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Ecuador could benefit from Russia’s oil ban

Washington’s decision to ban Russian oil has left refiners in the U.S. scrambling to secure new sources of heavy crude. Ecuador, a country that has been struggling for more than a decade to revive its flagging oil industry, has the potential to provide that oil

Ecuador could benefit from Russia’s oil ban

Quito, April 19 - Neftegaz.RU. For over a decade the deeply impoverished South American nation of Ecuador has battled to revive its flagging oil industry.
Washington’s decision to ban Russian energy imports in the wake of the invasion of Ukraine has sparked speculation that Ecuador, which has oil reserves of over 8 billion barrels, can fill the supply gap, Oilprice analysed.

Since 2021, U.S. refiners have been looking at whether Ecuador can supply the heavy oil that many of their facilities are configured to process.
According to Bloomberg, U.S. refiners Valero and Marathon as well as Shell have held meetings with Ecuador’s oil company Petroecuador, responsible for over 75% of the country’s petroleum output, to secure supplies of crude oil for their operations.

These events have sparked considerable optimism for Ecuador’s government that the country will be able to attract the foreign capital required to revive its ailing petroleum industry.

Heavy-handed government intervention and corruption, notably during former President Correa’s decade in office, coupled with an unfavorable regulatory environment acted as significant deterrents to foreign investment.
The steady decline of Ecuador’s hydrocarbon sector weighed heavily on the country’s petroleum-dependent economy.

Despite Moreno’s reforms, Ecuador’s oil industry failed to attract the desired level of private investment, in part because of the considerable uncertainty created by the 2021 presidential election.

Lasso, who is Ecuador’s 47th president, issued a decree containing a 100-day action plan, aimed at significantly boosting the country’s oil production.
An essential element of that decree was opening-up Petroecuador’s operations to private investors, renegotiating existing contracts to encourage greater investment and privatizing government-owned assets.

Lasso is also in the process of renegotiating existing service agreements with a view to transitioning them to PSAs thereby reducing the government’s financial burden and incentivizing greater petroleum industry investment.
These steps are crucial to boosting oil production which will deliver an economic windfall for Ecuador’s ailing debt-laden economy where petroleum extraction is a key growth driver.

Oil rents, which are essentially the gross profit generated by petroleum production, according to the World Bank, were responsible for 6.7% of Ecuador’s 2019 gross domestic product.
Crude oil is also Ecuador’s largest export accounting for nearly a quarter of all exports by value during 2019.
Those numbers underscore the petroleum industry’s importance, which is rising because of substantially higher prices, as a source of income for a cash-strapped national government.

While Lasso is targeting oil production of 1 million barrels per day by 2025, there are signs that Ecuador is struggling to grow production despite all the recent industry reforms.
For January 2022, Ecuador only pumped an average of 442,789 barrels per day, a worrying 13% decrease compared to a year earlier.

The privately-owned OCP and Petroecuador’s SOTE pipelines are the only means of transporting oil extracted in eastern Amazon basin to the Pacific port city of Esmeraldas.
Severe riverbed erosion in the Napo Province has been a serious operational hazard for the pipelines since the completion of Coca Codo hydroelectric dam.

Landslides were responsible for rupturing both pipelines in April 2020.
The OCP pipeline was again ruptured by falling rocks in late-January 2022.
The risks posed by erosion and landslides are constant, as well as oil spills, are likely because of rockfalls causing ruptured pipelines.

These events highlight that considerable investment is required, to overhaul and replace Ecuador’s aging petroleum infrastructure.
Repayments for oil-backed loans from Asia, taken out by Correa to fund infrastructure & social projects were absorbing anywhere up to 90% of Ecuador’s oil exports.

That coupled with infrastructure outages and a lack of investment in industry operations is weighing heavily on Ecuador’s ability to ramp up oil production and exports to meet increased U.S. demand.

Author: Matthew Smith

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