Ecuador refinery project caps Moreno reform effort

Ecuador's outgoing administration is seeking to consolidate an overhaul of its oil industry on the eve of next month's general elections.

The capstone of the government's ambitious reform plans is a proposed $3bn deep conversion project and 25-year lease of the 110,000 b/d Esmeraldas refinery. A consortium led by South Korea's Hyundai and US contractor KBR — the only group that purchased a tender package in a process launched last year — is expected to present a formal proposal on 19 February. Morgan Stanley would structure the project financing.

"This marks the return of American companies, which were mistreated during the previous regime," Ecuador's minister of energy and non-renewable natural resources René Ortiz said on an Institute of the Americas roundtable today, referring to the populist 10-year administration of former president Rafael Correa, a close ally of Venezuela's late president Hugo Chavez and his successor Nicolas Maduro, who stepped down in May 2017. "Some upstream companies were even forced to sue Ecuador in arbitration tribunals and of course Ecuador lost, and it has cost Ecuador more than $4bn in indemnity," Ortiz said.

The Esmeraldas refinery project could be supported by the government's new $2.8bn framework agreement with the US development bank DFC to refinance debt and support private sector investment. For the US, the 14 January agreement aligns with a wider strategy to counter Chinese lending in the region. The Correa administration signed billions of dollars in oil-backed loans with Beijing, some of which are still outstanding.

Esmeraldas is one of three refineries owned by state-owned PetroEcuador, which absorbed its upstream counterpart PetroAmazonas on 1 January as part of President Lenin Moreno's austerity program. Together the companies have some 10,000 employees on the payroll, which will be reduced in the first quarter to avoid redundancies, Ortiz said.

Speaking this afternoon on the roundtable, PetroEcuador's new chief executive Gonzalo Maldonado said the new merged company could eventually list shares in a public-private model similar to Brazil's Petrobras. "This would be a way to democratize the company, not privatize it," Maldonado said. He touted the company's success in placing heavy sour spot barrels in the market in transparent tenders, and highlighted plans to improve export infrastructure to enable larger-scale loadings.

Slower rhythm

Further downstream, Ecuador has slowed the adjustment of domestic diesel prices as a way to alleviate pressure on the economy, which has been pummelled by the Covid-19 pandemic.

Under a May 2020 policy aimed at removing heavy subsidies, gasoline and diesel prices are now tied to WTI and adjusted on a monthly basis. The monthly adjustment in the case of diesel was recently reduced to 3pc from a previous 5pc, postponing the convergence with international levels to December 2021 from a previous target of June, Ortiz said.

"Last year ended with $648mn in savings from the process of eliminating the (fuel) subsidies -- this is the result," Ortiz said. Residential LPG is still subsidized, but the government is working on a program of targeting subsidies for that fuel as well.

The government is hoping the new market-based pricing policy will also encourage private companies to import fuel, leasing storage and other infrastructure from PetroEcuador and establishing a parallel system of non-regulated fuel prices.

Ecuador's declining natural gas production in the Gulf of Guayaquil could be offset by future LNG imports as well, Ortiz said.

Quito withdrew from Opec a year ago, and currently produces around 510,000 b/d of Oriente and Napo crude grades, some of which PetroEcuador exports through monthly tenders.

Among the government's other priorities is renewable energy. Recently awarded solar and wind projects offering a combined 400MW of installed capacity represent $400mn in investment. A project on the Galapagos islands is scheduled to be awarded soon.

Election bonanza

Ecuadoreans go to the polls on 7 February to elect a new president from among 16 candidates. The National Assembly is on the ballot as well. The elections are widely seen as a referendum on Moreno's economic reform agenda. A presidential run-off, if necessary, would be held on 11 April, a watershed political date for the region. On the same day, neighboring Peru holds presidential elections and Chile holds elections for a constitutional convention, governors, mayors and city councils.