What’s new in exploration

 Vol. 233 No. 11

In the last few years, Ecuador has renegotiated agreements under a new hydrocarbons law, received unusual international largesse from the UN, started production from a new field, and been subject to scrutiny and lost lawsuits over its treatment of indigenous people. This month, state-run oil company Petroamazonas will take over the E&P unit of state-owned oil firm Petroecuador, and launch a new lease sale.

A recent oil conference in Quito, the country’s capital and center of the oil industry, addressed predominantly technical subjects but also covered a few exploration topics. Two parallel sessions at the XII Ecuador Oil & Power Expo & Conference (Sept. 26–28, 2012) included panel discussions on exploration and increased reserves and enhanced recovery, and presentations on satellite imaging and geographic information systems and computational numerical simulations.

Reserves. As of 2011, Ecuador has proven oil reserves of 6.51 billion bbl—the third largest reserves in South America after Venezuela and Brazil. Most of the reserves are in its northeastern area, including 850 million bbl in the Ishpingo-Tambococha-Tiputini (ITT) Block, in Yasuní National Park, along the Napo River. Additional ITT development is postponed for 10 years, under a 2010 agreement between the government and the United Nations Development Program (UNDP). The international community will pay Ecuador $350 million/year to not develop the ITT Block, an agreement that merits a column all by itself.

Production. Ecuador produced 499,510 bopd in 2011, up 2.76% from the previous year, but still shy of the 2006 peak of 536,000 bopd. Oil from Pañacocha field in the Ecuadorian Amazon began in 2011. This was the first new production since the current government took office in 2007. The field is operated by Petroamazonas Ecuador SA, and includes eight wells producing 24°API crude from two pay zones.

Ecuador aspires to reach 600,000 bopd by 2013, through EOR projects in mature fields. Output increased in 2003, when the 300-mile Oelducto de Crudos Pesados (OCP) pipeline opened parallel to the 310-mile Sistema Oleducto Trans-Ecuatoriano (SOTE) pipeline.

Ecuador is one of Latin America’s largest oil exporters and rejoined OPEC in 2007 after having left in 1992. It’s the smallest OPEC member and has a production quota of 434,000 bopd, although the U.S. Energy Information Administration estimates that Ecuador exported only 285,000 bopd in 2010. The oil sector provides about half of the country’s export earnings and a third of all tax revenues.

New hydrocarbons law. The original production contracts were signed in the mid-1990s, and granted the state 17–27% of the first $15–$17 in revenue for each barrel sold. The operating companies were also subject to a 20% tax on windfall profits. In early 2006, the Ecuadoran Congress voted to increase the windfall profits tax to 60%, but then-President Alfredo Palacio scaled it back to 50%. He failed to win re-election. Fifteen foreign oil companies were operating in Ecuador at that time.
After Ecuador’s populist president, Rafael Correa, won the presidency later that year, he increased the windfall profits tax to 99%, and also seized the assets of Anglo-French energy company Perenco. Companies responded by severely reducing investments in the country.

 Under the new contracts, effective November 2010, Ecuador’s share of oil revenue rose from 70% to 80%. At that time, Ecuador’s Minister of Non-renewable Natural Resources, Wilson Pastor, estimated that the renegotiated contracts would redirect an additional $5.4 billion to the Ecuadorian treasury. However, the operators will only invest $1.2 billion in Ecuadorian development in the following four years, 2011–2015, equal to the amount spent in 2006, alone.

Foreign expertise. Major foreign oil companies still operating in Ecuador include Repsol, Chile’s ENAP and Italy’s Eni, as well as PetroOriental and Andes Petroleum, both representing consortia of Chinese companies. Brazil’s Petrobras and South Korea’s Canada Grande refused to accept the new contract conditions and left the country in 2010.

Another departure was Noble Energy, which had discovered, developed and operated Amistad natural gas field in the Gulf of Guayaquil. Noble opted to leave the country rather than renegotiate.

Lease sales. In October, the Ecuadorian government announced that it will call a licensing round on Nov. 28 for bids for oil exploration and production contracts for 13 blocks in the southeastern Amazon jungle, near the border with Peru.

Indigenous rights. A few months ago, Ecuador’s Kichwa Indians won a landmark case concerning abuse of local rights by exploration companies. On July 25, the Inter-American Court of Human Rights ruled that the Ecuadorian government had ignored indigenous rights when PetroEcuador awarded exploration rights to a consortium led by Argentina’s Compañía General de Combustibles (CGC) in 1996. By 2003, CGC had drilled 467 boreholes for a seismic survey around the Kichwa village of Sarayaku, and packed them with 1,433 kg of explosives. These were never detonated and remain buried around the town, home to 1,200 people. The seismic survey ended in 2003, but CGC’s contract did not end until 2010.

According to The Economist, the court found that the state had breached the villagers’ rights to prior consultation, communal property and cultural identity by approving the project, and that CGC’s seismic tests had threatened their right to life. It ordered Ecuador to pay damages, clear the remaining explosives and overhaul its consultation process. The court directed that in the future, affected groups must be heard in a plan’s “first stages…not only when the need arises to obtain the approval of the community.”