Political Risk Latin America Blog @PolRiskLatam

If it ain’t broke…

Posted in News and Articles, Political Risk by politicalrisklatam on November 30, 2010

by S.K. for The Economist – Americas View, November 29th, 2010.

For four years Rafael Correa, Ecuador’s populist president, has sought to renegotiate the country’s contracts with foreign energy companies, who he says have been earning far too much for the oil they extract from beneath its Amazon forests. Once his officials reached new terms with the firms this year, however, Mr Correa skipped the signing ceremony, held on November 23rd. He had good reason not to draw attention to the new agreement: Ecuador would have fared far better if it had simply kept the previous scheme in place.

Under the old contracts, signed in the mid-1990s, the state took 17-27% of the first $15-$17 in revenue for each barrel sold. The companies kept the remainder and any proceeds above the $15-$17 cutoff, a highly favourable arrangement for them. In 2006, after the world oil price reached $70 a barrel, Mr Correa’s predecessor, Alfredo Palacio, imposed an additional 50% tax on the firms’ revenues, ensuring that the state would receive a healthy share of the windfall. The companies continued to produce oil in spite of the new levy, although some of them also sued the government before international arbitrators.

After taking office in 2006, Mr Correa announced he was unsatisfied with the system he inherited, and that he hoped to move to a fee-for-service system like Mexico’s, in which the government would pay the companies a fixed amount for their work and keep all revenues from oil sales for itself. His government never made a formal proposal to the companies along these lines until August of this year. But in the meantime, he increased the windfall-profits tax to 99%, and seized the assets of Perenco, a French energy company, while threatening to do the same to the other firms. In response, the companies began cutting back on their business in Ecuador. Since Mr Correa took office in January 2007, private oil production in the country has fallen from 255,700 barrels per day to 162,000—a gap worth $2.3 billion a year, or 4% of GDP, at current prices. (continue reading… )

 

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