Ineptitude and corruption triggering privatizations in the Ecuadoran energy sector

By Alvaro Ríos

Former hydrocarbons minister of Bolivia and managing partner at Gas Energy Latin America

Corruption is one of the most despicable scourges that afflicts humanity. It makes wealth concentrate in few hands but poverty in many. It generates susceptibility, discomfort and distorts fundamental values such as effort, study, innovation and hard and honest work.

If to the existence of corruption, we add projects executed by state enterprises with ineptitude, quality deficiencies which are non-productive and unsustainable due to lack of market, studies and planning, the impact for citizens is tremendously perverse.

Exactly that has happened in the Ecuadoran energy sector.
It can be seen in the eight hydroelectric projects under construction without serious technical studies, or for market or future demand. Many of them suffer construction problems, such as the Toachi Pilaton fissures.

As there was an oversupply of electricity without demand, overnight an attempt was made to implement a program to replace induction cookers powered by LPG with others that function with electricity. A resounding failure due to the neglected need to strengthen the electric distribution networks. Improvisation after improvisation.

In the hydrocarbons sector - in the works carried out by Petroecuador in the Esmeraldas and Pacific refineries, the Bajo Alto natural gas liquefaction plant, the Pascuales-Cuenca  pipeline and the Monteverde-El Chorrillo LPG complex - more deficiencies have emerged; works with terrible quality and corruption during contracting. Many investigations are ongoing and several people have been detained.

Recall that a large part of these projects was financed with the future production of oil, seizing the country and landing it in the current critical economic situation that confines President Lenín Moreno. The total debt (external and internal) of Ecuador inherited in 2018 amounts to US$50bn.

Since the state cannot pay this high debt - while Petroamazonas, Petroecuador, Celec and other state energy companies are indebted and have run out of economic resources - there is nothing left to do but the much criticized and unwanted structural reforms to avoid entering a serious economic and financial default.

For this, they have had to raise subsidies for all gasoline except the standard. Subsidies to diesel have also been removed except for some sectors such as shrimp traders. The LPG subsidy is the big question, especially because of its high social impact.

Additionally, structural changes are being introduced in exploration and exploitation contracts, returning them to participation contracts where companies have all the risk and pay a share to the state. Recall that former president Rafael Correa had taken the contracts to a rate model, which captured a lot of income while oil prices were high, but mortally wounded the exploration.

In 2020, unfortunately, additional adjustments will have to be made and business units will have to be privatized and/or concessioned, reducing the size of the state. Petroecuador is once again joining Petroamazonas. Several of the operations of Petroamazonas will be negotiated and delivered to the private sector, in a kind of farmout.

The Pacific refinery, involved in a major scandal in association with PDVSA, should be addressed by the private sector if feasibility permits. Everything indicates that the state is also seeking to privatize or concession some hydroelectric plants and electricity assets. There is much more than is possible to name in the space of this column.

Not only Brazil is in the process of shrinking the size of state companies in the energy sector, now it is followed by Ecuador, and Venezuela will have to do it too, even though many of its assets are already under pressure due to their bulging debts.

Ineptitude and corruption when facing the projects and investments executed by state companies are detrimental to the welfare of the citizens of a country.

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Picture credit: KTSDESIGN / SCIENCE PHOTO LIBRARY / KTS / Science Photo Library