With Claudia Viale and Felipe Bedoya
Ecuador: the long road to hydrocarbon contract renegotiation.
On June 25, Ecuadorian President Rafael Correa sent a draft amendment to the Law of Hydrocarbons to the National Assembly. The text includes 28 articles and 5 transitional provisions as a basis for renegotiating all future oil contracts in the country. The Minister of Non-Renewable Natural Resources, Wilson Pastor, talked to the national newspaper “El Comercio” and highlighted the need to reform the oil contracting process to help move the country from production sharing agreements to service contracts, which would take in higher revenues for the National Treasury.
The draft law establishes a flat payment rate for exploration and exploitation companies that will cover their operating costs and compensate them for oil extraction services, and provides for an additional payment to companies that make new investments in exploration to increase reserves. The proposed amendment would also create the Ministry of Hydrocarbons, an entity that would administer contracts, as well as the National Agency for Regulation and Control, which would regulate oil companies' operation and would replace the current National Directorate of Hydrocarbons. Both organizations would be under the jurisdiction of the Ministry of Non-Renewable Energy. Finally, the proposed law includes an amendment to the tax system, reducing the percentage of profits that oil companies that provide exploration and exploitation services pay as income tax, from the current 44.4% that applies to all economic sectors to only 25%.
Rafael Correa's government has sought to renegotiate contracts with foreign oil companies and transition to service contracts since 2007, even without legislating a new regulatory framework for the hydrocarbon sector. Therefore, at that time, all contracts between Ecuador and the companies were written to expire in 2012, necessitating the negotiation of final contracts under the new legal framework. The amendment to the Law of Hydrocarbons submitted by Correa's office calls for the sector's principal contracts to be renegotiated within 120 days of the passage of this amendment and the remainder of sector contracts within 180 days.
However, reactions to the proposal, from both oil companies and trade unions, have been negative. Major oil companies operating in Ecuador, such as Brazilian state-owned company Petrobras, the Spanish-Argentinean company Repsol-YPF, the Chinese consortium Andes and the Italian company ENI, all disagree with the new legal framework, arguing that it underestimates the operating and financial costs to companies for extractive activities.
Meanwhile, the country's oil unions argue that the new framework favors the interests of transnational corporations. According to representatives of the Ecuadorian oil workers' union, the new law undermines the constitutional mandate that the state be responsible for managing strategic sectors through state-owned companies. They add that the new contractual model will hurt state-owned oil companies Petroecuador and Petroamazonas, since they would cease to control operation of existing oil blocks and the new contracts will be directly awarded to companies, according to Section 8 of the reform. In the words of former oil union leader Fernando Villavicencio, "The reform aims to transfer the fields operated by Petroecuador and Petroamazonas to foreign companies, with the goal of privatizing the most productive fields."
This double front against the Hydrocarbons Law reforms, drawing criticism from both industry and unions, comes as President Correa increasingly requires more resources to meet the social programs promised by his administration. Complicating the situation further is the fact that oil production and Ecuador's oil revenues have been falling recently, due to decreased investment from private oil companies uncertain about the future of their contracts, as well as the lowered productivity of oil wells operated by Petroecuador.
Consequently, President Correa has seen the need to take a more conciliatory approach with private foreign oil companies and stop demanding further exploration and exploitation without offering anything in return. Instead, the country is giving them incentives to increase their exploration and production to generate revenues for the National Treasury; among them the reduction in income tax rates from 44.4% to 25%.
Yacimientos Petrolíficos Fiscales Bolivianos (YPFB) and Petrobras of Brazil increase investment to raise oil production.
In mid-June, Bolivian President Evo Morales criticized the head of the state-owned oil company Yacimientos Petrolíferos Bolivianos (YPFB), Carlos Villegas, and the Minister of Hydrocarbons, Fernando Vincenti, for their lack of investment in the sector and for failing to develop the Bolivian Hydrocarbon Industrialization Company (Ebihara). Morales also urged hydrocarbon sector authorities to increase expenditures and investment projects to produce more natural gas, thereby ensuring domestic and external supply.
Indeed, Bolivia has been increasing its commitments to export natural gas to other countries in the region, and is simultaneously facing a significant increase of domestic demand. Specifically, Bolivia has commitments to export natural gas to Argentina and Brazil, whose demand in June was between 29 and 31 million cubic meters daily for Brazil, and 5 million for Argentina. Meanwhile, average domestic gas consumption in Bolivia exceeded 7 million cubic meters per day in the first half of 2010: a rise of more than 16% from the same period in 2009.
The growing export commitments and domestic demand have proven the need for increased investment in the sector to make more discoveries and enter new areas, thus increasing future oil supply. With regard to hydrocarbon investment, YPFB announced on June 20,that its own investment in Bolivian gas production reached US$ 332 million in 2009: 40% less than the US$ 552 million initially planned. For 2010, YPFB and private companies are slated to invest a total amount of US$ 1,415 million to develop the sector and ensure gas supply for the domestic and external market. YPFB's share of this total would be US$ 652 million, with the remaining US$ 763 million pledged from private companies like Repsol YPF and Brazilian state-owned company Petrobras, among others.
