Q&A: Ecuador Moving From Crisis To Opportunity

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(Argus, 8.Oct.2020) — Since leaving Opec in January, Ecuador has been hit by oil market shocks, the Covid-19 pandemic, oil pipeline ruptures, and a staggering legacy of corruption in the state-owned oil industry. Quito is now looking to the private sector to transform the fuels market, and to Beijing for more oil-backed credit. Energy minister René Ortiz, a former Opec secretary general, spoke with Argus senior contributing editor Patricia Garip about the road ahead.

What has life been like for Ecuador since exiting Opec?

Ecuador’s decision to leave Opec was based on austerity and the expectation that we would be producing above 700,000 b/d. But this was under normal circumstances. We were expecting a price floor of $50/bl and no ceiling. In December last year, 2020 looked optimistic for everyone. At the famous Davos meeting, everyone was talking about growing prosperity. Opec was expecting around 2-3pc oil demand growth. The world was preparing for a positive first quarter. Even when Wuhan closed, everyone thought they would manage.

And all of a sudden we get to April. On April 7, Ecuador’s three pipelines collapsed. China was closing. The Saudis were giving discounts, even though they were preparing for Opec ++ on April 9. There were about 60 exporters there. I remember the chairman, a Saudi minister, calling each of us so enthusiastically to present the Opec white paper and sharing the scenarios starting with a cut of 10mn bl. The Saudis thought they could easily get an agreement and they couldn’t. The Mexicans said they weren’t ready.

Back in March, the Saudi sources of information were very clear. I think the Russians did not understand that we were heading for a real market collapse. That is what started the oil price war. Those were the circumstances under which I was appointed minister. Two days later the pandemic started and I have never been back to my office. We are doing everything through the internet.

The first quarter was also when Ecuador entered the mining market on an industrial scale for copper and gold. And electricity as well, we have become a trustworthy supplier to Colombia and Peru. Back in December 2019, Ecuador’s economic priorities were mining, electricity and hydrocarbons. Now the priorities are social and health needs.

In this tough environment, how did you decide to deregulate the fuel market?

Monetizing industrial assets would have been difficult in this context because people want to see the sites and they can’t. So we decided to start by changing Ecuador’s entire energy picture.

This government was inaugurated in 2017 with 48 ministries. It was inconceivable that a government could be so big. So we started by dismantling state enterprises. Demonopolizing the internal fuels market meant many legislative and presidential decrees, which was done very properly. We took advantage of the shrinking of the Ecuadorean economy by around 35pc.

PetroEcuador was importing high-octane gasoline at a rate of 70pc to satisfy internal demand, and 80pc for premium diesel. So we decided to index the domestic prices to WTI, full stop.

People began to understand the tremendous sacrifice of importing so much fuel. It was the market that eliminated the fuel price subsidies. We introduced a price fluctuation band of 5pc. We started at $1.75/USG for extra gasoline and Ecopais, and $1 for diesel. This was too low but it was the president’s decision in order to help reactivate the economy with fuel for trucks. Since then prices have hardly gone up.

The next step is for the private sector to import fuel at Euro 5 standards, at unregulated prices. The private sector can also bring in the same quality gasoline that PetroEcuador is supplying, but then it is subject to the regulated price band. The more fuel the private sector imports, the less will be needed from PetroEcuador, and that will take fiscal pressure off the government.

What are the required regulations to get this going?

The regulations will address the use of PetroEcuador’s infrastructure — ports, marine terminals, pipelines, land terminals, storage. This should be coming in the next few days. Whatever applies to the private sector will apply to PetroEcuador to ensure competition. So there will be competition and quality for the first time.

If you want the regulated gasoline or diesel you can have it at your own risk, considering whether it is good for your car. Remember the price for our 89-octane super gasoline is already free and set every month. The consumption is very small, but it has started to educate people about the market.

Is imported gas a possibility as well?

We want the private sector to introduce new fuels such as LNG. The Amistad gas field that started 20 years ago is declining and is down to only 19mn-20mn cf/d. Industrial end-users such as ceramics plants are beginning to switch to diesel which is so polluting. The idea is to import LNG to offset Amistad’s decline and transform the transportation sector using CNG.

And now Ecuador is looking for investors to operate the Esmeraldas refinery.

Esmeraldas produces fuel that is not locally consumed. That’s wrong. We need a big intervention and that can only be done with the private sector. We issued another decree to delegate the refinery to the private sector and to install a deep conversion train. People are very interested.

The 40,000 b/d Libertad refinery is very old and we were going to close it. Many of the workers got Covid because there is no camp for them in the city. But when we introduced the decree for Esmeraldas, investors asked, why not do the same for Libertad? Probably in the next few weeks I will also open up that refinery for transfer to the private sector to improve all equipment and add new processing units. Now investors are asking about the Shushufindi refinery too.

We took advantage of the pandemic, in the sense that it gave us a chance to work on ideas without much interference.

With so many other refineries on the market, what is the case for investing in Esmeraldas?

We are talking about $2.4bn in investment, so only high calibre companies will come, including engineering companies that know the business. There is the possibility of forming consortiums to take advantage of this 25-year management contract with a per-barrel fee. PetroEcuador will buy the crude for the refinery and then take the products. This turns PetroEcuador into a new company that can buy crude as well as sell it.

All of Ecuador’s industrial installations suffer from technological obsolescence. We have to change that. PetroEcuador spent $2.2bn at Esmeraldas without doing anything. There was incredible overpricing, and some of the work wasn’t even needed. There are ministers, directors, supervisors in jail, hundreds have been indicted and sentenced. Some have fled. That money was entirely wasted. Companies witnessed this from the outside and know what happened. We have to maintain the rule of law and respect for contracts.

How much of an advantage is Ecuador’s use of the US dollar?

A dollarized economy is sustained on three legs: direct foreign investment, exports and debt. We have exhausted the debt so we only have the other two. For investors, the refinery is an ongoing business and the dollar is an advantage because they can also export products. Ecuador is well-positioned on the Pacific coast to sell marine fuels under the new IMO regulations. Other refineries on the Pacific are not producing to Euro 5 standards. You have to go up to Long Beach for that, but in California they are subject to dismantling.

Climate change decisions are taking us into a new world, but we are positioned for that too. Especially on electrification. Only one fifth of our hydro potential is being used. And we are moving into solar in Galapagos, all with the private sector. The site of the Pacific refinery project will have a solar plant. We will receive proposals for that in the next couple of months.

We inherited legal problems from the former regime. Ecuador faced many arbitration cases. We lost them all and are paying those sentences. We still have more to deal with and probably we may end up negotiating with them. We are ready to talk.

Will Ecuador go back to China for more oil-backed credit?

China Development Bank will head this syndication, with a German bank included this time. Ecuador succeeded in restoring credibility by renegotiating $17bn in bond debt, with a grace period of five years, so this will be good for the next government after the elections in February 2021. The signing last week of a new letter of intent with the IMF is also part of rebuilding our credibility. We shrank the size of the government, but we still have to pay the workers who left. So we need more money.

We want a new contract with China to be different from the previous contract to make it strictly government foreign debt, one sovereign credit. We still owe close to 200mn bl under the existing contracts. Now PetroEcuador will no longer be the debtor but it will have a long-term contract with the Chinese trading companies, at market prices using its formula. There are more than three Chinese trading companies, they are competing among themselves, we can see that. PTT could be part of this too. This will be signed in the next month or so.

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