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Ecuador: Investor Concern Grows

Perenco threatens to leave Ecuador as the government plans to raise coporate taxes.


Ecuador’s government continues to deter new private investments despite its growing economic crisis. Ecuador's economy is expected to decline by 2 percent this year, according to estimates from the International Monetary Fund. The fall is due to a combination of falling revenues from oil, its top export, and declining foreign and private investments.


One of the latest examples of a foreign investor getting ready to pack their bags and leave Ecuador is oil company Perenco. The UK-based firm today warned Ecuador that it may leave the country unless the government of President Rafael Correa complies with orders of two international arbitration tribunals that prohibit it from seizing oil produced by a consortium of Perenco and Burlington Resources Oriente Ltd.


Meanwhile, Correa is now planning to raise taxes in a move that is expected to hurt the private sector further, experts warn.


The actions by Correa are part of his efforts to make Ecuador more socialist, as he pledged to do before winning re-election last month. “I really dislike multinationals,” he said during a radio program on July 4th. “I know of the disasters they have caused in third world countries, in Ecuador.”

In March, Ecuador’s state oil company Petroecuador started to confiscate crude oil produced by Perenco Ecuador and Burlington from Blocks 7 and 21 as part of efforts to collect back taxes the government claimed were owed. 

Such a move was ruled illegal by two different panels at the International Centre for the Settlement of Investment Disputes (ICSID). One ruled in favor of Perenco in May, another in favor of Burlington last month. Despite the ICSID tribunal orders, Petroecuador carried out three auctions of the crude oil it has seized from Perenco Ecuador and Burlington, Perenco said in its statement.


"The Government's conduct in violation of the tribunals' orders has left Perenco Ecuador and Burlington exposed to all the cost and risk of operations at Blocks 7 and 21 with no corresponding revenues,” Rodrigo Marquez, Latin American Regional Manager for the Perenco Group, said in a statement. “This situation is unsustainable. The consortium cannot be expected to produce oil for the sole benefit of the Government of Ecuador. Accordingly, not only will Perenco Ecuador contemplate the possibility of enforcing its rights against buyers of the seized crude, but Perenco Ecuador and Burlington have today informed the Government that they imminently will suspend operations unless the Government complies with the tribunals' orders."

Ecuador announced earlier this month that it had pulled out of the ICSID in a move that is expected to further deter foreign investments, according to experts.

Meanwhile, Correa’s government yesterday revealed further details in a new tax reform, which will boost the minimum corporate tax rate as well as taxes on alcohol and tobacco. "
The introduction of a minimum corporate tax is set to ring alarm bells for the private sector, which is already struggling to cope with the effects of the economic slowdown,” UK-based Global Insight said in a commentary today. “Representatives of the liquor industry have expressed concerns over the planned reform, arguing that higher taxes would depress sales and thus not result in higher tax revenues for the government.”

Despite growing attacks against foreign investors, the Obama Administration decided to extend Ecuador’s duty-free access to the United States under the ATPDEA program (while suspending Bolivia’s access). However, in a letter to Congress last month, President Barack Obama warned that “my administration will monitor Ecuador’s investment policies to ensure that Ecuador continues to meet its BIT obligations.” President Obama also criticized Ecuadorian government meddling in the environmental trial against Chevron. “The U.S. government has encouraged Ecuadorian government officials to refrain from commenting on ongoing judicial cases,” Obama wrote, referring to the Chevron case.

Chevron has repeatedly denounced government meddling in Ecuador's judicial system, including statements by Correa favoring the plaintiffs in the $27 billion lawsuit against the U.S. oil company.

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