Petroleum And The Economy In Ecuador - Prospects

This article describes the close relationship existing between the economy and the production of oil in Ecuador, which makes the country almost totally dependent on it. The article focuses on the current situation of the oil industry and suggests some urgent measures aimed at fostering private investment and sustaining its socio- economic development.

Oil revenues

The Ecuadorian economy is highly dependent on oil revenues. The current price of oil is hugely favourable to the growth of the Ecuadorian gross domestic product (GDP), but this will not last forever.

There is a very close relationship between the price of a barrel of oil and the growth of the Ecuadorian economy. Ecuador became an oil exporting country in the 1970s. Currently, oil revenues account for 40 per cent of the national budget. Total oil reserves in Ecuador have reached 9,408,506,394 barrels, including proven, probable and possible reserves.

Total oil production at April, including the production of the state oil company, Petroecuador, and private companies, reached 526,491 barrels of oil per day. Despite this, Ecuador must make new investments in exploration and exploitation; otherwise, its economic development will be seriously affected.

Decline in oil production

During the first quarter of 2004, the domestic production of crude oil by Petroecuador has gradually declined, at a rate of 30,000 barrels of oil per day (bpd). The state oil sector has evidenced a sustained fall of 3.1 per cent per annum on average since 1994. In contrast, private companies have historically increased their production, reaching an average of approximately 330,000 bpd in 2004.

The state monopoly is managed with no criteria for reinvestment and technological improvement, with considerable inefficiency and

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constant increases in operating expenses. On the other hand, it is subject to variations and fluctuations in political management. Also, the loss of confidence in government policies has generated uncertain prospects.

Although the heavy crude oil pipeline, the Oleoducto de Crudos Pesados (OCP) has started operations, it does so at half capacity, just like the Trans-Ecuadorian Oil Pipeline System (SOTE), to the detriment of state revenues. The fall in production in the five major oilfields managed by Petroecuador (including Sacha) is due to lack of investment and technological obsolescence, which threatens even the possibilities for future extraction. On the other hand, for many years the country has neglected exploration and the adequate replenishment of reserves.

Large imports of oil by-products – including diesel and liquefied petroleum gas (LPG) – to mitigate the shortage in the domestic market have been a cause for concern, reaching 17,000,000 barrels in December 2003.

There are urgent calls for the Ecuadorian Government to define efficient oil policies through its Advisory Committee on Oil Matters, established via Decree 574 of July 2003. The main objectives of this Committee are reversing the decreasing trend in production, defining substantial projects with future projections and attracting private investment needed to sustain the sector’s growth.

Legal insecurity

Ecuador risks losing international prestige owing to the way it treats its oil sector, a fact that can discourage investments sorely needed to reactivate it. According to the Hydrocarbons Law, oil policies are dictated by the President of the Republic; however, in practice it is the Administrative Council of Petroecuador which assumes this function.

The most relevant aspect of the oil reform that needs to be undertaken is, without a doubt, greater private involvement. Other issues include new contract schemes, the generation of efficiency in the state sector and the re-establishment of the rule of law in current contracts. It is clear that in the Ecuadorian oil industry, the privatisation of public activities has already generated and will continue to generate greater dynamism in the near future. It is essential to enact stable, anticipated open and transparent laws.

Prospects

Between 2002 and 2003, crude oil exports grew from US$1.84 billion to US$2.38 billion, respectively – an increase of US$533 million, or 29 per cent. However, it is worth noting that the production of Petroecuador dropped from 81 million barrels in 2002 to 74 million barrels in 2003, while private production grew from 62 million to 78 million barrels in the same period.

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The completion of the OCP, which required close to US$1,500,000,000 in private investments, favoured an increase in total oil production, which rose from 385,000 bpd in 2002 to 494,000 bpd in 2003 (28 per cent). This had a favourable impact on the GDP, on the trade balance and on the balance of payments.

The increase in oil prices, from US$22.65 in 2002 to US$26 in 2003, allowed a surplus of close to US$290 million to accumulate for the Oil Stabilisation Fund. In addition, it is expected that the resources of the Fondo de Estabilización, Inversión Social

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