Outsiders Find Oil, Exasperation Mix in Ecuador

QUITO, Ecuador (By Juan Forero, NYTimes) March 1, 2004 — Just last year, Brazil's giant state oil company, in the midst of expanding operations across Latin America, entered Ecuador's potentially lucrative but exasperating oil industry after acquiring a controlling stake in an Argentine company that had operated here since the mid-1990s.

The purchase gave the Brazilian company, Petroleo Brasileiro, two big oil blocks that now produce 17,000 barrels of oil a day and part ownership of a new heavy-oil pipeline that foreign oil companies once said held great promise.

But today, oil analysts and a company official say, Petrobras, as the company is known, is quickly trying to unload much of its stake. It is not that Ecuador is not blessed with plenty of oil, they say, but rather that the country has a dismal record of managing oil contracts.

Oil consultants and the managers of three companies of the roughly 20 that operate here say Ecuador has reneged on agreements, raised tax and royalty rates beyond what is palatable to investors, and otherwise changed the legal framework governing how companies operate, alienating a host of international oil firms.

"Ecuador is still very attractive to oil companies," said the Petrobras official, who asked that his name not be used. "There is oil. But the problem is above ground, not below ground."

Oil companies are not abandoning Ecuador en masse, say government officials, who contend that Ecuador remains an inviting prospect for foreign oil investors. But some of the biggest companies, giants like Exxon Mobil and BP that could be spending billions of dollars to drive the development of Ecuador's oil industry, are long gone. Other companies are considering leaving or scaling back their investment, oil consultants and company officials say. Ecuador, analysts say, is not getting nearly the amount of investment that was once expected.

The complaints are recurring ones for energy companies that have explored here since the country's biggest oil deposits were first developed in the 1970s. But lately, the problem has become particularly acute, leading to a rash of complaints and tense meetings between President Lucio Gutierrez and the general managers of several companies.

If several issues relating to taxes and contracts are not resolved, the ramifications could prove troubling for a country in which the oil sector accounts for a fifth of output and 30 percent of government revenues.

Ecuador had been hoping to double production to 850,000 barrels a day by 2004 with the recent completion of a new pipeline built to carry the geHispanicus heavy crude found in Ecuador's eastern Amazon.

The Heavy Crude Pipeline, built for $1.3 billion by a consortium of foreign companies, was designed to carry 450,000 barrels a day. But with private investment curtailed and no new big discoveries, the flow is only about 180,000 barrels running through the 300-mile tube each day.

And although overall production in the country is up, thanks to foreign firms, with output in Ecuador increasing from 389,000 barrels a day in December 2002 to 500,000 this past December, oil analysts said that production would have been higher had there been more private investment, as initially foreseen.

Meanwhile, production by the state oil firm, Petroecuador, has slipped to about 191,000 barrels a day from 221,000 barrels at the end of 2002 because the company has failed to develop big exploration projects.

"Their production is declining, and there is not sufficient exploration activity going on," Jose Valera, a Houston-based consultant to oil companies in Quito, said of Ecuador. "The country is going to soon face difficult choices."

Government officials publicly downplay the problems and say Ecuador, which has 4.6 billion barrels of proven reserves, among the largest in Latin America, is on the cusp of an oil boom sure to benefit dependable customers like the United States.

"Never has a company suffered a unilateral termination of its contract," Carlos Arboleda, the minister of energy and mines, said in an interview late last year. "If companies leave, it is because they buy and sell rights. That is part of the dynamism in the oil sector."

Oil companies and industry experts, however, have a sharply different impression.

"They are fed up," Rene Bucaram, an oil analyst in Quito and former general manager for Texaco in the 1980s, said of foreign firms. "They talk about fiscal security. They talk about problems with the value-added tax, about the problems that Petroecuador and low-level officials cause for them."

Petroecuador and the Ministry of Mines and Energy, oil analysts say, are too bureaucratic.