Ecuador's energy sector expecting little change with new president
Under President Rafael Correa, Ecuador embarked on an ambitious development program that included a number of large scale works for the energy sector, characterized by closer ties with "friendly" nations, in particular China, to secure the financial resources required to carry out the projects amid the adverse commodity pricing environment for the oil-dependent economy.
To provide perspective, BNamericas spoke to José Ontaneda Andrade, a lawyer and energy expert from Quito law firm Ontaneda & Posso Abogados.
BNamericas: Energy policy in president-elect Lenín Moreno's government plan does not vary much from that of Rafael Correa's administration. What is your outlook?
Ontaneda: I believe that the same course will be maintained and not much will change in terms of energy policies.
We understand there'll be continuity and our principal partners will be Asian countries, China especially. Also countries with which we have had a traditional relationship, such as Iran and others from the Middle and Far East, therefore I don't believe there'll be a dramatic change.
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BNamericas: Many argue that Ecuador has "mortgaged" itself to China due to so much energy sector financing the country has taken on from the Asian giant. What impact has this had on Ecuador?
Ontaneda: The impact of the high interest loans has been very negative, starting from very small aspects.
For example, the practice of North American and European oil companies always has been to implement high investment policies in the countries they enter.
These companies rented housing for their managers, presidents, vice presidents and high level officials that fluctuated between US$2,000-3,000 [a month], which drove the real estate market.
With the arrival of the Asian companies, these began to rent much smaller and cheaper apartments for US$500 for up to 5-12 officials in each one.
Then there are the excessive interest costs. We're talking about annual interest rates that border 7% and up to 12%. Bilateral credits, government to government, are excessively expensive.
We've had to mortgage our oil for five to seven years. That is the guarantee that Ecuador has with these countries. There also is the issue of an oil price freeze, amid the greatest oil sector crisis due to the low price.
Therefore, in seven years if oil is US$140, US$150 or US$180 a barrel, I cannot sell it at that price because I pledged it at US$40.
BNamericas: Authorities heralded the start of crude production at Tiputini as a major milestone. Do you believe this undertaking will help Ecuador sustain or even increase oil output?
Ontaneda: It's true that what is expected is an increase in production and with that an increase in the state's coffers from the sale of oil from that zone, but let us also not forget that we returned to OPEC in this government and last year we signed an agreement to lower production.
If we're exploring and exploiting new fields and at the same time reaching agreements with the international community, in this case with OPEC, for a reduction of 26,000b/d, we're shooting ourselves in the foot.
At one time, the government had a very good five years with the increase in production and price, with investments carried out, many resources spent, but at year seven the country began a decline, not only due to internal problems but also the international context.
BNamericas: Another flagship project is the Pacífico refinery, whose development has come under question.
Ontaneda: The construction of the refinery was one of the worst fiascoes or economic, social and technical failures that could have occurred in the history of world oil.
One, its location for Ecuador is inconvenient due to seismic reasons. Keep in mind the earthquake that hit Ecuador last year. A very important geological fault had been detected years ago, and authorities could have been warned.
Second, its construction without first having secured an adequate and financially qualified strategic partner was a serious mistake. We ventured into the construction of a US$12bn-25bn megawork and Ecuador is a country that cannot expose itself to this type of megawork, as we don't have the capital.
We partnered with Venezuela when Venezuela had already faltered economically and the first symptoms of economic turmoil that could cause problems for Venezuela and also its partners, such as Cuba, Nicaragua and Ecuador, started to be seen.
Later we announced pledges with Asian countries that turned their backs on us.
Until we reached the day that we were left without a partner and a very big white elephant with an investment of approximately US$1.2-1.8bn only for earth movement and the aqueduct, which is an interesting proposal but didn't benefit anyone at all.
Today, the properties where the refinery was going to be installed is home to eight or 10 state entities.
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BNamericas: Turning to the power sector, Correa's government has pushed through a number of large-scale hydroelectric projects, such as the 1.5GW Coca Codo Sinclair complex, substantially increasing Ecuador's installed capacity. What's your assessment?
Ontaneda: Undoubtedly, in the energy sector, with respect to hydropower, the construction of projects and large works is interesting. So much so that we would have capacity to export electricity to Colombia, that is a positive aspect.
The problem or worry continues to be the very long-term pledges we have with Asian companies, many of which are very good, others mediocre and poor, but what interests us is that they not be services or goods acquired at high costs.
Maybe they weren't very well negotiated, but it's indisputable that Ecuador's power infrastructure has gone through a real revolution.
For a look at power projects in Ecuador, go to the BNamericas Project Profiles Database, which includes:
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