Publish in Perspectives - Wednesday, October 11, 2017
Experts praise Ecuador's new oil minister Carlos Perez, pictured with President Lenin Moreno (middle) and the new CEO of Petroecuador, Byron Ojeda. (Photo: Ecuador Oil Ministry)
The new government’s transparency drive set to help energy sector.
BY ENERGY ADVISOR
Ecuadorean President Lenín Moreno’s administration in late August said it is commissioning a foreign auditing firm to look over the technical and financial terms for five oil-sector projects that have had serious operational failures despite large investments. What are the likely root issues causing the operational problems? Will these problems amount to big setbacks for the country’s oil sector? Is the oil sector being properly managed under Moreno’s government? Is the Moreno administration likely to bring forward any major oil-sector reforms as a result of the audit?
Santiago Mosquera, professor at USFQ Business School: News in the oil sector is positive. From the appointment of Hydrocarbons Minister Carlos Pérez to the most recent results of a bidding process for small oil fields, there is plenty of evidence that the sector is likely to improve under the administration of President Lenín Moreno. Minister Pérez, who has a long experience at top-ranking positions in multinational companies both locally and abroad, has made a complete assessment of the oil industry in less than three months, improving transparency on the real financial situation, which is clearly weaker than originally expected. After years in complete obscurity, the government has made public the existing credit oil facilities with Chinese companies and Thailand’s PTT, while the foreign auditing will provide an external opinion on the technical situation of key public assets. Some service-providing contracts, which have affected state-owned Petroamazonas’ liquidity position and triggered the accumulation of debts at the hydrocarbons ministry, are under revision, thus improving the government’s take in the oil business without private players threatening to leave the country. Private interest in the oil industry remains strong, as evidenced by the number of consortia participating in the bidding contest for small oil fields. New bidding rounds are expected in the short term. This is particularly positive, since the sector has suffered from a lack of investment in exploration and production in recent years, which explains the evolution of crude output—total output shows a 4.1 percent decline from its peak in November 2014, but after excluding the output of the ITT project that started in 2016, the reduction across mature fields is 12.9 percent.
Jose L. Valera, partner at Mayer Brown: Moreno’s government is not turning out to be Correa 2.0, as Correa and his loyalists expected. Moreno’s government is uncovering and bringing to light all sorts of murky deals, shady public accounts and corruption that took place over the past years. The oil-sector projects under audit include 1) the Pacífico Refinery, a joint venture between Petroecuador (51 percent) and PDVSA (49 percent) with Odebrecht as the main contractor and where little can be shown for the hundreds of millions already spent; 2) the Pascuales Cuenca fuels pipeline, which is showing serious soil stability issues and a lack of facilities for pressure control; and 3) the overhauling of the Esmeraldas refinery, which can’t operate at nameplate capacity and is producing gasoline that cannot meet quality specifications. Their problems, among many others, are a big setback for the country’s oil sector, which is the main source of revenue for the government. The sector does require deep reforms, and the Moreno administration is likely to bring them forward. Bringing to light prior malfeasance is a good start. Also encouraging is Moreno’s declared policy change concerning exploration and production activities. The prior service model provided no incentives for exploration and ensured that Ecuador’s production remained stagnant, at best. The Moreno administration has announced that future contracts will be under a joint venture or ‘participation’ model. When companies will have a right to keep a percentage of the production, they will have the proper incentives to risk capital in exploration. This is what the country needs to replenish its reserves and ensure greater production.
Ramiro Crespo, president of Analytica Securities in Quito: Thanks to the lack of transparency in the oil sector, one way of getting into the oil business in Ecuador is to get into politics. Under Moreno’s incompetent predecessor, corruption was rampant in the sector, and the state oil companies were used as cash cows without meeting proper accounting standards, which the audit will undoubtedly reveal. The shoddy construction of these series of major projects, which was probably repeated in other industries like electricity, inflicted a greater damage on state coffers than on the industry itself. The investigation of Vice President Jorge Glas and others is just beginning to confirm the scale of the theft. The audits also provide an opportunity in the very capable hands of Oil Minister Carlos Pérez, a career private-sector oilman, to clean house and emulate at least the partial privatization that went ahead in Brazil and Colombia, providing greater controls of these assets—and increase in value—by shareholders, markets, district attorneys and public opinion in general. The greatest failure was in refining, with at least $3.7 billion thrown out of the window or embezzled. Ecuador should consider getting out of this low-margin, dirty business and concentrate on oil production, increasing profitability and cleaning Ecuador’s urban air. Under Pérez, whom I deeply respect, Petroecuador has successfully resumed selling oil in the open market, highlighting the amount of graft in the previous administration’s oil trading and shipping, with billions in shady loans-for-oil deals with China that will require further legal review.
Leonardo Sempértegui, partner at Sempértegui Ontaneda in Washington: The auditing process is a direct consequence of the clamorous collective petition for transparency about the use of public resources in the execution of energy, extractive industries and infrastructure projects over the last 10 years in Ecuador. It is safe to say that most of the energy experts in Ecuador, myself included, believe that corruption is the main reason for the found operational problems in projects. They were poorly conceptualized, designed and executed (in some cases, starting construction without final designs)— decisions that can only be explained by scandalous negligence or ignorance (which is not likely), or plain corruption. Since the auditing will be focused on new or upgraded facilities (pipelines, refineries, etc.), I don’t think exploration and exploitation activities would be severely affected. Regarding the management of the oil sector, President Moreno’s government is starting to send some encouraging signals. The hydrocarbons minister is a well-qualified and reputable professional, the government has made clear that it is not going to cover up corruption scandals from the previous regime, and it is talking about looking for new private investors under more conventional production-sharing agreements, discarding the services contract that resulted in damaging both the state and the operator. Let’s hope these good hints do not stop at good intentions. One of the main pending tasks is the restructuring of the state oil company (Petroamazonas EP), to make it an efficient corporation, about which the government has been silent. Beyond the Petroamazonas-specific reform, there is no need for major changes in the sector, since the current hydrocarbons law provides the tools to attract investments. Transparency (which probably is the most needed characteristic now) is a matter of attitude more than regulation. Public, international auctions should be the rule, and directing contracting should be a very limited exception.