, and Ecuador as a destination for international investors.

What is the importance of the Secretary of Hydrocarbons in the oil and gas sector of Ecuador and in the broader economy?

In 2010 a legal reform was introduced that brought about a significant change in Ecuador's hydrocarbons sector, particularly regarding its structure. Since then we have been a dedicated agency removed from the operational component of the business, and responsible for overseeing the sector, as well as awarding and managing oil contracts. This marks a key improvement by introducing a climate of impartiality, and has importantly provided comprehensive legal security for investors.

What is the advantage of the tariff per barrel system that Ecuador uses today?

The tariff per barrel system is based on a service contract, and has replaced the production-sharing contract. Given Ecuador's circumstances, namely its reliance on oil income, it has secured civil control over oil income. Today, all oil is owned and managed by Ecuador, whereby what benefits the industry benefits the country at large. However, there is some misunderstanding. It is believed that production-sharing contracts are attractive for the oil companies. I always invite them to consider the real economic model, which proves much more profitable. Oil companies in that system are gaining more than they would have previously in a deal where they assume no risk given the nature of a service contract. We need to better communicate precisely how the system actually works to their advantage.

Is it an incentive to increase production? Will there be production sharing in the contract?

Not really, because the economic model is based on free cash flow. It is the production model itself that generates the income to meet required investments. The fundamental difference with the production sharing contracts is that the oil companies obviously have ownership over the oil they produce. Now however, they make no investments and provide a service throughout the lifespan of the contract. They have special terms for producing particular oil products, such as enhanced oil recovery. In my view, it is in the interest of the country, and as such has been a political decision.

What is the case for developing the Yasuní-ITT Field, and can it be done without an environmental impact?

I think it can. The field is located in one of the regions of greatest biodiversity in the world. It has to be preserved for humanity. These are the values that Ecuador has to respect. The government has done its best to do so. Unfortunately, we were unable to receive the compensation that Ecuador required to avoid exploiting its resources. It might be controversial, but, obviously, the government has obtained authorization from the legislative body. There is a commitment that we have to assure. The operatorship will be on behalf of the government of Ecuador through its public companies. They will be overseen and the works will comply with all the requirements to preserve the environment. Ecuador absolutely needs the resources of this field, but must develop it responsibly.

How important is the development of the Pacific Refinery for Ecuador?

We are building a new refinery not only for local consumption, or for export, but moreover, for a petrochemical complex that will change the entire local production chain. The other refineries in Ecuador were built 40 years ago and are costly to maintain and less than reliable. Without its own refinery, Ecuador is destined to remain dependent on the import of fuel from the international market. Having a refinery is therefore fundamental to national security, as the basic component of a major change in our production matrix.

What makes Ecuador an attractive destination for international investors?

In comparison with certain other countries, Ecuador provides a more secure geological environment. This means that while we have the resources there is less associated risk in exploiting them. Potential investors examining the contract system in Ecuador will surely find the sector a tempting business proposition. Moreover, we now have in place an independent agency tasked with working closely with investors, and dedicated to the signing of fruitful deals.