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Ecuador’s Oil Paradox

Ecuador, already hostile to foreign companies, advocates a novel oil policy. Meanwhile, Chevron sets the record straight.


While Peru is aggressively pursuing foreign investment in its oil sector and envies the oil reserves of its Andean neighbor Ecuador, Ecuadorian President Rafael Correa seemingly would prefer not to have oil. Last week, he launched a novel idea: The country would stop exploring for oil in the Ishpingo, Tambococha, Tiputini (ITT) field if the international community gave it $350 million per year.

"The “request” ... carries a high level of “naïveté”, to say the least, and gives the sense that the Ecuadorian government has no real understanding of how things work in the world community at this time," Bear Stearns analyst Alberto Bernal said in a commentary Friday. "For example, one could argue that it would be a travesty of world diplomacy to grant Ecuador $350 million for not exploiting oil while an immense humanitarian tragedy is taking place in Darfur. Also, it would be equally foolish to give the government of Rafael Correa those resources instead of investing that money in granting additional retroviral treatment in Africa for all the children suffering from the AIDS epidemic."


ITT, which may have reserves of one billion barrels, has garnered interest from various oil companies from Latin America and China.  Correa's new scheme is only the latest in a confusing set of signals he has sent over oil, Ecuador's top export and revenue source. In March, his government said it would likely exclude Brazil's state oil giant Petrobras from any exploration in ITT because it wasn't sufficiently state-owned (Petrobras trades on Bovespa in Sao Paulo and in New York through a popular ADR).  However, during a quick one-day trip to Brazil in April, Correa announced that Petrobras would be able to explore in ITT, joining a consortium that included Chile's Enap and China's SIPC.

The mixed signals over ITT also follow other investor-hostile policies implemented by both Correa and his predecessor, Alfredo Palacio. In May last year, the Palacio government cancelled its contract with Oxy, the largest foreign investor in the Andean country. It ordered Petroecuador to assume control of Oxy’s installations, known as Block 15. The government claimed the U.S. company had violated its contract by selling a stake in 2000 to Canada-based EnCana without prior approval from authorities. Oxy denied any wrongdoing and claimed the confiscation is the culmination of the Ecudorian government losing its case in an international arbitration panel.

The fallout was significant. Oxy had been the top foreign investor in Ecuador and the U.S. stopped its free trade talks with Ecuador. Ecuador now faces a legal suit in the World Bank's International Centre for Settlement of Investment Disputes (ICSID) over the expropriation.

Meanwhile, a new hydrocarbons law that went into force in April 2006 raised the government take of oil receipts from 20 to 50 percent.

Since Correa assumed Ecuador's presidency in January, foreign investors - in oil and non-oil sectors alike - have had to deal with a series of challenges ranging from political chaos to frequent attacks against private local and foreign investment from Correa and his officials. In addition to expelling the World Bank representative in April, Correa on Saturday asked that prosecutors arrest the banking superintendent for voicing concerns about the government's new banking policies.

And on Monday, Correa's controversial finance minister Ricardo Patiño, claimed that Fidel Egas - the owner of Banco Pichincha - was behind a conspiracy against the government, using his TV station, Teleamazonas.


Correa's latest oil idea comes as he also continues his support for a local suit against Chevron. Correa last week met with U.S. actress Daryl Hannah of Splash fame. Hannah was in Ecuador to show support for a $6 billion suit against Chevron claiming that the U.S. oil giant is guilty of contaminating a portion of the Amazon. Her visit followed a trip by British actress Trudie Styler, who accused Chevron of "genocide."  Correa himself visited the affected area in April. During his visit he said Texaco should be held responsible for the damages, although the judiciary has the final word. He also said the contaminated area was the result of "savage capitalism."

Chevron has categorically denied all accusations of wrongdoing, pointing out that blame for the contamination lies squarely with Ecuador's state oil company Petroecuador. "Anyone looking for the source of oil contamination of the Ecuadorian rain forest need look no further than Ecuador’s state-owned oil company, Petroecuador," Kent Robertson, a media relations advisor at Chevron, tells Latin Business Chronicle.  

Petroecuador is widely seen as one of the most inefficient state oil companies in Latin America. Although it assumed control of the oil fields that were previously run by Occidental, it has failed to do so efficiently.  Partly as a result, Ecuador's oil production fell by 8.0 percent to 501,056 barrels per day in the first quarter this year, U.S.-based consultancy Global Insight pointed out Monday. Production was also affected by protests that disrupted output at fields operated by Petrobras.

Petroecuador has also been plagued by extensive theft, Global Insight says. Correa last month ordered the militarization of the country's oil wells in a bid to reduce the theft of fuel and equipment such as cables. 

The suit against Chevron charges that its subsidiary Texaco was negligent in massive oil spills that have contaminated areas of the Amazon.  That suit follows other suits filed in the United States, but thrown out by U.S. courts.

"Petroecuador has been the exclusive operator of the oil fields for the past 17 years and has a horrendous environmental record, a fact that even the current Ecuadorian administration recognizes," Robertson says.


Texaco operated an oil field consortium with Petroecuador from 1964 to 1990, when the Ecuadorian company took over management of the oil field. Texaco continued with a minority stake in the consortium until 1992.  In 1995, Texaco agreed with the Ecuadorian government to conduct $40 million environmental remediation in the area of the former concession. Three years later, the government of Ecuador declared that the remediation was completed according to the terms and parameters agreed upon and released Texaco from any future liability.

The present conditions of the Oriente are a consequence of Petroecuador’s ongoing operations as well as its inaction, Robertson says.  "Petroecuador, the major shareholder of the former consortium, has long ignored its legal and contractual obligations to remediate its share of the sites under a 1995 agreement with the government and Texaco Petroleum Company," he says. 

In the seven-year period from 2000 to 2006, Petroecuador was responsible for a total of 882 oil spills, Chevron points out.  "This indisputable reality is ignored by plaintiffs’ attorneys and activists who organize “toxic tours” and other publicity events," Robertson says.

In 1993, trial lawyers filed two class actions in New York against Texaco, but they were dismissed in 2002. In 2003, attorneys ultimately filed a new suit in Ecuador against ChevronTexaco (now Chevron). Despite the dramatic statements by Tyler and other activists, the US oil company believes it as a solid case. More than 99 percent of all soil samples collected from the Texaco-remediated areas confirm that the remediation was effective, it says. More than 99 percent of all drinking water samples meet safe drinking limits for petroleum compounds as defined by the World Health Organization and the United States Environmental Protection Agency.

"Chevron is sympathetic to the plight of the inhabitants of the region," Robertson says.  "The area is plagued by a lack of infrastructure, crime, astoundingly poor living conditions, and a government that has all but abandoned the needs of its people."

Despite the statements from Hannah and Tyler,  Chevron encourages the international community to visit Ecuador, he adds. 

"We believe that if visitors objectively analyze the complete record, they will find irrefutable evidence that Texaco Petroleum Company acted responsibly and conducted an effective remediation program following the end of its involvement in the oil producing consortium in the 1990s," Robertson says.

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