BLACK GOLD

Ecuador has come up with a roadmap to double its crude oil production during President Lasso’s time in office.

PRESIDENT LASSO BECAME THE STAR OF THE SHOW at COP26 in Glasgow when he opened the summit by announcing his nation’s intention to go green in a big way. Indeed, there have been many signs following the summit that Lasso’s administration is taking real measures to make the Latin American nation’s economy more eco-friendly. Ecuador still sticks to its commitment to unconditionally reduce its greenhouse gas emissions around 25% by 2025. However, this does not mean the country will shut down its oil industry, which has been a driving force of Ecuador’s economy for many years. While the country is determined to make many of its industries carbon neutral and reduce the effects of Amazonian oil exploration activities, the oil industry itself is not seen as necessarily evil. Ecuador does not see any contradiction between taking a green turn and upgrading its oil industry.

In 2021, Ecuador announced its plan to double its oil production in the space of four years. The country had left OPEC a year ago to unshackle itself from OPEC’s quotas and frequent production cuts. The Andean nation’s economy was affected by COVID-19 in 2020-2021; in 2020, GDP saw a 7% decline, and 2021 was no better. With oil prices moving up in 2022, Ecuadorian decision makers are determined to ride on the back of rising crude oil prices to kickstart and restructure the economy.

The government’s rationale for ramping up production is that oil may soon lose its value as a major source of energy, and it should be exported as much as possible while it is still valuable. Juan Carlos Bermeo Calderón, Minister of Energy and Non-Renewable Natural Resources, told the media in 2021 that “oil has to be exploited now because tomorrow it will not be needed.”

Ecuador’s oil industry has for years suffered from over-regulation, aging infrastructure, and mismanagement. President Lasso, who won the election in 2021, believes his country’s petroleum industry has much room for improvement. As one of his earliest acts in office, Lasso signed an executive decree (No. 95) to kickstart a series of reforms and developments in the petroleum industry, improving the sector’s previously poor outlook. However, it will not be an easy feat. In 2021, Ecuador exported just under 500,000bpd, and ramping up that figure to 1 million barrels is not simply a matter of twiddling a dial and pumping out more oil from the reservoirs. A total overhaul of the petroleum infrastructure and visionary policymaking are needed.

In late 2021, the Minister of Energy told TBY that “to reach 1 million bpd, we have to set gradual benchmarks for partial compliance goals and to ensure accountability over time,” also adding that his ministry was planning to reach the 500,000bpd mark before the end of 2021. That milestone was indeed achieved; Ecuador produced 502,000bpd in December 2021, and the next target is 583,000bpd for 2022. The 1 million bpd target also means that drilling projects must start in new places of the country.

Exploration activities are underway in different regions of Ecuador. In 2022, Petroecuador will drill some 40 new oil wells in Ishpingo-Tambococha-Tiputini (ITT) in the Amazonian basin. The region is expected to be oil rich, containing at least 1 billion barrels of crude oil, although exploration activities will be fraught with complications as the wells are dangerously close to the Yasuní National Park, which is protected both for its biodiversity and indigenous people. The Minister of Energy has reassured the media that the project will proceed under the “best technical, environmental, and social conditions.”

Inviting private and foreign companies to invest in the industry is one of the possible solutions, and if the contracts are formulated fairly, they can lead to a win-win situation for both Ecuador and the investors. S&P Global, a Manhattan-based business intelligence firm, has estimated that the realization of President Lasso’s proposal to double crude exports will come with a “price tag of USD12 billion.” Foreign investors also care about transparency, absence of corruption, and a guarantee that their investment will not be affected by currency devaluation. To achieve a higher level of investor confidence, the current administration has put in place anti-corruption measures such as the ISO anti-corruption protocol, as well as the dollarization of contracts. Using an anchor currency in contracts is now a selling point for the Ecuadorian oil sector.

It is expected, as such, that foreign companies will try to increase their market share in oil exploration and production in Ecuador. “Petroecuador produces around 80% of the total oil production of the country. There are plans to increase that production by promoting private investment,” said Pablo Luna Hermosa, general manager of Petroecuador to TBY, adding that Petroecuador’s “objective is to meet the production goals set by the government. In this way, foreign investors will be able to have greater legal security, which is important and profitable for both the state and the company.”

An oil rig pictured at night in Ecuador’s Amazon region