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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 Vast Oil Wealth May Never Be Tapped

Over a decade of resource nationalism, an alleged corrupt billion-dollar Ecuadorean court verdict against energy super major Chevron, economic instability, civil unrest and aging infrastructure are sharply impacting Ecuador’s economically crucial oil industry. The magnitude of these negative events is being multiplied by the fallout from the COVID-19 pandemic which has almost crushed Ecuador’s fragile economy. Last year the Andean country was rocked by violent protests against President Lenín Moreno and his pro-business economic reforms, notably ending unsustainable fuel subsidies, as part of a $4.2 billion IMF loan program. Those urgently needed reforms, which were rejected by Ecuador’s National Assembly in November 2019, were designed to reduce the country’s crippling fiscal deficit, improve tax collection, and attract urgently needed foreign investment.

Moreno's administration is in the process of reorganizing Ecuador’s crisis plagued hydrocarbon sector to boost investment and unlock the country’s vast petroleum wealth. Ecuador has proven oil reserves of 8.3 billion barrels, which are the third highest in South America after Venezuela and Peru. They are also significantly greater than Colombia and Peru, yet Ecuador’s northern neighbor pumps substantially more crude oil and has received considerable economic benefit from exploiting its petroleum wealth.  Regardless of Ecuador’s considerable hydrocarbon potential, it is struggling to exploit its hydrocarbon wealth. For at least a decade, Ecuador’s burgeoning petroleum industry has lurched from one crisis to another, with former President Rafael Correa’s policies focused on resource nationalism, sharply impacting investment and production. Like southern neighbor Peru, Ecuador’s petroleum wealth is mainly located in the country’s eastern Amazon region, which is believed to contain more than a fifth of the country’s oil reserves. Significant changes to the regulation of Ecuador’s petroleum industry, including the introduction of participation contracts, which allow upstream oil companies to access reserves-based lending, have done little to improve its outlook. Related: Oil Majors Aren’t Worried About A Biden Presidency

In April 2020 landslides ruptured three crucial oil pipelines located in Ecuador’s Amazon near the Coca river and city of Coca. This triggered a massive oil spill into the waterway which spread down the river until it entered the Napo River, a tributary of the Amazon, and finally even reached as far as Peru. This spill not only caused significant environmental damage but threatened the water supply of the city of Coca and its 45,000 inhabitants. It also forced the pipelines, which are the only effective means of transporting crude oil produced in Ecuador’s Amazon at the Shushufindi and Auca oilfields, the country’s largest, to the northern port city of Esmeraldas. 

The city of Esmeraldas contains Ecuador’s largest oil refinery which is owned by state-controlled Petroecuador and has the capacity to process 110,000 barrels of crude oil daily. The failure of the three crucial oil pipelines caused Ecuador’s oil production to plunge to a multi-year low of 208,062 barrels daily on average for April 2020 (Spanish). It took until June 2020 for production volumes to return to normal reaching an average of 514,863 barrels daily for the month. By October 2020, Ecuador only pumped 512,264 barrels of crude oil, which was less than 1% greater than a month earlier and still well below Quito’s 2020 production target of 600,000 barrels daily. 

Source: Ecuador Ministry of Energy, Natural Resources and Renewables, and U.S. EIA.

National oil company PetroAmazonas is responsible for the lion’s share of Ecuador’s oil output, pumping an average of 409,672 barrels of crude oil during October, which equates to 80% of the Andean country’s monthly oil production.

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Ecuador’s oil industry is failing to meet production targets because of the poor state of the Andean country’s energy infrastructure and a lack of investment. Soil erosion in the Amazon remains a constant problem that threatens the operation of Ecuador’s main oil pipelines. A lack of spending on maintaining and developing Ecuador’s energy infrastructure has led to the failure of pumping stations and minor pipeline outages, as well as lagging transportation volumes. Pipeline capacity constraints and the threat of further outages will prevent Quito from substantially boosting oil output, particularly in the Amazon, without significant investment in infrastructure. A long history of a lack of maintenance spending at the Esmeraldas refinery has resulted in a range of equipment failures at the facility over the last two decades including a large explosion in 1998. During April 2020, an electricity outage saw the fluid catalytic cracking unit out of service for an extended period. The facility has long been plagued by corruption scandals and fears of explosions due to poor maintenance. In response to those issues Quito announced in July 2020 that it was seeking a private company to invest in and manage the Esmeraldas refinery in an attempt to improve operations and the quality of distilled products, including gasoline, produced. The sulfur content of the maritime bunker fuel produced by the refinery is up to four times higher than the 0.5% specified by IMO2020. This means it fails to meet global requirements without being blended down. A key reason for that is Ecuador’s main crude oil grades Napo and Oriente, which have API gravities of 16.8 and 23.6 degrees along with sulfur contents of 2.33% and 1.61%, are heavy and especially sour. That makes it more costly and difficult to refine them into high-quality low sulfur content fuels.

In a further blow to the impoverished South American country’s oil industry, the CEOs of state-owned Petroecuador, which controls its oil refineries and PetroAmazonas, Ecuador’s main crude oil producer, resigned at the start of November. A potential motivation for their actions could be the deal struck by Quito with Chinese investment banks to receive loans for oil. There are concerns that Ecuador’s oil production is insufficient and too erratic, because of infrastructure and investment issues, to meet existing crude oil export commitments and those loan repayments. Resentment toward Ecuador’s oil industry among communities in the Amazon and indigenous peoples are creating a tinderbox that could erupt into protests and community blockades of oil operations as witnessed in Colombia and Peru. That growing hostility is being fanned by a long history of pollution of local lands and waterways by oil waste, the sharp impact of the COVID-19 pandemic on those communities, and an ongoing lack of access to resources. The chronicle of crises afflicting Ecuador’s petroleum infrastructure, a lengthy history of poor governance and corruption, the overhang of resource nationalism, and growing civil resistance to the oil industry indicate that Quito may never be able to successfully tap Ecuador’s considerable petroleum wealth without radical policy changes.

By Matthew Smith for Oilprice.com 

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