As crude oil production in Ecuador stabilized and the state-owned company PetroEcuador renegotiated its oil supply contracts, more volumes of Napo and Oriente crudes were sent to the export market and increased in value following Russia’s conflict with Ukraine.
Nevertheless, freight rates, which have reached a record high, are now putting pressure on the prices of both crudes, and Ecuador may fall below its crude oil production target for 2022.
Join Josh Vence, Argus ’ Business Development Manager for Latin America, Julio Faldin, Vice President of Crude Oil and Products for South America, and Giovann Rosales, Latin American crude oil reporter , and learn more about the oil market in Ecuador.
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Transcript
Josh Vence: Hello and welcome to Hablando de Mercado (“Market Talks”) – a series of podcasts presented by Argus on the main events affecting the commodities and energy markets in Latin America and the rest of the world. My name is Josh Vence, and I am a business development manager at Argus for Latin America. In today’s episode, we will be talking about the crude oil market in Ecuador with Julio Faldín, Vice President of Crude Oil and Products for South America, and with Giovann Rosales, crude oil reporter in Latin America for the Argus Americas Crude report.
Julio, let us start with you. You have been aware of and involved in many of the changes in crude oil trade in Ecuador. To provide a more in-depth context of the issue, could you describe a bit more the structure of the Ecuadorian oil market, its stakeholders, infrastructure, etc.?
Julio Faldin: Hello, Giovann and Josh, it is a pleasure to be able to participate in this podcast focusing on Latin American issues.
Ecuador is mainly an exporter of raw materials, being a net exporter of crude oil. To give you an idea of its relevance, oil income accounted for 4.4% of the country’s GDP last year, according to the World Bank. This year, this share of GDP is definitely expected to increase thanks to higher international crude oil prices.
Oil production is around 470,000 barrels per day (b/d), with the country positioning itself as the sixth largest producer in Latin America, after Brazil, Mexico, Colombia, Venezuela, and Argentina. With that being said, due to its rapid growth in oil production, Guyana may climb to sixth place next year, surpassing Ecuador, or even to fifth place, surpassing Argentina, with a potential production output of more than 600,000 b/d.
Around 70% to 80% of Ecuadorian crude oil production is produced directly by PetroEcuador, an enterprise 100 percent controlled by the Ecuadorian state, while production by private upstream companies' accounts for approximately 20% to 30%, among which we can name Andes Petroleum, Enap, New Stratus, Petro Oriental, and Pluspetrol, although there are also other key players in the exploration stage, such as Frontera, Tecpetrol, and Gran Tierra.
Currently, these private companies operate through Service Contracts agreements, in which PetroEcuador is responsible for a fee paid in exchange for the exploration, drilling and production work carried out in the concession areas of these companies, always in association with PetroEcuador.
There are, however, projects to change this concession system towards a Participation Contract scheme, in which operating companies obtain direct compensation in barrels of crude oil for the services performed, also in association with PetroEcuador, being thus able to develop the direct marketing of these barrels. PetroEcuador has three refineries in the country, with two located on the Pacific coast – the Esmeralda Refinery, with a maximum capacity of 110,000 b/d and the La Libertad Refinery, with a capacity of 45,000 b/d, and the Shushufindi refinery, located in the Amazon, with a maximum processing capacity of 20,000 b/d. The utilization of these three refineries is below 150,000 b/d, taking around 30% of domestic oil production, while the remaining 70% of the oil production has to be exported. The two main crude oils produced by Ecuador are Oriente and Napo. Each month, around 10,000 b/d per month are exported, of which 7,000 b/d are under long-term financing agreements with the Ecuadorian government and Asian companies, while the remaining 2 million barrels are currently marketed in public tenders in spot or medium-term shipments.
The destinations of these crudes vary – in general they are bought by refineries or trading companies to be processed on the West Coast and in the U.S. Gulf Coast, or even by refineries in Chile and Peru.
