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Ecuador Requires Oil Firms to Renegotiate Contracts

Gonzalo Ortiz

QUITO, Jul 28 2010 (IPS) - A new law gives private oil companies in Ecuador four to six months to renegotiate new service contracts.

The law, which went into effect Tuesday, will replace the current production-sharing agreements with a flat rate per barrel of oil produced. It also reduces the taxes paid by private oil firms from 44 to 25 percent.

The oil companies have asked that the rate be set on a case-by-case basis, depending on how much each firm has invested and international oil prices.

Ecuador, a member of OPEC, exports some 470,000 barrels per day of crude pumped from oilfields in the country’s eastern Amazon region and carried by two pipelines to the Pacific oil port of Balao.

Two public companies, Petroecuador and Petroamazonas, account for 56 percent of output, while the remaining 44 percent is produced by private companies that mainly operate with contracts that give the state a share of the oilfield profits.

The new legislation gives the companies holding the largest concessions, like Spain’s Repsol-YPF, Italy’s Eni, Brazil’s Petrobras, and Andes Petroleum and PetroOriental, owned by China, 120 days to renegotiate their contracts.


Firms operating on marginal fields, which produce less than six percent of total national output, will have 180 days.

“Renegotiation of the contracts has been one of the objectives of the current government since it discovered, in the midst of the rise in oil prices of the last few years, that some contracts had no price adjustment clause allowing the state to receive part of the windfall profits,” economist Norma de los Reyes, an expert on oil issues, told IPS.

The government’s first measure was to push through a law that required companies to hand over a larger share of windfall profits. But the ultimate aim of President Rafael Correa, who took office in January 2007, has been to renegotiate the contracts, de los Reyes pointed out.

However, the reluctance of foreign companies and the lack of a legal framework blocked progress in that direction, and led the government to see passage of the new law as indispensable, she added.

Minister of Non-Renewable Natural Resources Wilson Pástor acknowledged that some firms may not accept the change, but expressed confidence that most would.

The companies that do not agree will be paid “a fair price” for the liquidation, Pástor said. The minister has previously stated, however, that many of the investments made by the companies have already been recouped, and that those firms would not receive compensation.

Audits would be carried out, he said, “respecting the rights of investors.”

The new service contracts law was published automatically Tuesday after Congress failed to amend, approve or vote it down within the 30-day time limit set by the Correa administration, which had earmarked the bill as urgent.

That was possible thanks to a legislative maneuver by the governing Alianza País party.

Given the failure to drum up the votes to pass the government bill and the presentation of a proposal to reform it, ruling party legislators and a few allies boycotted the session called to debate the draft law Sunday night, and the deadline lapsed.

Opposition lawmakers decried the maneuver and Alberto Acosta, a prominent former ally of Correa and the former president of the constituent assembly that rewrote the constitution, said the government “has resorted to old practices of the partidocracia (when certain parties dominated the system) to shove through an extremely important law with total disregard.”

Rightwing critics warned that the new law generated legal uncertainty which would discourage investment in a key sector of the economy, that provides one-third of the government budget.

The law promotes greater state control through “turning the oil companies into mere providers of services, without offering incentives for investing,” said Jorge Pareja of the Foro de Opinión Petrolera (FOPEC), the oil industry forum.

Some voices on the left, meanwhile, complain that forcing companies to renegotiate will unnecessarily prolong contracts that were due to expire within the next few years, after which the oilfields in question would have reverted to the state.

Acosta said in a TV interview that it was “disgraceful” that the Alianza País legislators “hid themselves away and evaded debate.”

He also criticised the fact that the law allows oilfields to be given in concession to foreign companies, state firms or joint ventures merely by presidential decision.

“Let’s suppose that this government does not turn over any oilfields, I’ll take their word for that,” he said. “But they (Alianza País) will not be in power forever, and a neoliberal regime will come along and find that those who say they saved the state’s resources left open a door for the cat to come in and eat the cheese.”

 
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