Ecuador's draft constitution approved by voters over the weekend will not have a major impact on the OPEC-member country's oil industry, Eurasia Group analyst Patrick Esteruelas told BNamericas.
"I would say that the constitution is not really the document to watch out for when trying to map out the future of the oil sector in Ecuador," he said. "The outcome of the current contract talks between the government and the oil companies are a much more important benchmark."
The constitution gives the central government greater control over the economy. Although it does not cite the energy industry extensively, the document calls for sustainable development of natural resources, over which the state has exclusive rights, according to its text.
"To the extent that the constitution of course calls for greater state control over so-called strategic sectors including oil, it does pave the way for greater state intervention in the future," Esteruelas said. "But that's something we've already been seeing in ongoing contract negotiations."
CONTRACT NEGOTIATIONS
Talks between the government and oil producers entail converting existing participation contracts into service provider ones, where the state would reimburse companies for their operations.
Companies, which in principle have agreed to talks with the government, are holding out for terms. "At the moment we are at a complete standstill," Esteruelas said.
Andes Petroleum, the largest private sector producer of crude in Ecuador, has inked a one-year "intermediary" contract that reduces windfall taxes to 70% from the normal rate of 99%. At the end of the contract year, Andes Petroleum must enter into a service provider contract with the government.
Other companies such as Repsol YPF (NYSE: REP) want to discuss new contracts now rather than enter intermediary deals that could create additional uncertainty, Esteruelas said.
Companies want service provider contracts to offer a variable payment model reflecting operating costs as well as past and future investments. The government, however, is leaning toward a fixed fee that might not reflect future investment opportunities.
"Until both sides essentially are able to come to an agreement on the details and the terms of the new service contracts, frankly I don't see any progress whatsoever," the analyst said.
"The distance is pretty huge," he said of the government and company positions. "In terms of overall fee charges or prices, you could be talking of anywhere between US$30/b and US$60/b. So it's quite a gulf."
Meanwhile the likelihood that companies will sign service provider contracts becomes more remote every day, as they would have to pay past-due windfall payments upon entering a new contract model. Ecuador increased windfall taxes to 99% in October 2007.
For example, Andes Petroleum was forced to pay US$100mn when it signed the new deal in past-due taxes. "The longer you wait, the greater the chance that you may have to owe the state in past-due taxes essentially the value of the entire block you're holding onto."
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