Lack Of Bids Leaves Government With Tough Choices

An unsurprisingly weak response to Ecuador's 11th Licensing rounds reflects the continued negative impact of recent policy changes. However with even traditional players in the sector showing only minimal interest in the blocks on offer, Ecuador is confronted with a choice between reform to attract badly needed capital or to increasing an already heavy reliance on state owned players from China.

Ecuador received bids for only 3 of 13 blocks that it opened for bidding as part of its 11th licensing round. The country had been hoping to secure sizable foreign investment in order to prove up the resource potential of the blocks, located in the south-eastern Amazon region near the border with Peru. According to assessments made during the 1970s, preliminary resources estimates for the region were in excess of 100mn barrels (bbl) of oil. However, the government was hopeful that in light of recent technological advances, the region could hold between 800mn and 1.6bn bbl of oil.

Ecuador's 11th Licensing Round
Block Bidder
22 None
29 Repsol
70 None
71 None
72 None
73 None
77 None
79 Andes Petroleum Co
80 None
81 None
83 Andes Petroleum Co
84 None
87 None
Source: Wall Street Journal, Deloitte

Lack Of Bids Reinforces Bottom Ranking

Spain's Repsol and Andes Petroleum, whose main shareholders include CNPC and Sinopec, were the only companies to submit bids. The round was seen as a test of interest in the country's potential given that the 11th licensing round was the first to be held since the government enacted new terms. In 2010, the government introduced new fee per barrel service contracts.

The previous production sharing agreements were more profitable and attractive to the industry, and the weak response in the round confirms that the above ground risks remain too strong to justify the US$1bn in investment that Ecuador hoped to net from the round.

The licensing round had already seen its deadline extended twice, and while officials claimed this was to allow additional time for interested parties to review data, we noted it was more likely that this was a reflection of lingering concerns regarding the country's business environment ( see, 'Bid Round May Struggle As Operating Environment Outweighs Upside' April 25). Ecuador's position at the bottom of our Oil & Gas Risk/Reward Ratings underscores the deterioration in the outlook for the country in the wake of President Rafeal Correa's tenure. This had seen the introduction of policies increasingly tending toward resource nationalism ( see, 'Correa's Re-Election To Perpetuate Energy Sector Stagnation,' February 20).

BMI's Latin America Oil & Gas Risk/Reward Ratings
Upstream R/R Ratings Downstream R/R Ratings Oil & Gas R/R Ratings Rank
Brazil 63.3 58.7 61.0 1
Colombia 61.5 48.8 55.2 2
Peru 56.4 41.9 49.2 3
Chile 43.8 44.9 44.4 4
Trinidad & Tobago 51.0 37.4 44.2 5
Venezuela 51.0 36.2 43.6 6
Mexico 30.5 49.9 40.2 7
Argentina 35.4 44.8 40.1 8
Bolivia 43.9 33.7 38.8 9
Ecuador 35.9 38.4 37.2 10
Source: BMI

Decisions Ahead...

Absent greater investment from international oil companies, we believe Ecuador is due to become increasingly reliant on state owned Chinese companies. State owned firms from China have consolidated their control over an increasing amount of the country's oil, providing financing for the country at a time when other international sources were reluctant in the wake of a 2008 default.

Yet this has come at a cost, with reports revealing concerns from Ecuadorian officials that oil now currently directed to Chinese firms could possibly fetch higher prices if sold under a more transparent and competitive bidding process.

However even Chinese firms failed to show much interest in the blocks on offer. Although this may reflect particular concerns with the blocks themselves, including risks associated with opposition from indigenous communities in the Amazon, it may be a sign that Ecuador will have to offer greater incentivises to Chinese firms if they are to commit to more upstream investment.

...But Unclear What Choice Ecuador Will Make

Given Ecuador is likely to struggle to both maintain output at current fields, where rates of decline are high, and to finance new exploration, foreign capital will be necessary if the country is to firm up the outlook for its hydrocarbons sector. Thus the tepid response to the bidding round supports our view that continued challenges to the economic outlook for Ecuador more broadly are pushing the government to consider some measure of reforms ( see, Uptick In Oil Production To Boost Economic Growth,' November 19).

Ecuador is increasingly confronting a choice between working to make its sector more attractive or increasing an already high reliance on China. The failure of the 11th licensing round and recent criticism of Chinese investment in the sector could push the government towards offering some additional incentives to encourage wider interest. However such reforms are likely to be marginal and thus unsuccessful in generating a more significant increase in investment given the scale of the country's challenges.

This article is tagged to:
Sector: Oil & Gas
Geography: Ecuador

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