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Q&A: Ecuador hopes policy shift will restore investment

05 Apr 2018 19:50 (+01:00 GMT)
Q&A: Ecuador hopes policy shift will restore investment

Quito, 5 April (Argus) — Ecuador´s new government is welcoming back foreign investment after a decade of aggressive state intervention. A key feature of the transformation is the return of oil production-sharing contracts that were replaced by service contracts a decade ago. Two upcoming licensing rounds will test investor sentiment. Francisco Rendon, Ecuador's hydrocarbons secretary, sat down with Argus to explain the policy shift that Quito hopes will revive the stagnant oil sector. Edited highlights follow.

When will the Hydrocarbons Secretariat launch the highly anticipated Intracampos and Southeast licensing rounds?

By the end of the year we will be launching the Southeast round, but our current priority is launching the Intracampos round in the coming weeks. Intracampos features eight oil fields located between areas that are already producing oil. Some of them are even situated between oil blocks known as Ecuador´s crown jewels, such as Libertador and Sacha.

The Intracampos oil fields (Perico, Iguana, Espejo, Sahino, Araza Este, Panayacu Norte, Charapa and Chanague) are located in the northern Amazon oil district, mostly in Sucumbios province, where power supply, transport and production facilities are already in place which makes them very attractive. These blocks will require a $1bn-1.2bn in exploration investment.

Which type of contract is Ecuador offering for Intracampos and the Southeast?

Ecuador is shifting its oil policy, initiated by oil minister Carlos Perez, to open the oil sector by bringing back production-sharing contracts. We have worked very hard to put in place an attractive contract model which is going to be tested in the Intracampos round and that will be the basis for the Southeast round.

For both of the rounds there will be a 20-year production-sharing agreement on offer, including a four-year period for exploration activities, extendable for two more years, followed by the development and production period.

What are Ecuador's expectations regarding the Southeast round?

We will offer 10 blocks by the end of the year. These are areas that demand high investment. Costs will also be high because there is no infrastructure in place. But we believe, based on geological information and the type of structures found in the Peruvian border area that also crosses Ecuador's territory, that the southeastern blocks could contain light crude of 34-36 °API.

Oil minister Carlos Perez announced that eight Canadian oil and gas companies are interested in bidding for the Intracampos blocks, including Canacol, Frontera and Madalena Energy. Do you expect that the Southeast round will attract bigger names?

Yes, several world-class oil companies have already shown interest in the Southeast round, including Shell and ExxonMobil. This could mark the comeback of the big oil companies to the country. Minister Perez's leadership has restored Ecuador's credibility.

We are also engaged in talks with the communities living close to the Southeast acreage to guarantee the success of the round.

Ecuador has 20 outstanding fee-based contracts with foreign oil companies, but their production has been shrinking since 2010 when they were forced to relinquish the production-sharing contracts. Is Quito open to offering the companies to switch back to PSCs?

The Hydrocarbons Secretariat is waiting for President Lenin Moreno to sign a decree regulating the production-sharing contracts' terms, and then for an approval from the Special Tenders Committee, to open an invitation for oil companies to switch back to the production-sharing contracts, if they are interested in doing so. This could encourage more investment and exploration activities in their blocks.

Foreign oil companies' production has also been shrinking because of tax controversies. What are oil authorities doing to settle issues such as VAT refunds?

We have agreed with Ecuador's tax authority on an economic model to prevent further disputes with oil companies. We have been talking with SRI (Ecuador's tax authority) and the finance ministry to resolve the issue of the VAT refund to oil companies. Ecuador has already refunded $90mn, and we are seeking a solution to pay the remaining $150mn. It is important to the Hydrocarbons Secretariat to settle all unresolved issues with oil companies stemming from past administrations.