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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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Ecuador's Oil Industry Desperately Needs A Miracle

Quito protests

Over the last decade it has been a wild ride for Ecuador’s trouble-plagued but economically crucial oil industry. Former president Rafael Correa’s heavy-handed policies, centered around oil nationalism and greater state control of the industry, deterred foreign energy majors from investing in the impoverished Latin American nation. Those impacted the profitability of private energy companies and allegedly led to profiteering by state run energy enterprises and far-reaching corruption.

Since assuming office in 2017 President Lenin Moreno embarked upon on a strategy of reforming and reviving Ecuador’s deeply troubled petroleum industry. The problems are so severe that Ecuador’s refineries are incapable of processing sufficient fuel to meet local demand. Moreno believes those changes will attract the urgently required investment needed to renovate aging and dilapidated energy infrastructure as well as expand Ecuador’s proved oil reserves and production. Among the most important reforms are Quito’s decision to exit the OPEC oil cartel, in January 2020, and the push to privatize much of Ecuador’s energy assets.  

After a devastating 2020 marred by pipeline ruptures, declining petroleum output, the impact of the COVID-19 pandemic, yet another corruption scandal it was believed that Ecuador’s oil industry might be finally stabilizing. In early 2021, Ecuador’s Energy Minister Rene Ortiz forecast (Spanish) a 2021 production target of 500,000 barrels of crude oil daily, which is 4% higher than the average 478,981 barrels pumped per day during 2020. Ecuador’s energy sector, despite oil prices rallying substantially, is struggling to attract urgently required investment to grow production. Data from Ecuador’s Agency For The Regulation And Control Of Energy And Non-renewable Natural Resources shows March 2021 crude oil production averaged almost 502,000 barrels per day, which represented a 36-basis point increase over February but still 7% lower than a year earlier. That indicates prevailing headwinds, including ailing infrastructure, a lack of investment, heightened geopolitical risk and the pandemic are weighing on Ecuador’s petroleum industry recovery

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It is worth noting that average daily crude oil production of almost 503,000 barrels for the first three months of 2021 is significantly higher than the 478,981 barrels per day pumped during 2020.  This is because April 2020 outages of the SOTE and OCP pipelines, connecting Ecuador’s Amazonian oilfields to the Pacific port of Esmeraldas, caused the country’s worst oil spill in over a decade. It is estimated that up to 16,000 barrels of crude oil gushed into the Coca River threatening local water supplies, notably the city of Cocoa, as well as damaging large tracts of land in a region already afflicted by substantial petroleum contamination. That ultimately caused the impoverished Latin American country’s oil production to essentially fall to zero, until the pipelines were repaired, because Ecuador’s most productive oilfields are in its portion of the Amazon basin. As a result, the Andean country only pumped an average of 208,062 and 333,369 barrels daily during April and May 2020 respectively. For that reason, Ecuador’s 2020 crude oil production only averaged 479,000 barrels per day during that year. While Ecuador’s petroleum output for the first three months of 2021 has declined by almost 2% since December 2020 to around 503,000 barrels per day the government’s target appears realistic if there are no further infrastructure outages.

Aging and poorly maintained energy infrastructure, notably pipelines, poses a key threat to Ecuador’s oil ambitions. There are fears that the SOTE and OCP pipelines are vulnerable to further subsidence and erosion. The phenomena which triggered the landslides leading to the ruptures has been attributed to the Coca Codo Sinclair hydroelectric dam on the Coca River which commenced operations in 2016. Essentially, the dam, by altering the water flow of the Coca River, has substantially bolstered the rate at which the river’s water are eroding its banks. This caused, firstly, what was Ecuador’s largest and most famous waterfall, the San Rafael waterfall, to disappear during February 2020. The level of erosion was so severe it eventually ate away substantial portions of the riverbank until it reached the land beneath the SOTE and OCP pipelines causing them to rupture. Not only did geologists and hydrologists predict the extreme erosion but Ecuador’s energy ministry as well as Petroecuador, operator of the SOTE pipeline, were warned that the pipelines could be compromised.

Authorities, nonetheless, allegedly ignored the warnings and little appears to have been done since to remedy the issue. While Petroecuador and Oleoductos de Crudos Pesados Ecuador S.A., the owner of the OCP pipeline, claim that over $20 million was spent to fully clean-up the spill, local communities were claiming as late as September 2020 that there is still considerable evidence of hydrocarbon contamination. According to community leaders there are regular minor oil spills into the Coca River and surrounding terrain. There are fears that heavy rainfall and the waterflow of the Coca River will cause further heavy erosion leading to further landslides and pipeline ruptures. This is magnifying already heightened tensions, caused by a long history of oil spills and environmental degradation dating back decades, between local indigenous communities, the national government in Quito and local oil industry.

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There is a long history of government mismanagement when it comes to managing Ecuador’s economically vital oil industry. Moreno, since becoming president in May 2017, has made significant efforts to reform Ecuador’s petroleum industry to bolster regulatory oversight and transparency as well as attract urgently needed foreign investment. A special audit conducted by Moreno’s administration found that nearly $2.5 billion destined for oil industry works and upgrades was lost to corruption, much of which is believed to have occurred during Correa’s tenure as president. That saw Moreno push to accelerate his reforms which include merged Ecuador’s state-controlled oil companies Petroecuador and Petroamazonas, completed earlier this year, with a stock market listing reportedly being considered. If that occurs it would bring Petroecuador in line with other South American national oil companies including Colombia’s Ecopetrol, Brazil’s Petrobras and Argentina’s YPF, which operate as public private partnerships.

Unfortunately, infrastructure outages continue to plague Ecuador’s petroleum industry, impacting production. Petroecuador was forced to close the SOTE pipeline for two days during March 2021 for maintenance, impacting production. The national oil company also closed the catalytic cracking unit at its Esmeraldas refinery for maintenance, causing the price for the high sulfur content bunker fuel it produces to spike. The Esmeraldas refinery has long been a trouble-plagued operation. Even a $2.2 billion upgrade undertaken when Correa was in office, which was tainted by far ranging allegations of corruption, failed to resolve the problems affecting the facilities operation. The Esmeraldas refinery is incapable of producing the low sulfur content maritime fuel required by IMO2020 or produce sufficient gasoline or diesel to meet domestic demand, forcing Quito to import fuel, placing greater pressure on an already fragile fiscal position.

To address that dilemma Lenin is attempting to put private operators in place. A consortium led by South Korea's Hyundai and U.S. contractor KBR were the only group to acquire a tender package for the planned $3 billion 25-year lease deal to take over operations at the Esmeraldas refinery. The contract was expected to be awarded in April 2021, but Ecuador’s leading presidential candidate Andrés Arauz, a protégé of former President Correa, is opposed to the plan. He has stated that he plans to reverse the deal if completed prior to entering office. Polls show he has almost 38% of voter support for the 11 April 2021 presidential runoff against Guillermo Lasso, who has just over 30%. If Arauz wins office it is likely that he will reverse many of Lenin’s oil industry reforms, which will be a poor outcome for an energy sector lacking investment and in urgent need of modernization. Ecuador’s energy sector is engulfed in considerable uncertainty. A combination of a decade or more of corruption, malfeasance and lack of adequate investment has left it exposed to regular production outages caused by deteriorating infrastructure. The likelihood of another populist leftwing candidate assuming the presidency is amplifying that uncertainty and weighing on an industry in urgent need of investment.

By Matthew Smith for Oilprice.com

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