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Will Ecuador’s Oil Industry Ever Bounce Back?

  • Ecuador’s economy is staring down yet another crisis.
  • Economic headwinds could further jeopardize its already-struggling oil industry.
  • Drill count is inching up slowly, but it remains to be seen whether or not Ecuador’s hydrocarbon industry can stave off crisis.

The oil-rich Latin American country of Ecuador finds itself yet again on the cusp of an economic crisis. Attempts to reform the disaster-prone economy and ease fiscal pressures for a heavily indebted government continue to flounder, with most efforts ending in civil unrest. Ecuador, like many countries in the region, was hit hard by the COVID-19 pandemic, which caused the gross domestic product to contract by 7.8%, poverty to soar and already weak government finances to come under considerable pressure. Even the adoption of the U.S. dollar after the 2000 economic collapse and populist left-wing coup, as well as the Andean country’s significant oil wealth, have failed to stave off a series of subsequent crises. Ecuador finds itself yet again facing dire economic headwinds with its economically crucial oil industry, once again, under considerable pressure. The last decade has been a tumultuous period for Ecuador and the country’s vital hydrocarbon sector. Successive governments have been mired in economic, political and social crises. In 2010 populist left-wing president Rafael Correa, who was found guilty in a 2020 Ecuadorean court ruling of serious corruption, was almost overthrown by an attempted coup. Correa’s successor Lenin Moreno faced violent protests, sparked by his plan to reduce fuel subsidies, which forced his administration to flee the capital, Quito, for the safety of the port city of Guayaquil. Current right-wing President Guillermo Lasso was forced to abandon plans to rationalize government spending and reduce a burdensome budget deficit after violent civil unrest, led by Indigenous organizations, rocked Ecuador during June 2022.

The latest anti-government protests were again triggered by spiraling fuel prices and a rapidly rising cost of living, which are weighing on many communities that are still affected by the fallout from the pandemic. Roadblocks and oilfield invasions effectively shuttered significant parts of Ecuador’s economically vital hydrocarbon sector. National oil company Petroecuador declared force majeure, halting operations and petroleum exports. As a result, oil production plunged by over 50% to be between 236,037 and 236,571 barrels per day during the period from 24 June to 29 June 2022. That caused June 2022 output to plummet by 18% compared to a month prior and 17% year over year to 408,076 barrels per day. Petroleum exports also fell sharply, seeing the total volume of oil exported by Ecuador for January to July 2022 plunge to 65.9 million barrels, the lowest level in nearly two decades. 

Those events couldn’t have occurred at a worse time for an increasingly unpopular President Lasso. He is under considerable pressure to reform Ecuador’s crisis-prone economy, repair government finances and reduce an unsustainable budget deficit. That burden is magnified by the requirements set by the IMF for a $6.5 billion financing package provided to Ecuador to assist with the country’s recovery from the pandemic while ensuring economic stability. The IMF imposed a series of conditions for the approval of facilities including continued improvement in public finances by cutting government spending, increased transparency and reduced corruption. Since the financing deal was struck, Ecuador has struggled to comply with the IMF’s terms. The latest $1 billion disbursement was approved in late-June 2022, as violent protests rocked Quito, after the institution accepted a December 2021 request from Ecuadorean authorities for a waiver of non-observance with performance criterion.

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The sharp decline in oil production and exports due to the civil dissent will further impact Ecuador’s already dysfunctional and fiscally weak economy, which is heavily dependent on oil production and exports. Prior to the pandemic, World Bank data indicates oil rents were responsible for around 7% of the Andean country’s gross domestic product, while petroleum accounts for a third of exports, according to government data (Spanish). Quito is highly dependent on the oil industry for fiscal income, with the notable rally in oil prices, which sees the international Brent oil price up 17% since the start of 2022, expected to deliver a considerable fiscal windfall. That saw the Lasso administration, before the June 2022 protests, announce that Ecuador’s budget deficit could fall to less than the 2% of GDP target stipulated by the IMF.

 

For some time, Quito has viewed the successful exploitation of Ecuador’s considerable oil wealth as a silver bullet for the Andean country’s economic woes. For that reason, Lasso has proposed doubling oil production by the end of his term in 2025, which, if successful will see it hit nearly one million barrels per day by the end of his term in 2025. Quito intends to achieve this by instituting a raft of industry reforms aimed at attracting substantial foreign energy investment. State-controlled Petroecuador, which is responsible for 80% of Ecuador’s oil output, announced in August 2022 that it is seeking partners to invest in 23 of its oilfields. That includes one of Ecuador’s most productive the Sacha oilfield which is pumping around 70,000 barrels per day with peak production anticipated to reach 96,000 barrels daily by 2025. Ecuador possesses sufficient oil reserves to support a significant leap in production. The Andean country’s current proven reserves are estimated to be 8.3 billion barrels, the third largest in South America behind Venezuela and Brazil, with a production life at the current rate of around 500,000 barrels per day of 47.3 years. Even if production doubled, those reserves will sustain over two decades of industry operations. 

If successful, Lasso’s initiatives will boost oil industry activity at a crucial time with prices remaining firm, leading to higher production and ultimately increased public revenues. If successfully executed, that will improve Ecuador’s economy and public finances, therefore, helping to head off any further crises. There are fears that further civil unrest coupled with a diminished social license will negatively affect Lasso’s plans to grow Ecuador’s oil output. Indigenous communities in the Amazon, where most oilfields are located, continue to contest industry operations claiming they are inflicting considerable environmental damage in the world’s most important ecological region. Tired industry infrastructure, notably failing pipelines, are weighing on Ecuador’s oil production. Pipeline ruptures caused by landslides led to large oil spills and sharply diminished output between April 2020 and December 2021.

It is for these reasons that Ecuador’s oil industry is struggling to return to pre-pandemic production volumes and tempo of operations. September 2022 production of 489,734 barrels per day was nearly 1% lower than a month prior and a whopping 10% lower than the 546,907 barrels daily pumped during September 2019. The Baker Hughes rig count, a reliable de-facto indicator of oil industry activity, shows there were only 10 active rigs in Ecuador at the end of August 2022. That is one more rig than for July 2022 and two greater than for the same month in 2019, indicating that drilling activity in the impoverished Latin American country is picking up, despite the June 2022 anti-government protests, boding well for increased oil production.

By Matthew Smith for Oilprice.com

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