Ecuador Renegotiates With Foreign Oil Firms

[Judi Lynn]

Source: Wall Street Journal

AUGUST 9, 2010.
Ecuador Renegotiates With Foreign Oil Firms

By SPENCER SWARTZ And MERCEDES ALVARO

Ecuador's populist President Rafael Correa wants to take a big slice of profits away from foreign oil companies operating in the Andean nation, which is facing protracted economic problems.

This week, Mr. Correa and his socialist government will force Spain's Repsol YPF, Italy's Eni SpA and other foreign oil companies to redesign existing contracts in a process likely to result in diminished profits for firms that accept the new terms.

The move could help Mr. Correa shore up political support at home and give his government additional money to pump up the flagging economy, which is forecast to grow just 1% this year and a little more than that in 2011, according to economists.

The overhaul may also bolster the case for higher world oil prices if the renegotiation leads to less investment and lower crude output down the road in Ecuador, a member of the Organization of Petroleum Exporting Countries.


Read more: http://online.wsj.com/article/SB10001424052748703988304575413511544308090.html?mod=googlenews_wsj

[bherrera]

1. Higher oil prices due to Ecuador? I doubt it

According to Indexmundi, the oil production from Ecuador is 486.000 thousand barrels of oil per day. This is less than 1 % of the world's oil production. Therefore whatever happens to the oil industry of Ecuador will not impact the market prices. It is also evident this idea the Ecuadorians have is a mistake, because they are trying to increase government take via negotiations, rather than by changing the tax law, which is a much more effective method. I assume the Ecuador government is being given some advice by the Venezuelans, who have done something similar. The Venezuelan idea has not worked very well for them, and their industry produces a lot less oil now, and is less efficient. Maybe these Latin American oil producers will gradually produce less and less oil, which is good for the planet (less CO2 emissions), but they are going to have problems during the period when they adapt to having much less oil to sell. And they need to invent something to make money besides selling bananas and coffee, which is very hard for them to do if they can not have foreign investment. I predict they will remain in poverty as long as they do not understand how to manage their economies.

[Judi Lynn]

2. As a reminder of Rafael Correa's history, he ran for the Presidency promising

sharp reforms in the Ecuadorean economy regarding oil companies, among other aspects.

Quick Wiki look, for refreshers:

Rafael Correa

Rafael Vicente Correa Delgado (born April 6, 1963)<1> is the President of the Republic of Ecuador and the current President pro tempore of the Union of South American Nations. An economist educated in Ecuador, Belgium and the United States, he briefly served as his country's Finance Minister in 2005. He was elected President in late 2006 and took office in January 2007. In December 2008, he declared Ecuador's national debt illegitimate because it was contracted by corrupt/despotic prior regimes, pledging to fight creditors in international courts, and with the pativideos scandal he succeeded in reducing the price of the debt letters and continued paying all the debt.<2> He brought Ecuador into the Bolivarian Alliance for the Americas in June 2009. His first mandate was due to end on January 15, 2011, but the new approved constitution written by the new National Assembly mandates general elections for April 26, 2009. In these election Rafael Correa won in the first round with 51.9% <3> of votes accounting, achieved for the first time since 1979, a representative be elected without having to face the second round. Therefore, his first mandate will end 2013.

Background
Correa was born in Guayaquil and earned an Economics degree at the Universidad Catolica de Guayaquil in 1987. Following his degree, he worked for one year in a mission at a kindergarten and run by the Salesian order in Cotopaxi Province, where he acquired some knowledge of Kichwa, the language of the majority of the native pre-Columbian population concentrated in the Andes region. In addition to Spanish, he speaks French, Quechua, and English.<4>

In June 1991, he received a Master of Arts in Economics from the Université Catholique de Louvain in Belgium. He later studied at the University of Illinois at Urbana-Champaign, where he earned a Master of Science in Economics in May 1999, and later a PhD in Economics in October 2001. According to The Washington Post, Correa's adviser at the University of Illinois, Werner Baer, supports his former student. "He appreciates the market to a certain point, but he knows that the market left alone concentrates wealth", he said. "He is not going to do anything foolish... because he is a fairly open-minded person."<5>

In 2005, Correa served as economy and finance minister under President Alfredo Palacio. During his four months in office, he advocated poverty reduction and economic sovereignty. Correa was skeptical of a free-trade deal with the United States, did not take the advice of the International Monetary Fund, and worked to increase Ecuador's cooperation with other Latin American countries. After the World Bank withheld a loan (citing the changes to the oil income stabilization fund), Correa resigned from Palacio's government. Correa had also proposed the issue of government bonds at a lower interest rate than the contemporary one (8.5%); Venezuela was to purchase half of the new bond issue. Correa claimed in his resignation letter that the sale was done with full presidential authorization, but cited lack of support from the president as a factor in his decision to resign.<6>

When Correa resigned, polls showed he had the highest credibility of any official in the administration at the time, with 57% of Ecuadorians saying that they trusted him.<7>

2006 presidential campaign

Rafael Correa chatting with an American boarding student in Cuenca Preparations
At the start of 2006 presidential campaign, Rafael Correa founded the Alianza PAIS—Patria Altiva y Soberana ("Proud and Sovereign Fatherland Alliance"). The movement espouses political sovereignty, regional integration, and economic relief for Ecuador's poor. Correa, an observant Roman Catholic, describes himself as a humanist, a Christian of the left, and a proponent of socialism of the 21st century.<8>

During the campaign, Correa proposed a constituent assembly to rewrite Ecuador's constitution.<9> Alianza PAIS did not run any congressional candidates, as Correa had stated that he would call for a referendum to begin drafting a new constitution. However, the Alianza PAIS movement signed a political alliance with the Ecuadorian Socialist Party, which did present candidates for Congress.<10>

Petroleum policy
On economic policy, Correa called for reform of the petroleum industry, including an increase in the percentage of petroleum revenues spent on social programs for the Ecuadorian poor, following the reforms of the Hydrocarbons Law promoted by former Economy and Finance Minister Diego Borja. He accused foreign petroleum companies operating in Ecuador of failing to meet existing environmental and investment regulations. In an interview, Correa stated:

Many of the oil contracts are a true entrapment for the country. Of every five barrels of oil that the multinationals produce, they leave only one for the state and take four... That is absolutely unacceptable. We're going to revise and renegotiate the contracts."<11>

More:
http://en.wikipedia.org/wiki/Rafael_Correa

[COLGATE4]

3. Typical behavior for an Ecuadorean government.

Forced "renegotiation" of contracts has been the Ace in the hole that all recent Ecuadorean governments have played. Ecuador is truly a land where a contract isn't worth the paper it's printed on.

[Prometheus Bound]

4. I really respect this government.