Nationalization Bug Prepares to Bite in Ecuador

[phantom power]

Ecuador could arrive at an agreement with U.S-owned City Oriente to end its contract to produce crude oil in the Andean nation, Ecuador's Energy Minister Galo Chiriboga said Monday.

(...)

The previous administration of President Alfredo Palacio mandated that when oil prices rose above those laid down in operating contracts, the government's share of the excess would be 50%. The new administration of President Rafael Correa raised that to 99% in October 2007.

The companies have said these decrees make their businesses unprofitable, and some have started legal proceedings.

City Oriente, based in Panama and backed by U.S. investors, started in 2006 an arbitration process at the World Bank's International Center for the Settlement of Investment Disputes, or ICSID, against the Ecuadorian government, claiming that the new royalty breaks the terms of its operating contract.

http://www.rigzone.com/news/article.asp?a_id=57366

[DFW]

1. Correa is playing to the crowd, but at the country's expense

With oil at $100 a barrel, Ecuador got 50% of what is now $100 a barrel, essentially
just for sitting on the oil and doing nothing. I know Ecuador somewhat, and they
are so poor, they have no means to extract the oil themselves. The 50% was a bonus
for them (as well as the oil companies, obviously) and he could have not rocked the
boat by raising the tax on the excess to 60% without making it more worthwhile for
the oil companies to pull out of Ecuador completely. Their costs may be well covered
with oil at $100 a barrel, but not if all they get is $1 per barrel after paying
off Correa. Even Chávez won't go in there and extract their oil for free (or even
1%). I hope for the people of Ecuador (and their economy) that Correa finds a tax
level that the oil concerns can live with, and still makes it worthwhile for them to
operate. The country desperately could use the money. The oil companies need to
spend on environmental damage cleanup, as well, and if they pull out, they'll just
leave the mess that is there now. If Correa can negotiate a deal that leaves the oil
companies with some financial incentive to clean up and continue operating, then
they'll both benefit (the oil concerns less so than before, but they won't turn down
a profitable deal). If he removes all incentive for them to be there, they'll leave,
and leave Ecuador to clean up the mess on its own, which it is not able to do on its
own at this time.

[phantom power]

2. Hmm. What is the " worthwhile" price of a disappearing resource?

This is a manifestation of the export-collapse. Nations are already beginning to internalize the fact that they have a certain amount of oil left, and they can see the end of it.

Kind of like the difference between me having a water well, which I can use to sell water, or me having a cistern, with a certain amount of water that won't be replaced.

How much do I charge for that water, if it's the cistern and not the well?

[DFW]

3. Same story all over the resource-rich third world

If they have the natural resources but no cash/technology to exploit it,
do they let it sit and their population try to climb out of poverty by
other means, or get a piece of a pie they know they have, but can never
access? Ecuador is further complicated by the pollution aspect, as the
oil companies so far haven't paid a lot of attention to it, as long as
the government was willing to get a cut. Corruption is rampant there, though
not as all-pervasive as in other countries I have been to. I have good friends
in the government there, but they are all archaeologists working on finding and
preserving relics of the country's incredible long history, and not part of any
ministry having to do with energy or development. I love the place and the
people, but to close my eyes to the desperate poverty in the country would
be to lie to myself. When you have zero, anything looks good. A government
that attempts confiscatory tax policies on foreign investors had better have
something to offer the populace in its stead, because if the foreign investment
pulls out altogether, the instability will rise, not diminish. Empty bellies
fight hardest--they have nothing to lose.

[phantom power]

4. Yes, I do see your logic...

In the bigger picture, the fact that all the choices are perilous is just one more symptom of being in checkmate.

[DFW]

5. Basically, you 've got it

My friends down there were born into a society that condemns 95% of them
to exactly nowhere. A tiny fraction of them manage to get their kids in
scholarships abroad, but if they make it, plenty of them never return home
except for cruises in the Galápagos. No one of both ability and integrity wants
to hang around, which leaves crafty demagogues and idealists who get discouraged,
along with people with no hope and a lot of anger. Most of the fancy
hotels are owned by foreigners, and even the better restaurants owned by locals
need armed soldiers at the door to prevent armed bad guys from robbing the place
and everyone in it (not good for repeat tourist biz, as you can imagine).

This is all, believe it or not, more than indirectly intertwined with our foreign
policy, as a friendly, engaged program of help (with no strings attached, which
practically eliminates all Republican administrations) would still be welcome. The
last time I was down there, there was some lawyer from Kissinger and Associates,
trying to coerce the government into awarding some deal or other to some hi-paying
client of theirs. The Ecuadorian government was having none of it, and didn't
appreciate the pressure tactics, but Republican-oriented people apparently still
think this is the way to get things done down there, and they can't seem to accept
change. Kissinger must still think it's Santiago, 1973.