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The new find will boost Ecuador's oil output. Currently, some 80 percent of its oil goes to Chinese intermediaries. (Photo: Secretaria de Hidrocarburos)
Eni said the Oglan discovery well flowed at 1,100 barrels a day in tests. (Map: Geoyasuni.org, Analytica)
Wednesday, October 1, 2014
Perspectives

Ecuador: Oil Relief


The Oglan field would hold an amount of oil equivalent to a third of the ITT field.

LATINVEX SPECIAL
Analytica

Italian energy company Eni recently announced that its Agip subsidiary had discovered an oil deposit that might hold some 300 million barrels heavy, 16-degree API crude in the oil block 10 it has run since 2000 (see map).

The find at a site called Oglan is equivalent to a third of the country's biggest unexploited conventional oilfield and to approximately 1.5 times a full year's production. While unlikely to immediately reshape oil policy, it may well mark a shift in industry interest towards the eastern Andean foothills. In the short term, it will bring a sigh of relief from the government.

Under President Rafael Correa, in office since January 2007, Ecuador has struggled to attract new exploration. Last week, Ramiro Cazar, an official at state oil producer Petroamazonas, acknowledged that the company aims to add 25 million barrels to reserves, down from 75 million last year. Output meanwhile averaged around 530,000 barrels a day in 2006, declining well below 500,000 during the years that Correa demanded a renegotiation of contracts to ensure a greater share of revenue for the state.

Since renegotiations ended in January 2011, production has recovered. In the first half of 2014, output occasionally topped 560,000 barrels, and averaged a daily 553,431.68. In September, however, it has dropped below 550,000 barrels a day, hinting at a possible production peak. This has affected Petroamazonas and its subsidiaries, as well as private companies.

Under the contract terms imposed by Correa, companies are paid a fixed fee per produced  barrel, which accounts for production costs, amortization, and a return on the company's investment. Petrobras, the largest foreign producer, refused the change in contract terms and departed, with its assets passing to Petroamazonas. It and its subsidiary Río Napo currently pump 78 percent of Ecuador's oil, in part however thanks to operations wholly run by service companies including Schlumberger in consortiums with other partners. Chinese-owned Andes Petroleum and PetroOriental, Repsol of Spain, SIPEC, owned by Chilean state-owned oil company ENAP, and Agip, besides smaller locally-owned consortiums, produce the remainder of Ecuador's oil. Among the larger producers, Andes and Repsol each pump around 30,000 barrels a day, with the others producing close to 12,000.

Eni said the Oglan discovery well flowed at 1,100 barrels a day in tests. Its data indicated that the Oglan find has a production capacity of up to 2,000 barrels per day per individual well.

The field lies 7 km from processing facilities of Agip's Villano field, also inside Block 10. Agip nonetheless needs further studies to confirm details for the find's commercial production. If it can prove its initial estimate, the Oglan field would hold an amount of oil equivalent to a third of the Ishpingo-Tambococha-Tiputini (ITT) field in northeast Ecuador, which Petroamazonas is currently developing. The state company doesn't plan to start pumping oil there before 2016. At the same time, some 800,000 people earlier this year signed a petition against developing the ITT field block because it lies almost wholly inside the Yasuní National Park, a preserve that protects numerous unique plant and animal species, as well as nomadic rainforest warriors still clinging to their original way of life.

Agip's block faces some specific environmental challenges, although less than in the ITT case, which has garnered global interest. Block 10 is one of Ecuador's southernmost production areas. To the south, it borders the Sarayacu Kichwa indigenous territory, which is strongly opposed to oil extraction. Incidents have included a power cut to Agip's operations in a financial dispute between an indigenous community and the company in March 2008. The company should avoid the pitfalls regarding consultations that have dogged the government in its moves to develop ITT and fields south of the Yasuní Park.

Agip, meanwhile, will likely require a higher base price under the fee-based contract scheme, perhaps around $50 per barrel, to develop the heavy-crude Oglan deposit. At the same time, the government gains a breather in its quest to increase production while extending Ecuador's production horizon. It will thus make the administration somewhat less dependent on Chinese companies and funding. Currently, Ecuador provides some 80 percent of its oil to Chinese intermediaries, who export most of the oil to the US, to pay back upfront financing provided by China's national development bank in recent years.

While a surprising event, Agip's discovery provides evidence that oil companies have been correct to focus their interest on the eastern Andean piedmont. Over coming years, new production will thus likely shift southwest from current oilfields, where Ecuador has pumped oil since 1972. In a tender in November 2013, companies ignored the Amazon lowlands on offer to the southeast, due to indigenous resistance from Sarayaku and other communities and because of limited prospects of finding commercially viable deposits. Instead, Repsol bid for oil block 29, and Andes Petroleum for blocks 79 and 83, not far from the big long-term prize for major oil producers, Pungarayacu. This field holds 4.5 billion to 13 billion barrels of ultra-heavy tar deposits, but recent development efforts have been unsuccessful. The government is currently in the early stages of negotiations with the China National Petroleum Corp., a shareholder in Andes and Petrooriental, over the field.

Hopefully, Agip's find will open its eyes to negotiations with additional suitors.

This commentary originally appeared in Ecuador Weekly Report published by Analytica. Republished with permission.

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