Bloomberg News

Occidental Dispute Marks Ecuador-Colombia Oil Divergence

October 09, 2012

Ecuador has seen its oil output stagnate since 2006. That’s when the country began increasing state control of reserves.

Next door, Colombia has invited international drillers, and production has boomed.

The two Latin American countries are diverging even more on their separate paths. Yesterday Ecuador decided to fight an order to pay $1.77 billion to Occidental Petroleum Corp. (OXY:US) in compensation for ousting the U.S. company in 2006.

Ejecting Los Angeles-based Occidental “was a bad deal because production began to fall,” said Vicente Albornoz, dean of the Universidad de las Americas business school in Quito. “Production fell all over the country because they created an adverse climate for investment.”

Ecuador is moving further into the camp of OPEC members that spurn foreign ownership of resources. The country with South America’s third-largest oil reserves is aligning itself closer to producers Venezuela and Iran in rejecting agreements that give global oil companies equity stakes in fossil fuels.

The consequences in most cases is that revenue to the government slides when state managers step in, in contrast to nations such as Colombia that welcome international operators and are experiencing soaring output and income.

Ecuador yesterday said it will appeal a World Bank arbitration panel’s record award for stripping Los Angeles-based Occidental of its concession and seizing its assets.

The case against Occidental, the largest onshore crude producer in the continental U.S., marked the beginning of a more than six-year push to boost state control in Ecuador that contrasts with Colombia, where private investment has seen output surge.

Attracting Capital

The neighboring country, which trailed Ecuadorean output before the expropriation six years ago, now produces about 444,000 barrels a day more than Ecuador.

As Ecuador increased the state’s participation in the oil industry, Colombia sold shares in state producer Ecopetrol SA and improved security and investment incentives for foreign companies, JPMorgan Chase & Co. analyst Benjamin Ramsey said.

Colombia has “successfully set up a model which has depoliticized the company and that has allowed them to make pretty efficient investment decisions,” Ramsey, a Latin America analyst in New York, said Oct. 4 by telephone.

Ecopetrol’s market value has surged to $122 billion, ahead of ConocoPhillips and Occidental, since the government sold a 10 percent stake in a 2007 initial public offering to fund expansions. The shares have gained about 28 percent this year, trouncing the 1.2 percent gain in the 67-member Bloomberg World Oil & Gas Index. Occidental lost 10.3 percent.

Output Slump

Since May 2006, crude production in Ecuador has fallen 6.2 percent compared with a 78 percent jump in Colombia, according to data compiled by Bloomberg. The gap swelled to a record 461,000 barrels in November 2011.

Ecuador stripped Occidental of its concession over an alleged contract breach, prompting the company’s complaint to the International Centre for Settlement of Investment Disputes, known as ICSID.

The settlement would be more than Occidental’s net income for any of the three previous quarters, according to data compiled by Bloomberg. Occidental has concentrated this year on drilling in onshore U.S. fields.

While Ecuador fought Occidental’s claims, oil prices rose to record highs, representing a lost opportunity for Ecuador’s government to collect windfall profits from higher oil exports, Universidad de las Americas’ Albornoz said.

New Contracts

WTI crude traded in New York, the benchmark for Ecuadorean oil, jumped 26 percent to $90.73 per barrel since May 2006. It hit a high of $144.29 per barrel in July 2008 before tumbling 77 percent to $33.87 in December of that year amid a global economic crisis. Prices increased as much as 1.8 percent today.

Ecuadorean President Rafael Correa, who inherited the Occidental case when he took power, continued efforts to boost state control of natural resources, nationalizing the country’s crude reserves and forcing producers including Spain’s Repsol SA to sign new contracts under threat of expropriation.

After the Andean nation’s Congress approved new oil regulations in 2010, the government renegotiated agreements with private producers, switching to service contracts from the previous production-sharing accords.

‘Too Soon’

In November of that year, Correa’s government canceled the contracts of four oil and natural-gas companies, including Brazil’s Petroleo Brasileiro SA and Houston-based Noble Energy Inc., when they refused to ink new deals. Ecuador reached agreements with five others giving the state control of reserves.

Ecuador’s Attorney General said yesterday that it’s too soon to say if the country will honor the arbitration panel’s final decision. President Correa’s administration, which defaulted on $3.2 billion of foreign debt in 2008 and 2009 and forced more than 4,400 mining companies to re-apply for permits as the government rewrote rules, has said it would refuse to comply with the court if it rules in favor of the company.

“Right now, it’s impossible to talk about compliance,” Garcia said.

Ecuador is seeking a new panel of arbiters and an annulment of the decision, he said. The country has 120 days as of Oct. 5 to challenge the decision and expects the appeals process to take as long as two years, Garcia said.

Ecuador’s Non-Renewable Natural Resources Minister Wilson Pastor declined to comment, an assistant said by telephone. Occidental’s press office didn’t immediately respond to a telephone message seeking comment.

Chevron Case

Separately, Chevron Corp. lost a U.S. Supreme Court bid today to block a $19 billion judgment by an Ecuadorean court in an almost two-decade legal battle over pollution in the Amazon. The court let stand an earlier federal appeals court ruling against Chevron saying judges in New York couldn’t bar a group of Ecuadoreans from seeking to collect the award anywhere in the world. Chevron says the judgment is the product of fabricated evidence and is the largest ever awarded by a foreign court against a U.S. company.

Ecuador’s dispute with Occidental, the nation’s biggest foreign investor at the time, revolves around the Andean country’s claim the company failed to obtain government approval to sell a stake in its so-called Block 15 concession in the Amazon rainforest to a unit of Canada’s EnCana Corp.

EnCana Deal

The two-part agreement called for Calgary-based EnCana’s AEC Ecuador Ltd. unit to receive a 40 percent interest and receive title to 40 percent of the oilfield contract after a four-year period. Ecuador canceled the company’s contract and expropriated its assets in the country in May 2006.

The field, now operated by a unit of state-owned PetroEcuador, produces about 149,000 barrels a day, according to Ecuador’s central bank, compared with about 44,000 barrels before the seizure. Total private-company output has plunged 46 percent since January 2007, the earliest year for which data is available.

As the two parties’ lawyers prepare for the appeals process, it’s too early to say how much the dispute will cost because it’s not clear Ecuador will respect the panel’s final decision, Universidad de las Americas’ Albornoz said.

“The most important thing is whether Occidental is going to collect or not,” he said. “Everything depends on that.”

The Organization of Petroleum Exporting Countries’ 12 members are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. Ecuador rejoined in 2007 after a 15-year hiatus.

Venezuela and Brazil hold South America’s largest reserves.

To contact the reporter on this story: Nathan Gill in Quito at ngill4@bloomberg.net

To contact the editor responsible for this story: James Attwood at jattwood3@bloomberg.net


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Companies Mentioned

  • OXY
    (Occidental Petroleum Corp)
    • $100.36 USD
    • -1.59
    • -1.58%
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