At the logistics level, Ecuador has two export terminals and two main pipelines: SOTE and OCP. Both pipelines connect the Amazon area with the Pacific coast. The Amazon area is the main producer of crude oil in Ecuador, located in the northern region of the country, near the border with Peru and Colombia. In turn, the Pacific coast contains the two export terminals and the two largest refineries in Ecuador.
Because the main crudes from Ecuador, Napo and Oriente have different qualities, Oriente crude oil is a medium crude, with an API of 22/24, being sour with a sulfur content of 1.5%, while Napo crude oil is a heavier crude, with an API of 17/19 and higher sourness than Oriente crude oil, with a sulfur content of 2%. Having these two pipelines provides the country with greater flexibility to achieve the segregation of these two qualities.
The Trans-Ecuadorian Oil Pipeline (SOTE), with a length of almost 500 kilometers and a pumping capacity of 360,000 b/d, ends at the Esmeralda refinery and the Balao crude oil export port, at which it is possible to load Panamax- and Aframax-sized vessels. The Heavy Crude Oil Pipeline (OCP) has a similar length, extending 485 kilometers, with a pumping capacity of 450,000 b/d, and ending at the OCP Maritime Terminal, which has a greater draft, allowing larger vessels, such as Suezmax and VLCC, to be loaded. The SOTE transports approximately 70%, while OCP handles 30% of Ecuador’s total crude oil production.
Josh Vence: Thank you very much, Julio, for the description of the oil market in Ecuador. I understand that this market is of great interest not only for Latin America, but also for refineries, particularly those located on the U.S. Pacific coast. Giovann, what can you tell us from the standpoint of Argus’ coverage?
Giovann Rosales: Hello, Josh and Julio, thank you so much for having me on the podcast! Crude oil production in Ecuador has remained within a range of 450,000 b/d to 533,000 b/d in the last 10 years.
The most significant thing, however, is that there is more volume available to sell in the spot or medium-term market. This is crucial for Argus, as it provides the company with sufficient liquidity to follow the behavior of the price of crude oil. It is because of this change in strategy that Argus has decided to begin publishing the daily prices of Napo and Oriente crudes.
Also, recently, PetroEcuador renegotiated oil supply agreements with PetroChina to extend the final delivery date of over 76 million barrels to 2027, for which it will also be releasing a greater volume for the spot market.
It should be noted that Argus published these prices until 2014, at which time most of the volume of crude oil was traded in long-term contracts, losing liquidity and, thus, the information required for the monitoring of prices.
Today, our prices comprise the benchmark used by PetroEcuador and its buyers for both short- and medium-term deals.
Josh Vence: Returning to the present, what has been the impact on Ecuadorian crudes as a result of the different international events, such as the conflict between Russia and Ukraine?
Julio Faldin: Ecuadorian crude oil, like other crudes produced in Latin America, has been impacted in various aspects by the conflict in Russia and Ukraine, the first of which is Europe’s search to gradually replace the supply of Urals crude oil from Russia, which causes changes in international trade flows. On the one hand, we have witnessed Napo and Oriente prices exceed $110/b and $114/b, respectively. We have also seen a greater influx of crude oil from the U.S. and Latin America arriving in Europe, enabling more American refineries to become interested in positioning themselves in Ecuadorian crude contracts, as is the case with Shell, P66, and Marathon, in addition to trading companies that are often interested in spot trading.
Giovann Rosales: That is a good point, Julio. Napo and Oriente crudes were strengthened mainly by demand in the U.S. West Coast, which is a region of higher demand for Ecuadorian crudes, as well as other Latin American crudes.
For example, a crude oil very similar in quality to Oriente is Vasconia, from Colombia. This is a grade widely used in refineries on the West Coast of the United States, as well as Medanito crude, from Argentina, and Liza crude, from Guyana.
