Snapshot: Ecuador migrates back to PSCs

Ecuador's decision to return to production sharing contracts (PSC) from service contracts may add new impetus to upstream hydrocarbons activity, which has been dominated by the state since former president Rafael Correa did away with PSCs in 2010 to take back control of natural resources.

The service contract has not been an appropriate contract model to boost exploration, and oil reserves of fields operated by private companies have not increased significantly in recent years, according to a presentation by hydrocarbons minister Carlos Pérez García.

The shift looks to move away from state-driven investment to direct private investment, and apply contractual forms and models which are flexible to adapt to any given market condition.

The PSC model is expected to be applied in the planned Intracampos and Sur Oriente licensing rounds, which will act as a litmus test to gauge how successful this policy about-face is in courting new investment.

INTRACAMPOS

Intracampos is due to launch at-end November and will offer eight areas with estimated investment of US$1.25bn. Awarding is scheduled for May.

SUR ORIENTE

In the case of Sur Oriente, a call for bids is penciled in for the end of 2Q18, with geological and geophysical data available for 16 blocks that cover a combined 27,930km2.

Authorities highlight the proximity of the areas to Peru block 192 and Peru field Situche-Central, within block 64.

PERSPECTIVE

To learn what some observers think of this contractual change, BNamericas asked three sector analysts and experts for their opinion.

Luis Fernández Pérez, general manager, Gas Energy Latin America Peru:

"There is no doubt that this is an important step for Ecuador, nevertheless, I consider that it is still insufficient to compete with Colombia, Brazil or Mexico. The problems in Ecuador are profound and require more than an isolated measure, regardless of it being a good measure.

It is necessary to remember that today, at the global level, companies have reduced their investments in exploration and have focused on countries with little geological risk and little country risk. Country risk in Ecuador continues being high."

Marco Baltazar, Latin America upstream research, Wood Mackenzie:

"A PSC could definitely generate interest from E&P companies if the right incentives are in place. Service contracts work under some circumstances, but they are not attractive for exploration. Ecuador has tried to attract investment through the previous model without success in the past. A change to a PSC, especially in the case of the Intracampos and Sur Oriente rounds that have been announced, is a step in the right direction and will provide Ecuador a better footing when competing against Mexico or Colombia for investment.

It still remains to be seen how these PSCs will look like, but we hope that a bigger focus is given to additional work commitments over additional participation in production for the upcoming rounds if the government is serious about exploration.

I do not personally believe it will cause any fractures with previous views under the past administration because we live in a very different world. The previous views were valid when prices were high and the government was trying to maximize the revenues from oil, but the challenges that the oil and gas downturn has brought to countries like Ecuador, where oil is such an important component of their GDP, is forcing the government to rethink its view on those policies. The Ecuadoran government needs to make up for those lost revenues, and attracting investment to increase production is one way to do so."

José Ontaneda Andrade, Quito law firm Ontaneda & Posso Abogados:

"This is the system of contracting that was in place in Ecuador up until president Correa decided to change the modality of contracts. This system of contracting assured better revenue for the Ecuadorean state which is why, without a doubt, I believe that President Moreno has reason that it will be better for the country.

It is without a doubt, even for private companies, a much clearer rule and they know what to abide by with greater clarity."

Read Ecuador's migration to service contracts, five years on, Leonardo Sempértegui Vallejo, Partner, Sempértegui Ontaneda Abogados

Pictured: Minister Perez at hydrocarbons sector promotion presentation (CREDIT: Hydrocarbons ministry).