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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 Is In Deep Crisis

  • A landslide in the Amazonian province of Napo, which caused the Marker River Bridge to collapse, forced the shuttering of Ecuador’s two principal oil pipelines five days ago.
  • National oil company Petroecuador was compelled to shutter wells and declare force majeure on almost its complete production.
  • Petroecuador was previously compelled to declare force majeure during June 2022 as violent protests swept across the impoverished Andean country.

The last decade has been difficult for Ecuador’s economically crucial oil industry. Despite recent reforms and rising investment, the Andean country’s hydrocarbon sector is struggling to recover from the corruption and malfeasance which occurred during Rafael Correa’s administration. A combination of poorly constructed and corroded infrastructure, natural disasters and frequent civil unrest are causing numerous production outages that are weighing on the economy and fragile government finances. Violent protests have rocked the small South American country of 18 million with worrying frequency over the last eight years. The civil disturbances, sparked by fuel price hikes and a spiraling cost of living, along with environmental incidents in Ecuador’s Amazon are impacting oil industry operations and causing production outages.

A landslide in the Amazonian province of Napo, which caused the Marker River Bridge to collapse, forced the shuttering of Ecuador’s two principal oil pipelines five days ago. That saw the state controlled Petroecuador owned 360,000 barrel per day SOTE pipeline and the 450,000 barrel per day privately owned OCP pipeline taken offline as a preventive measure despite neither pipeline being ruptured. With both pipelines shuttered there is no means of transporting the crude oil extracted in Ecuador’s Amazon, where much of the Andean country’s oil production occurs, to the Pacific coast. 

For this reason, national oil company Petroecuador was compelled to shutter wells and declare force majeure. According to Ecuador’s Energy Ministry, production will be offline for up to three weeks dealing yet another blow to rightwing President Guillermo Lasso’s plans to substantially boost oil output. During 2022, Ecuador pumped an average of 480,299 barrels per day, which while 1.6% higher than a year earlier was still significantly less than pre-pandemic production of 531,000 barrels daily during 2019. This is the second time in less than a year that Petroecuador was obliged to declare force majeure. Energy Ministry data shows by February 26, 2023 (Spanish) Ecuador’s oil production had fallen to 243,678 barrels half the daily average of 489,000 barrels per day pumped for January 2023. Related: Russia Is Intent On Defending Its Oil Market Share In India

Petroecuador was previously compelled to declare force majeure during June 2022 as violent protests swept across the impoverished Andean country and protestors stormed oilfields in the oil-rich Amazon. This was responsible for Ecuador’s 2022 oil production being lower than it had been before the pandemic and failing to reach the official annual planned government target. These events are hindering Lasso’s plans to boost Ecuador’s oil production. On taking office during May 2021 the president planned to more than double output to one million barrels per day by the time his term ended in 2025 but because of prevailing headwinds that target has been revised downward to 750,000 barrels per day. There are signs that even the reduced production target is unachievable with production outages remaining as an ongoing problem.

Since the completion of the Coca Codo Sinclair Dam on the Coca River in Napo province by the Sinohydro corporation during November 2016 erosion, landslides and flooding have become persistent problems. In the past, those events have led to the SOTE and OCP pipelines rupturing and spilling crude oil into the surrounding environment including the Coca River which flows into the Napo, a tributary of the Amazon River. One of Ecuador’s worst oil spills occurred in April 2020 when landslides ruptured both pipelines seeing an estimated 15,000 barrels of crude flow into the Coca River. That spill affected over 300 miles of river, with petroleum even flowing into the Napo, and local potable water supplies. There were many complaints by local indigenous communities that the spill was not adequately cleaned-up leaving tainted drinking water and a seriously damaged local environment. Another 6,000-barrel spill from the OCP pipeline occurred during January 2022 when it was ruptured by falling rocks. The spill flowed into the Coca and Napo rivers and affected over five acres of the ecologically important Cayambe-Coca national park.

The shuttering of the SOTE and OCP pipelines was undertaken to ensure that if the pipelines are ruptured by landslides there will not be another environmentally damaging spill. Devastating erosion appeared along the banks of the Coca River and in the Cayambe-Coca reserve after the Coca Codo Sinclair Hydroelectric plant commenced operating during late-2016. In fact, during 2020 the erosion caused the 492 feet, or 150-meter, high San Rafael waterfall which had existed for thousands of years situated on the Coca River to collapse. This was Ecuador’s tallest waterfall and a major environmental attraction. According to scientists the Coca River is once again suffering from regressive erosion which will eventually alter its course. Increased erosion is attributed by some scientists to the hydroelectric plant’s diversion reservoir which removes sediment from the river water depriving downstream waters of their natural sediment load. That is creating an effect called “hungry waters” where the river water’s erosive capacity increases, seeing its waters aggressively erode the riverbed and banks, as they seek to recover the normal sediment load.

Even before the construction of the hydro-plant it was recognized that the SOTE and OCP pipelines pass through highly geological unstable territory which was already increasing the risk of ruptures, oil spills and outages. It is for these reasons that the SOTE and OCP pipelines must be rerouted if the risk of ruptures, related oil spills and outages due to landslides and other erosion related events are to be reduced. This is essential if Ecuador is not only to sustain petroleum production without interruption but for growing output to the desired volume of 750,000 barrels per day. The latest outage, which is expected to last up to three weeks will significantly impact production volumes. This will further effect Ecuador’s oil dependent economy where petroleum is responsible for 58% of exports by value and around 4% of gross domestic production. Any substantial lengthy decline in production will also have a negative effect on Quito’s revenue, placing pressure on an already fiscally fragile economy.

By Matthew Smith for Oilprice.com

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