Introduction: A Tricky Task

Following a period of stagnant production levels, Ecuador is in the midst of preparing a set of incentives to attract private companies to its oil sector.

Between 2004 and last year, oil production in Ecuador registered a compound annual growth rate (CAGR) of just 0.042%. In 2018, average output through May is at 518,000 b/d, 3% down from 2017. The government's goal is to reach a total output of 520,000 b/d by the end of 2018.

Recent developments have not helped foster the turnaround. The sharp decline in oil prices starting in 2014 severely affected the investment capacity of the local state-holding companies in recent years. Meanwhile, the country has been forced to adjust its output to the limits agreed between Opec and Russia in 2016, which set quotas to reduce oil production.

Holding the world's 17th largest oil reserves, comprised of 8.3Bb, Ecuador rejoined the cartel in 2007, after a 25-year hiatus outside the organization. The commitment has contributed to the recovery of the price of oil, helping producing countries balance their accounts while limiting exports. 

"A significant portion of Ecuador's output reduction is due to its membership in Opec. But it also results from the lack of investments and inefficiencies," Carlos Sarmiento, service provider Schlumberger's general manager in Peru, Colombia and Ecuador, told BNamericas.

The reduced level of investment is also explained by the fact that private companies generally operate through service contracts, being remunerated based on fixed rates agreed with the government.

In the past, Ecuador used to sign production sharing contracts with private companies but the government under former president Rafael Correa switched to the service contract model aiming to increase the public stake in oil revenues.

The perception is that the current fixed-rate system inhibits new investments as it limits future potential gains for oil companies, especially during a time of low oil prices.

Another problematic issue relates to the large debt Ecuador's former president Correa contracted with China through anticipated sales of oil. As most of these contracts were inked when oil prices were higher, the government is obliged to earmark a large amount of its current production to pay off this debt, which affects decision making and investments as well.


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