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Petroecuador’s Esmeraldas refinery, the largest in the Andean nation. (Photo: Petroecuador)
Wednesday, August 19, 2020

Ecuador Seeks More Private Oil Investment

Private capital will help solve Ecuador’s refining problems, experts say.

Inter-American Dialogue

Ecuador is looking for a private partner to invest in state-run oil company Petroecuador’s Esmeraldas refinery, the largest in the Andean nation, Energy Ministry René Ortiz announced this month. Ortiz said the process seeks to transfer and delegate a portion of the operations to the private partner, but the refinery would remain property of the Ecuadorean state. Is bringing on a private partner to invest in the Esmeraldas refinery a good idea, and to what extent is such an investment necessary to revamp the refining plant? Is new funding likely to solve technical issues that have been rampant at the refinery over the past years, and how big of an impact would a restored and fully operating Esmeraldas refinery have on Ecuador’s oil sector? What else should the government focus on in order to strengthen the country’s refining capacity?

Jose L. Valera, member of the Energy Advisor board and partner at Mayer Brown LLP: Bringing on a private partner to invest in and manage the Esmeraldas refinery is a good idea. Such an investment is absolutely necessary to revamp the refining plant. The Correa administration spent $2.2 billion on this refinery with almost nothing to show for it. The recurring problems include obnoxious odors and emissions that are making the local population sick, air pollution and no reduction of greenhouse gas emissions, substandard product fuel quality and inefficiencies, as measured by the amount of output relative to the amount of input. The Moreno administration is rightfully putting a stop to more waste of governmental resources. The intention of this measure is that a private partner will invest the capital necessary to make the required improvements and upgrades and manage the investment and subsequent operation. The private partner will have an economic incentive to ensure efficiency and to incorporate technological innovation and best practices. The Esmeraldas refinery has 65 percent of the country’s refining capacity. The impact of this measure will be substantial because the domestic fuel market is very poorly served at present.

As to additional measures, the government should follow this model to encourage the construction of incremental refining capacity. There is no reason for a government to be in the oil refining business, with all the attendant costs and economic risks. Instead of owning refineries, the government should instead direct its efforts to offering a good framework of regulations and contracts for the private sector to take the economic risks and contribute to economic growth.

Jorge León, member of the Energy Advisor board and energy economist at BP:  The Ecuadorean government is seeking a private investor to transfer the operations of the Esmeraldas refinery. This refinery was built in 1977 and has a capacity of 100,000 barrels per day; that is more than 65 percent of total Ecuadorean refining capacity. Minister René Ortiz, a very experienced and knowledgeable oil man, has stressed the fact that this would be a process to transfer and delegate a portion of the operations, but the refinery would remain the property of Ecuador. Furthermore, employees’ stability is assured. The aim of the process is to improve the quality of the fuels the refinery produces and, in particular, to produce fuels that are at least compliant with the Euro 5 standard. At the same time, the refinery produces low-value residual fuels that could be better processed and  used. Preliminary estimates suggest that the refinery desperately needs around $2.5 billion in new investment. Given the fiscal situation that the country is currently facing, finding a private partner seems to be the only way to attract that level of investment.

In the last few days, it was mentioned that more than 90 firms have shown interest in participating. Even though there is not an official timeline to strike a deal, the clock is ticking as the current government has less than eight months remaining in office.

Luis Calero Hidalgo, Ecuador- based oil analyst: Ecuador has a deficit in its production of fuels in order to be able to supply internal demand; about 50 million barrels of derivatives are imported annually, equivalent to 55 percent of demand. Additionally, the fuels produced nationally are of low quality, with a high sulfur content, above international standards. The production deficit means that Ecuador, with a dollarized economy, spent about $17 billion on fuel imports over the last five years. Solving the two deficits (in quantity and quality) is a national imperative in order to improve Ecuadoreans’ quality of life by having a less polluted environment and strengthening dollarization by restricting the outflow of foreign currency.

How can we do it? There are three ways:

1.) directly through public investment, 2.) completely delegating the management of the public company to the private sector and 3.) allowing the participation of the private sector to participate in public management.

The government has opted for the third one, although partially, in a restricted way, according to the decree it issued. It would have been ideal if the two aforementioned problems of quality and quantity had been addressed in a comprehensive manner, which would have then led to an expansion of the current national processing capacity (175,000 barrels per day) and, simultaneously, to a modernization of the three refineries (Esmeraldas, La Libertad and Shushufindi).

A replacement of the refinery management model should be included as an objective, based on the autonomy that was constitutionally granted to public companies.

Paola Gachet O., partner at Ferrere in Ecuador:  During the past months, Ecuador has been looking for different alternatives to improve the operation of the Esmeraldas refinery, historically in the hands of Petroecuador, a state-owned corporation. Due to Ecuador’s economic situation, Petroecuador is facing financial restrictions to invest in the required works, needed not only to maintain the existing infrastructure, but also to increase and improve its processing capacity. (Ecuadorean authorities announced their desire to improve the capacity to produce Euro 5 gasoline, a new project). Several projects (opex and capex) had been put on hold due to these financial restrictions. That represents the main reason why bringing a private partner for the refinery is not only a good idea, but an imperative solution. In addition, technical capacity is essential to deal with new technologies and for improving the administrative activities of the facility. The fact that the refinery is managed by a state-owned firm brings a series of limitations and inefficiencies that come with the internal operation of a state company, as well and restrictions imposed by law. In order to strengthen the country’s refinery capacity, the government’s offer needs to be attractive for private investors and provide clear rules and legal stability, as well as training the different controlling agencies to avoid any legal risk. The Ecuadorean economy has a direct relation with the refinery’s operation, considering that the oil sector deeply affects the national budget. Reducing imports of oil derivatives (diesel and gasoline) will reduce the amount of imported goods, giving a positive balance to a country that doesnot have its own currency and depends on the existence and entering of dollars to its economy.

Marc Becker, professor of history at Truman State University: Dating back to the 1970s oil boom, careful observers have noted that for every barrel of oil that Ecuador exported, the country became a dollar poorer. This has long been a key feature of resource extraction from marginalized economies—petroleum rents benefit industrialized countries to the detriment of those on the periphery. A central problem is the export of raw material from the Global South and the importation of finished goods, with all of the accrued value from their processing remaining in the industrial north. Over the past 20 years, a series of left-wing governments in Latin America have sought to reverse this pattern, but to no avail. Former Ecuadorean President Rafael Correa engaged in one of these honorable but ultimately futile ‘neo-extractivist’ experiments. On the surface, refining petroleum in Ecuador instead of exporting crude oil and importing gasoline and diesel appears to be a logical solution to these long-standing problems of underdevelopment, but unfortunately, that has never played out as planned.

Rather than moving forward to find a new and better solution—which would require a fundamental change on a global level in economic relations—Ecuador’s current rightwing government of Lenín Moreno is going backwards to previous failed and discredited neoliberal policies. The partial privatization of the refinery will only ensure that the petroleum rents will continue to flow out of the country and further impoverish Ecuadoreans.

The country would have been better off if it had never discovered oil, and instead sought to foster endogenous development strategies. 

Republished with permission from the Inter-American Dialogue's weekly Energy Advisor


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