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Another Corruption Scandal Engulfs Ecuador’s Oil Industry

The trials and tribulations for Ecuador’s deeply embattled petroleum industry continue. If crumbling infrastructure, refinery outages and pipeline ruptures were not enough, the Andean country’s state-controlled PetroEcuador finds itself embroiled in another scandal which could derail progress with reforming Ecuador’s troubled energy sector. The national oil company which owns and operates Ecuador’s refineries and related infrastructure is due to be merged with state-controlled PetroAmazonas which focuses on upstream operations. Shortly after that was announced by the country’s energy ministry, the CEOs of both companies resigned, although it was recently announced that Gonzalo Maldonado was appointed the new CEO of PetroEcuador. The latest scandal couldn’t come at a worse time for Ecuador’s Ministry of Energy and Non-Renewable Natural Resources, which is seeking a private operator to invest $2.4 billion and take operational control of PetroEcuador’s Esmeraldas refinery. Not only is Ecuador battling the overhang from former president Correa’s policy of resource nationalism, but its oil industry has a long history tainted by corruption and bias against international energy companies. While Moreno’s government has implemented a range of policies aimed at attracting urgently needed foreign investment to reinvigorate the hydrocarbon sector, foreign energy companies have yet to make any significant investments. A combination of the factors discussed earlier combined with sharply weaker oil prices, relatively high breakeven prices and the growing preference for lighter sweeter crude oil grades are a deterrent. Now his government finds itself embroiled in a massive corruption scandal involving the world’s largest oil trading firm Vitol Inc. According to a recent Bloomberg article Vitol, despite considerable statements to the contrary, was allegedly bribing officials in Ecuador and Mexico as late as July 2020. Those illicit activities were also occurring in Brazil where between 2005 and 2014 the company paid over $8 billion in bribes to executives of the national oil company Petrobras.

Related: Why Warren Buffet Is Betting Big On Oil & Gas Pipeline Companies

The U.S. Department of Justice in a statement issued last week asserted:

“Over a period of 15 years, Vitol paid millions of dollars in bribes to numerous public officials – in three separate countries – to obtain improper competitive advantages that resulted in significant illicit profits for the company,” 

As a result of the Justice Department’s investigation into violations of the Foreign Corrupt Practices Act, Vitol has agreed to pay $135 million in compensation to resolve the matter and a similar investigation by Brazilian authorities.

This comes on the back of a range of other corruption scandals which rocked state-controlled oil companies in Latin America in recent years, and the commodities industry’s long-running reputation for malfeasance. The bribery scandal involves officials of Ecuador’s Ministry of Energy and Non-Renewable Natural Resources and PetroEcuador. As a result, Ecuadorean authorities are determining whether they will withhold (Spanish) $1.5 million owed to Vitol for shipments of premium diesel, which could total as many as 2 million barrels of the fuel.

There is every indication that it could delay Ecuador’s energy ministry’s plans to reinvigorate operations at the vital Esmeralda’s refinery. The latest corruption scandal is a red flag for foreign investors interested in becoming the operator of the Esmeraldas refinery. The U.S. Department of Justice finding comes not long after a $9.5 billion judgment made by an Ecuadoran court against energy supermajor Chevron was found by the U.S. District Court to be a product of fraud and racketeering. The energy ministry is asking the winning bidder to enter a 25-year contract and invest $2.4 billion, which is potentially a risky proposition when the persistent issues impacting Ecuador’s petroleum industry are considered. The Esmeralda’s refinery underwent a botched $2.3 billion overhaul in 2015 under the government of then-President Correa, the failure of which was linked to corruption. Despite the work being completed, operational issues persisted and Moreno’s government announced a series of repairs, during March 2018, to alleviate the most pressing operational issues. Nevertheless, the view was that it would take a three-year overhaul to make the Esmeraldas refinery fully operational. The plant is currently incapable of producing IMO2020 compliant maritime bunker fuel or meet domestic demand for diesel, underscoring the parlous state of its operations.

Corruption and bribery are not the only hazards facing international energy companies choosing to invest in Ecuador. Aging energy infrastructure highlighted by the intermittent operation of the Esmeraldas facility and multiple pipeline ruptures during April 2020, which caused Ecuador’s oil production to decline precipitously, illustrate the risks associate with investing in the Andean country’s energy sector. The latest scandal is yet another deterrent for international energy companies considering investing in Ecuador’s troubled hydrocarbon sector. It highlights Moreno’s reforms of the petroleum industry have not gone far enough. There are still considerable headwinds ahead for a country which was seeking to boost oil production to 600,000 barrels daily and sharply fuel imports as part of urgently required economic reforms.

By Matthew Smith for Oilprice.com 

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