At the early stages of the conflict, this appetite for Ecuadorian crude oil could be observed in the reduction of the spreads or discounts of Napo and Oriente crude vs. the WTI reference, with a strengthening of up to $4/b between pre-conflict prices and the maximum appreciation observed in March, April, and June.
It was in April that Russia’s crude oil exports to the West Coast dipped to less than 27,000 b/d, from nearly 70,000 b/d a month prior. It should be noted that, after April, no barrels of Russian crude were received on the U.S. West Coast.
At the same time, crudes that generally had their final destination on the U.S. West Coast began to see higher demand in the European market, generating a supply deficit on the U.S. West Coast.
Julio Faldin: As the volume of U.S. crude oil exports strengthened towards Europe, for example, volumes of U.S. strategic reserves began to scale in the U.S. market, although this strengthening in spreads lost its relevance, reaching a minimum in the month of August, which is when the quality of the crude oil in the strategic reserves was mainly sour, with a sulfur content of approximately 1.4%. This effect was reversed in September as more sweet crude oil was exported from U.S. strategic crude reserves.
Another direct effect of the change in crude oil flows was that the distances of cargo trips have ceased to be optimal, with longer trips and greater delays, ultimately putting a percentage of the vessels available for contracting out of circulation. This has resulted in higher freight prices, directly affecting spreads.
Giovann Rosales: Yes, and freight prices have had the greatest impact on Latin American crudes. In particular, the route to transport crude oil from Ecuador to the U.S. West Coast in a Panamax vessel rose to levels not seen for over 15 years. The cost to send a vessel to the West Coast is almost $47 per metric ton, which is equivalent to $7 dollars more for each barrel of Napo or Oriente crude oil.
It should be noted that, currently, U.S. ANS crude oil, which can be seen as a competitor of Ecuadorian crude oil, is marketed at higher prices than the current Napo and Oriente crudes. This spread may give room to a possible appreciation, should demand remain stable. Nevertheless, what is being seen in the global market right now is a lower demand, due to the risks of a possible recession.
Julio Faldin: As a result of this perception of lower demand, we are seeing a lower participation of refineries, as they have less flexibility to increase their storage capacity at a fast pace, and instead, trading companies are gaining prominence, with greater discounts to compensate for higher freight, storage and coverage as a result of longer storage times, as well as the market structure, which should also be compensated.
Josh Vence: At the end of last year and in the middle of this one, we heard about a series of logistical and social incidents that had an impact on Ecuador’s crude oil production. What could you tell us about it?
Giovann Rosales: Josh is right, although they were events of different types. Both have had repercussions on crude oil production, forcing PetroEcuador to declare force majeure in its sales contracts. In the case of the end of last year and the beginning of this year, the intense rainfall and overflowing of the rivers resulted in land displacements along the route of the SOTE and OCP pipelines, causing spillage and stoppage of pumping, resulting in the loss of production.
In turn, in June, there were social protests due to the increase in fuel subsidies in the Amazon area. The conflict escalated to the point of paralyzing over one thousand wells, resulting in a decrease by approximately 3 million barrels.
Another aspect worth mentioning is the fact that private production was not affected at the levels of PetroEcuador thanks to its greater storage capacity, thus preventing the shutdown of wells.
These incidents did not cause the cancellation of previously agreed shipments, but they did have to be replanned, delaying deliveries by 15 to 20 days.
The Ecuadorian government’s production target for 2022 was 580,000 b/d, although from January to August of this year, the country is averaging at almost 460,000 b/d.
Julio Faldin: Another issue that I would like to highlight is the fact that, although Ecuador is a net exporter of crude oil, it is also a net importer of refined products, particularly diesel and gasoline, which is why Ecuador has a refining capacity deficit. For many years, this situation has led to the evaluation of several projects to increase the refining complex, as well as other projects to optimize current refineries, considering that they have the reserves and the production of crude oil for local processing.
Josh Vence: Thank you, Julio and Giovann! We are running out of time, but I’d like to thank you for joining us in this episode of Hablando de Mercado.
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