Oil pipeline to make Ecuador a leading petroleum producer
Ministry of Energy and Mining takes advantage of country’s wealth in natural resources and opens for private capital

Rich in natural resources such as oil and gold and featuring unparalleled biodiversity and a prime geographic location, Ecuador is an ideal target for foreign investment in petroleum, energy and mining — a role it is both ready for and welcomes. To encourage and hasten investment in its largely unexplored resources, the Ministry of Energy and Mining has made its top priority the development of alliances with multinational corporations to expand the country’s infrastructure and provide Ecuador with multimillion-dollar projects that inject new capital into the economy and create jobs for its people.

A small country, about the size of the state of Colorado, Ecuador experienced a petroleum boom in the late 1970s that boosted the economy and changed the composition of the country’s GDP. The sector’s growth eventually stagnated due in part to global events, but mostly owing to a politicized petroleum industry, whose rules and regulations were broken by those who enacted them. Lack of investment in the country’s infrastructure also hindered the sector’s growth.

Over the years, oil production of state-owned Petroecuador and multinational corporations operating in Ecuador had been restricted by the limited transport capacity of the Trans-Ecuadorian Pipeline System (SOTE). Because SOTE could only transport 400,000 barrels of crude oil per day, excesses had to be stored. Although the corporations were willing to invest in expansion of their oil fields, the need for an alternate transport facility stopped them from doing so.

In recognition of this long-standing problem, which existed well before his administration came into power, President Gustavo Noboa signed an executive decree that opened the hydrocarbons sector to allow for more private investment and pushed forward construction of the new Heavy Crude Oil Pipeline (OCP), which has the capacity to transport about 450,000 barrels per day. As a result, Ecuador is likely to experience a new petroleum boom.

The contract for the pipeline was awarded to OCP Ecuador S.A., comprised of five multinational petroleum companies — Alberta Energy Company, AGIP Oil Ecuador BV, Kerr McGee Corporation, Occidental Petroleum Corporation, Perez Companc, Repsol YPF — and Techint, a construction company. Investment in construction of the OCP is $1.1 billion. Hernan Lara, President of OCP Ecuador, indicates that an additional $2.5 billion will be invested to expand infrastructure needed to produce enough crude oil to fill up both SOTE and OCP. According to Mr. Lara, during construction of the OCP 7,000 direct and 50,000 indirect jobs will be created. In addition, OCP Ecuador will employ about 300 people during the 20-year period it manages the pipeline. As stipulated by the contract, construction should be completed 25 months after its start on June 26th of this year.

A billion-dollar project, OCP includes construction of a 503 km pipeline that will transport hydrocarbons from Lago Agrio in Nueva Loja to the OCP Maritime Terminal in Balao, Esmeraldas. “After studying five alternative routes we chose the northern route because it had the less environmental impact. The OCP will run parallel to the SOTE in most of the terrain, but will diverge because there is an area that has high seismic activity,” says Maria de Los Angeles Mantilla, the company’s government affairs director.

Construction of the OCP is generating many opportunities in the state-owned petroleum industry. “The new OCP enables us to open the ninth round of investment in the fields of the oriental side of Ecuador, where we are encouraging private sector participation,” says Rodolfo Barniol, Executive President of Petroecuador. Petroecuador is looking for a joint venture in what he claims will be one of the most important oil fields in Latin America. The project will consist of the exploitation and development of the Ishipingo-Tambococha-Tiputini (ITT) fields, located in the northeastern Amazon region. The estimated investment for this project is $2 billion.

Petroecuador is also looking for partners to invest in the many projects its affiliates, Petroproduccion, Petroindustrial and Petrocommericial, are involved in. These projects include construction of high conversion refineries, combustible terminals and gas pipelines. Mr. Barniol expects to see $300 million increases annually in investments in Petroecuador’s operations. (In the upcoming fiscal year, Petroecuador’s contribution to the budget is an estimated $1.6 billion, with another $200 million earmarked for the added value tax.)

In the opinion of Christian Davalos, Executive Director of the Association of Petroleum Exploring and Exporting Companies (Asopec), the petroleum sector’s greatest challenges will lie with the government’s ability to provide transparent rules and security in investments and to effectively manage the sector’s earnings. He believes that the creation of the Petroleum Stability Fund, which serves as a budgetary safety blanket for variations in the price of petroleum, is an important measure, but that the government should be more conservative when estimating the price of petroleum for budget purposes. He is, nonetheless, confident in Ecuadorians’ ability to further develop their country’s resources.

The government of Ecuador believes that private investment is the best solution for overcoming problems in the electricity sector, most of which are due to lack of funding. Through the National Council on Modernization it is offering for concessions its electricity distribution companies. Multinational corporations such as AES, Union Fenosa and Perez Companc are among the bidders.

Ecuador’s underdeveloped mining sector also has tremendous potential for growth. Many international corporations, as well as joint ventures with local partners, are investing millions of dollars in Ecuador’s oriental region for exploration and some exploitation of minerals, primarily gold. Among them are Hampton Court Resources, I Am Gold, Norman Gold, Ecua Corriente and Cominzasa. They are undeterred by obstacles such as obsolete laws, environmental witch hunts, and invasions of their fields by informal miners, who sometimes use techniques that are detrimental to the environment. Petitions from the Chamber of Mining have led the Ministry of Energy and Mining to develop norms and regulations calling for heightened transparency of rules and to guarantee the million-dollar contracts the investing companies have signed.