Ecuador’s oil expansion plans halted by protests, sabotage

By Stephan Kueffner and Peter Millard on 11/5/2019

QUITO (Bloomberg) - Ecuador’s plan to boost its economy by attracting foreign oil investment is falling victim to heavy resistance from indigenous groups newly empowered by the protests that rolled across the nation last month.

The 11-day uprising caused the government to rescind a fuel-price increase designed to meet austerity demands tied to a $4.2 billion International Monetary Fund loan. But perhaps more importantly, the protests helped spark a new push by indigenous groups against President Lenin Moreno’s plan to let foreign drillers invest billions to explore and develop deep in the Amazon region.

The oil industry’s outlook had been improving with Moreno ditching a decade of oil nationalism with business-friendly contracts. Ecuador also announced in October it was leaving the Organization of Petroleum Exporting Countries in January because it didn’t want to meet the group’s output limits. Now, though, after the protests cost Ecuador’s oil operations $130 million in lost revenue and repairs, the plan to boost production ahead is threatened.

Instead of drilling more oil, “we are working on economic alternatives for the country, so it can leave behind this dependence on oil,” said Severino Sharupi, a leader of the Shuar Nation from the southeast Amazon, where Ecuador hopes to expand oil operations.

Meanwhile, with the government locked in talks with the representatives for the indigenous groups, an auction of oil blocks in northern Ecuador is on hold while Moreno’s plans to open up more of the Amazon to drilling over the next two years stand to be even more difficult.

The protests damaged 101 wells spread across 20 fields and forced all 24 rigs to halt work, according to state-owned producer Petroamazonas. It’s a level of devastation that may keep investors on the sidelines until the end of the current administration in 2021, said Fernando Santos, a former oil minister who is now an industry analyst.

The ongoing talks between the two sides need to be successful to avoid future disruptions, Santos said. But for the time being, “foreign investment is dead,” he said.

Ecuador’s oil production has remain relatively steady for the past decade amid a lack of investment in an industry dominated by the national oil company. The government cut its 2020 target to 530,000 bpd from 550,000 bpd after the damage to production infrastructure during the October riots.

Rene Ortiz, a former OPEC secretary general who is now working as an industry analyst, believes there’s still a chance for a more positive result. To overcome opposition, authorities will need to share more of the spoils with indigenous groups that historically have been impoverished and dispossessed, he said.

In the past, he said, indigenous leaders received government posts and their communities gained soccer fields, clinics, or schools to win support for government policies. “What they want is to be consulted,” Ortiz said. He suggested the government consider legal changes to give a 1% royalty to indigenous communities from any new licenses.

The energy ministry, meanwhile, didn’t respond to multiple emails seeking comment on the protests or the next auction. Ecuador was just one of four Andean nations to suffer unrest in recent months in a development that will make investors more wary of plowing cash into oil projects that are vulnerable to protests and sabotage.

First-Round Success. Ecuador’s first round of oil bids was largely considered a success. Bogota-based Frontera Energy Corp. and Santiago-based GeoPark Ltd. are interested in a second bidding round for the Intracampos region, where demand was strong in March with seven of the eight blocks offered getting sold, the companies said in separate emails.

“Ecuador is an oil-producing country and has some of the best oil infrastructure in Latin America,” according to a statement by GeoPark sent by email. “Establishing a position in this oil system is central to our medium- and long-term strategy.”

Ecuador’s energy ministry didn’t respond to multiple emails seeking comment on the date for the next auction. Frontera said it is waiting for the government to provide a time line and conditions for the round to make a decision on whether it will participate.

Part of the reason Moreno swiftly walked back the fuel price increases was to diffuse any social tension ahead of the next round of oil bids, said Schreiner Parker, vice president for Latin America at consultant Rystad Energy.

“It plays into the wider story of having a social license to operate, which is something that oil companies didn’t talk about 15 years ago,” said Parker, who is based in Rio de Janeiro. As indigenous groups “begin to understand their power even more, they become an actor that has to be negotiated with going forward.”

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