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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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The Fall Of Ecuador's Oil Empire

  • After a peak of 557,000 barrels per day in 2014, Ecuador's oil production has sharply fallen due to a combination of political crises, anti-oil industry protests, corruption, declining foreign investment, and infrastructure failures.
  • Pipeline failures and protests, particularly in the Amazon region, remain constant threats to Ecuador's oil production, with a spate of oil spills causing severe environmental damage and contributing to the decline in production.
  • Amidst these crises, political instability and an increase in violence, driven in part by the cocaine trade, are also weighing heavily on foreign investment in the crucial hydrocarbon sector, with fears of another looming economic crisis in the country.
Ecuador

A 2005 to 2015 oil boom under the stewardship of leftist President Rafael Correa pulled Ecuador, one of South America’s poorest countries, out of poverty. After securing greater government control of the hydrocarbon sector, which led to substantially higher oil rents boosting Quito’s coffers, Correa spent lavishly on social programs such as health and education. This saw millions of people lifted from poverty in the tiny Andean country of less than twenty million, which at the end of the twentieth century had been gutted by a devastating financial crisis. The transformation was remarkable, by 2015, nearly 40% of Ecuador’s population was classified as middle class. Then disaster struck, oil prices collapsed, which, along with heavy-handed state intervention and mounting anti-oil protests, caused foreign energy investment to dry up, leading to declining production and, ultimately sharply lower petroleum revenues. 

Since the start of this decade, Ecuador’s oil industry has appeared as a mere shadow of its former self. Economically crucial petroleum production is caught in an irreversible downward trend. After peaking at a multidecade high of 557,000 barrels per day in 2014, during the last oil boom, petroleum production has trended lower, plunging to a multidecade low of 473,000 barrels per day for 2021, which was the lowest volume since 2003. There are signs of further pain ahead, with data from the Ministry of Energy and Mines showing that Ecuador only lifted an average of 452,603 barrels per day during July 2023, an 8% drop compared to the same period a year earlier. 

A combination of political crises, endemic corruption, anti-oil industry protests, corroded infrastructure and falling foreign energy investment are all weighing on attempts to bolster petroleum output to pre-pandemic levels. This forced the government of rightwing President Guillermo Lasso to slash the annual daily 2023 production target of 540,000 barrels per day by 8%, or 40,000 barrels, which reduced it to 480,000 barrels daily. Based on current production data from the Energy Ministry and recent events, with civil unrest and yet another political crisis rocking Ecuador, even this revised target appears unachievable.

The February 2023 shuttering of the Petroecuador-owned SOTE pipeline and privately controlled OCP pipeline, which both connect key oilfields in the Amazon to the Pacific port of Esmeraldas, forced Quito to declare force majeure and suspend oil exports. The impact this had on Ecuador’s oil production and exports was further complicated by national oil company Petroecuador declaring force majeure for four oil blocks in Orellana province because of protests by Indigenous communities. That, according to energy ministry data, caused March 2023 oil output to plunge nearly 10% month over month to 448,387 barrels per day.

Production outages due to pipeline failures and protests in the Amazon region remain a constant hazard. It was ruptures of the SOTE and OCP pipelines that were responsible for one of Ecuador’s worst oil spills in recent years during 2020. The pipelines were ruptured by landslides and subsidence after a period of heavy rains causing nearly 16,000 barrels of oil to spill into the Coca River and nearby countryside. The oil not only threatened local water supplies but flowed into the Napo River, a tributary of the Amazon, causing considerable damage in one of the world’s most environmentally sensitive areas.

The SOTE pipeline ruptured again in May 2023, near Nueva Loja, the capital of Sucumbíos province, spilling oil into the San Miguel and Conejo rivers. It is claimed that there have been over 1,000 oil spills in Ecuador’s ecologically sensitive Amazon, causing irreparable damage, which is often aggravated by poor and incomplete clean-up efforts by Petroecuador. The key culprit for the ruptured pipelines is heavy erosion of the Coca River, which began with the completion of the Coca Codo Sinclair Hydroelectric Dam in 2016. Regressive erosion caused the 2020 collapse of Ecuador’s largest waterfall, the San Rafael Waterfall, on the Coca River, and for the waterbody to change course, it also continues to threaten the nearby oil pipelines.

Any government initiatives aimed at rebuilding and updating existing energy infrastructure, such as the SOTE and OCP pipelines as well as the ramshackle 110,000 barrel per day Esmeraldas refinery, Ecuador’s largest such facility, are on hold. President Lasso’s government has been mired in scandals since taking office on 24 May 2021. After a recent attempt by Congress to impeach Lasso, Ecuador’s president utilized a clause in the country’s constitution to dissolve the legislature and initiate early general elections for the presidency as well as the legislature. Tha comes after mid-2022 protests against Lasso’s administration due to a spiraling cost of living rocked Ecuador forcing Quito to declare force majeure, thereby halting all oil exploration and production activities.

Heightened political instability, which is an ever-present problem, is being aggravated by an explosion in violence focused on Ecuador’s largest city, the Pacific port of Guayaquil and the northern port city of Esmeraldas. Soaring violence is being fueled by cocaine trafficking, with Ecuador now an important cocaine transshipment location with the country wedged between the world’s largest cocaine manufacturers Colombia and Peru. This has seen Mexican cartels and Colombian as well as European organized crime groups establish a sizeable presence in the tiny South American country, building alliances with local prison and street gangs. As a result, between 2018 and 2022, Ecuador’s murder rate more than quadrupled to 26 homicides per 100,000 inhabitants. This is also weighing heavily on foreign investment, notably for the economically crucial hydrocarbon sector.

The multitude of crises engulfing Ecuador, which are directly and indirectly impacting the Andean country’s economically vital petroleum industry, makes it difficult to see how Quito can reverse the trend and grow production. This will impact an economy where oil is responsible for 6% to 10% of gross domestic product, more than 20% of government revenue and is the largest export representing 36% of all goods shipped abroad by value. Recent events could not have occurred at the worst time, with Quito struggling to rein in elevated levels of debt and boost declining fiscal income. For these reasons, Ecuador could end up on the precipice of another economic crisis which will ratchet-up the considerable hardships already being faced by a population still struggling with the fallout from the pandemic.

By Matthew Smith for Oilprice.com

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