Similarly, in late June, Brazilian state-owned company Petrobras announced an investment plan wherein the company would allocate US$ 224 billion between 2011 and 2014 to various areas of the oil sector, with 54% going towards exploration and production. Investment in refinement, transportation and marketing represent another 30% of Petrobras' investment. The company had initially planned an investment of US$ 186.6 billion between 2011 and 2013, but has increased its investment by 20% in an effort to increase production and continue its exploration activities in the pre-sal area.
In its investment plan, Petrobras is already counting US$ 58 billion from a capital injection it expects to receive from the government, meant to increase its share in the ownership of Petrobras. The investment is established in one of the bills of Brazil's new regulatory framework concerning exploitation of pre-sal. However, since these bills have not yet been approved by Congress, Petrobras does not yet have the funds it is dedicating.
In both countries, the investment plans aim to increase hydrocarbon exploration and production according to the export and domestic supply goals that each nation has set for itself. For instance, in Bolivia, production in June 2010 averaged 42.7 million cubic meters per day and is currently projected to cover the country's domestic demand and export commitments to Brazil and Argentina.
However, Bolivia must also consider current attempts to negotiate an energy agreement with Uruguay, which includes the delivery of a fixed amount of Bolivian gas. Since gas delivery commitments to Argentina will increase sharply in upcoming years, while Bolivia's domestic market is also growing, the country needs to discover more hydrocarbon reserves to cover both internal demand as well as its export commitments in the region. Today, Uruguay has a demand of 0.3 million cubic meters a day—much smaller than those from Argentina and Brazil—but estimates suggest that it could increase in coming years to reach 3 million cubic meters daily.
In the case of Brazil, these investments are primarily intended to continue the development of exploration and production activities in the area of pre-sal. Thus, the company's goal is to increase hydrocarbon production from the 2009 rate of 2.5 million barrels of oil and gas to 3.9 million by 2014 and 5.4 million by 2020.
Oil and mining activities pollute Peru's rivers.
In late June, Peru suffered two serious accidents linked to extractive activities that severely affected local populations and the environment. Consequently, the absence of national policies and strategies to manage these sorts of accidents, and the failure of companies to comply with standards designed to mitigate extractive industries' socio-environmental impact, are once again being hotly debated in Peru.
The first accident was an oil spill in the Marañón River on June 19 near San José de Saramuro, in the Loreto Region in the northeast corner of Peru. The Marañón River is one of the largest in the country and feeds into the Amazon River. The spill came from an oil-transporting ship owned by Challenger Transport SA, which was carrying crude oil extracted from Block 8, northwest of the Loreto Region, while Pluspetrol Norte SA, the company which holds the concession of that oil block, was performing cleanup and maintenance of their pipelines. According to Pluspetrol, between 300 and 400 barrels of oil were spilled, out of the ship's total load of 5,000 barrels. After the accident, a contingency plan was implemented by Pluspetrol, together with state-owned company PetroPerú, to try to control the impact.
Just six days later, on June 25, a dam to contain waste from mineral extraction, owned by the company Caudalosa Chica collapsed and released over 21 billion cubic meters of toxic waste water into the Opamayo and Totorapampa Rivers, which flow through the districts of Huachocolpa and Lircay in the Huancavelica Region. Together with the villagers, about 700 mine workers cleaned the tailings from the rivers and repaired the collapsed dam.
The pollution from both the oil spill and the collapse of the dam that contained mining waste damaged the health of local residents who use the rivers for drinking waters and also affected the animal and plant life of surrounding areas, impacting fishing activities, agriculture and cattle raising on lands in the watersheds of these rivers. According to analysis from the Peruvian Amazon Research Institute (IIAP), which gathered samples from the Marañón River after the oil spill, the amount of hydrocarbons in the water was 500% greater than permissible levels. Similarly, in Huancavelica, thousands of trout were killed and many agricultural areas were affected because of the toxic waste spilled into the Totorapampa River.
Both ecological disasters exemplify an ongoing problem with no solution in sight. Firstly, companies with a history of pollution often continue to ignore warnings from authorities and local people and fail to comply with social and environmental standards established in the countries where they operate.
Secondly, the state lacks the capacity to control extractive activities and punish those companies which cause these types of ecological disasters. Indeed, the Caudalosa mine was releasing its untreated waste to the Opamayo River without any repercussions. Representatives from the Regulating Entity for Investment in Energy and Mining (Osinergmin), had already identified problems with the dams and notified the company, but did not continue monitoring them.
Finally, the damage caused by the environmental impact of these extractive activities also opens a discussion on whether or not to establish a moratorium on mining and oil activities until the country establishes standards for economic and ecological zoning, land use planning and the clear delineation of responsibilities and powers of the Public Regulating Entity to oversee industry activity and prevent accidents like these.
Sources: El Comercio (Ecuador), El Universo, La Hora, La Razón, El Deber, Folha do Sao Paulo, El Comercio (Peru), Página/12, La República (Colombia), Perú21
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