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Can Lenin Solve Ecuador's Oil Crisis?

Offshore

100 years after the Great Russian Bolshevik Revolution, Lenin has once again seized power. Lenín Moreno, a socialist candidate and former UN Envoy on Disability and Accessibility, claimed last week’s presidential elections with a narrow 51 percent win. He will preside over a Parliament in which his PAIS Alliance still has a majority, yet is faced with a myriad of challenges, ranging from the reconstruction of earthquake-shattered cities, to slow economic growth due to the background of lower-than-desired crude prices to numerous corruption investigations incriminating government dignitaries. Crude oil is in many ways crucial to Ecuador’s economic prosperity and, as such, Moreno’s oil-sector measures are sure to greatly influence his tenure.

With oil production breakeven figures averaging 39 USD per barrel across the country, Ecuador has managed to put an end to the loss-making cycle of 2015-2016. The two main Ecuadorian grades, the lighter Oriente (25°C API) and the heavier Napo (19°C API) are currently trading at 49-50 and 40-41 USD per barrel, respectively, which eased Quito’s strain, especially considering that only a year ago, in April 2016, the Oriente-Napo average basket amounted to 34.3 USD per barrel. Oil revenues form an important element of the government’s income, as crude remains Ecuador’s top export article (34 percent of the total). For instance, royalties paid by the state-owned Petroecuador fell by 65 percent between 2014 and 2016 against the background of stagnant oil output. The oil crunch has hurt private companies too, as Rafael Correa annulled the previously existing PSA terms so that private companies now receive a fixed rate for each barrel. Related: Can We Expect A Big Draw In Crude Inventories Anytime Soon?

Against the background of oil prices balancing just above the acceptable levels, Moreno will have to demonstrate considerable resolve to wean off all senior-ranking public officials implicated in one of Ecuador’s most grand-scale corruption scandals. Brazil’s “Car Wash” investigation and the leaking of Panama Papers shed light on the fact that Ecuador’s former hydrocarbon minister Jorge Pareja reportedly took bribes (inter alia from Brazilian conglomerates such as Odebrecht) in exchange for granting state contracts. As the modernization of Petroecuador’s Esmeraldas refinery went $1 billion over budget, suspicions about high-level corruption being widespread among the company’s leadership are hard to ignore. If President Moreno does not spearhead a campaign against oil-sector corruption and money laundering, his wait-and-see attitude might erode support for the ruling party.

Oil production is also a matter of worry for the new President, as Ecuador has vowed to reduce output to 522 000 barrels per day from its previous 550 000 bpd output level. Notwithstanding the future of the OPEC Vienna deal, Quito will be walking a thin line if it aims to maintain or increase its oil output. Almost half of its estimated reserves (1.67 billion barrels, according to government data) are in the Ishpingo-Tambococha-Tiputini (ITT) formation, most of which, regretfully for the Ecuadorian government, constitutes a part of one of our planet’s most biologically diverse natural parks, the Yasuni National Park. After the spectacular failure of ex-President Correa’s appeal to the international community to collect $3.2 billion to recompense Ecuador for its waiving of production in the Yasuni, Quito has taken small gradual steps to initiate drilling in the Tiputini block, currently producing approximately 30 000 barrels per day (assumed to reach 300 000 bpd by 2023-2024). Related: China’s Electric Vehicle Market Is Unbeatable

It is only a matter of time until Lenin Moreno will expand oil production into the Amazon rainforest, even in the so-far untouched (and most oil-rich) parts of it like Ishpingo. The proposal to build up Ecuador’s services sector, especially its tourism, is certainly laudable, but it is unlikely to yield significant financial results in the short-to mid-term. Even beyond that, given that 80 percent of oil production is now in the state’s hands, the government needs a safe option to alleviate its 4 percent budget deficit against the background of a low-price environment. Interestingly, a similar story played out in the 1960s, albeit to a much more muted international outcry (if any), when Texaco, the precursor of Chevron, found significant reserves of oil in Ecuador’s Oriente region. By the 1970s, almost 70 percent of the Oriente constituted a part of an oil concession. Paradoxically, Ecuador’s OPEC membership and oil-exporter status hinges on its oil production in ecologically fragile areas, as prior to the opening up of the Oriente the country’s output fluctuated between 8-9 000 barrels per day, based solely on production from the Santa Elena island near Guayaquil. Thus, although oil extraction in one of Latin America’s most biologically diverse areas has been going for almost half a century, Ecuador’s present and future lies in oil companies expanding their activities to new frontiers.

Almost 99 years ago, on June 20, 1918, upon seizing power on the wave of the Bolshevik Revolution the Russian Lenin nationalized the oil sector and all related industries – in 2017, the Ecuadorian Lenin should go in the opposite direction. As proved by Bolivia, which following the nationalization of its gas industry managed to lure in majors as Repsol, Total and Gazprom, one need not betray Socialist ideals to infuse new life into a stagnant energy sector. President Moreno will avoid abrupt movements, will most likely initiate a national referendum of some sort regarding the admissibility of oil production in the ITT, btu regardless the results of it and public mood in general, by the logic of Ecuador’s economic development he is ultimately bound to start the Amazon ball rolling.

By Viktor Katona for Oilprice.com

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Leave a comment
  • Steve Cunningham on April 14 2017 said:
    A socialist taking charge of a South American country with lots of oil. Are we talking about Ecuador? Or Venezuela?

    The names have simply changed. Socialist just can't help themselves. They will destroy Ecuador if unchecked. Guaranteed.

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