By global standards, Ecuador is a relatively small oil producer and exporter. However, the oil sector plays a prominent role in the country’s politics and economic welfare. The oil sector accounts for about 50 percent of Ecuador’s export earnings and about one-third of all tax revenues.
Despite being a crude oil exporter, Ecuador must still import refined petroleum products due to the lack of sufficient domestic refining capacity to meet local demand. As a result, the country does not always reap the full rewards of high world oil prices — while these high prices bring Ecuador greater export revenues, they also increase the country’s refined product import bill.
Ecuador rejoined the Organization of the Petroleum Exporting Countries (OPEC) in 2007, after leaving the organization at the end of 1992. Ecuador is OPEC’s smallest oil producer and exporter. Despite an increasingly challenging investment environment, Ecuador has managed to slightly increase production since 2009.
Ecuador’s energy mix is largely dependent upon oil, which accounted for approximately 70 percent of the country’s total energy consumption in 2010. Hydroelectric power was the second largest energy source, though its share of Ecuador’s electricity generation — nearly two-thirds in 2008 — has declined in recent years due to droughts. Non-hydro renewables constitute another important part of Ecuador’s energy mix, almost all of which is attributable to the use of bagasse (the fibrous residue of processed sugarcane) in industry and the traditional use of biomass in rural households. However, estimates of Ecuador’s biomass consumption are inherently imprecise due to the fact that traditional fuel wood is not typically bought and sold in easily observable commercial markets.
Ecuador is the fifth-largest South American oil producer and a leading source of crude oil imports for the U.S. West Coast.
Ecuador, though only the fifth-largest oil producer in South America, is one of only two Western Hemisphere states belonging to OPEC. Ecuador produces approximately 500,000 barrels of crude oil per day (bbl/d), most of which is exported. The United States is Ecuador’s largest crude oil customer, but Ecuador has begun to look towards the Asian market, namely China, as an alternative export market and source of investment. Resource nationalism and debates about the economic, strategic, and environmental implications of oil sector development feature prominently in the politics of Ecuador and the policies of its government.
According to the Oil & Gas Journal (OGJ), Ecuador held proven oil reserves of 7.2 billion barrels as of the end of 2011, an increase from the year before. Ecuador claims the third-largest oil reserves in South America after Venezuela and Brazil. Most of Ecuador’s oil reserves are in the Oriente Basin in the eastern part of the country, underlying the Amazon.
Petroecuador, the national oil company, controls most of Ecuador’s crude oil production. Petroamazonas is Ecuador’s other major state-run oil company, which the government tentatively plans to merge with Petroecuador, while Río Napo acts as a joint venture of Petroecuador and Petróleos de Venezuela. Major foreign-owned oil companies operating in Ecuador include Repsol (Spain), Eni (Italy), Enap (Chile’s state-owned company), and Andes Petroleum, which is a consortium of the China National Petroleum Corporation (CNPC, 55 percent share) and the China Petrochemical Corporation (Sinopec, 45 percent share). The Ministerio de Recursos No Renovables (Ministry of Non-Renewable Resources) has regulatory oversight of the oil sector.
Ecuador permits foreign investment in its hydrocarbon resources, which are exclusively owned by the state, but the nature of contractual terms and legal uncertainties have deterred private investment. In November 2010, the government of Ecuador completed its contract renegotiations under a new hydrocarbons law, which replaced production-sharing agreements for private companies with a fixed per-barrel fee for their exploration and production activities. The new framework is designed to increase the government’s take, but led some companies — including Noble Energy and Petrobras — to abandon their upstream presence in Ecuador.
The changes to Ecuador’s legal framework continue a trend towards policies of resource nationalism in the oil sector. In 2006, Petroecuador took over the production assets of Occidental Petroleum as a result of expired contracts. In 2009, following a tax dispute, the government also appropriated two blocks assigned to Perenco. Chevron’s lengthy legal battle with Ecuadoran plaintiffs is a much different issue, waged in a different arena, but also raises questions about the potential costs of investing in Ecuador. In February 2011, an Ecuadoran court ordered Chevron to pay over $18 billion in damages to indigenous communities that it had found to be harmed by Texaco’s operations in Ecuador between 1964 and 1990 (the company was later acquired by Chevron). Chevron is appealing, and an international tribunal is due to rule on the matter in 2014.
Since 2009, Ecuador has agreed to three separate loan agreements with China that were explicitly backed by oil deliveries. Under these agreements, Ecuador is required to invest a share of the loaned amount in infrastructure projects involving Chinese companies and repay the loans in crude oil shipments. In addition to these formal arrangements, China has made numerous other large-scale loans to Ecuador that have coincided with oil supply agreements.
Exploration and production
Ecuador produced an estimated 499,000 bbl/d of oil in 2011, almost all of which was crude. Ecuador’s oil production has increased slightly since 2009, but remains below a 2006 peak of 536,000 bbl/d. Thus far in 2012, Ecuador’s oil production has fluctuated around 500,000 bbl/d. State-owned companies produced over 70 percent of the country’s crude in 2011, with the remainder attributable to fields operated by private companies.
Ecuador’s most productive oil blocks are located in the northeastern part of the country. Shushufindi and Auca are two of the most prolific fields. Crude oil production increased sizably in 2003 with the opening of the Oelducto de Crudos Pesados (OCP) pipeline, which removed a chokepoint on heavy crude oil transportation in the country. However, production has leveled off in recent years, the result of natural decline, the lack of new project development, and operating difficulties at existing oil fields. The inauguration of the Panacocha field in the Ecuadorian Amazon — the first new production expansion since the current government took office in 2007 — is one reason for increased production over the last two years.
Ecuador aspires to increase production by approximately 50,000 bbl/d over the next two years, a more manageable goal than the 600,000 bbl/d that authorities had initially hoped to achieve by 2013. In order to increase production, Petroecuador is in the process of negotiating contracts with Schlumberger, Baker Hughes, Halliburton, and the Ecuadoran service company Sertecpet to carry out enhanced oil recovery projects in some of the country’s large, mature fields. Ecuador plans to solicit bids for its 11th licensing round for oil exploration in November 2012, which will include 13 blocks in the Amazon.
Ecuador is pursuing a novel initiative with regards to the development, or lack thereof, of the Ishpingo-Tambococha-Tiputini (ITT) field in Yasuní National Park. In 2007, the Ecuadoran government proposed an indefinite moratorium on the extraction of oil from ITT, which holds 850 million barrels of proven reserves, in order to protect biodiversity and avoid dislocation of two isolated indigenous cultures. The proposed moratorium was conditional on contributions from the international community, which was asked to reimburse Ecuador for 50 percent of the opportunity cost — or foregone revenues — of not developing oil in an environmentally sensitive area. Contributions of at least $3.6 billion from the international community would be deposited in a fund — administered by the United Nations Development Program (UNDP) — that would be invested in projects to advance conservation, renewable energy, and social development efforts in Ecuador. However, international contributions have been disappointing, there have been reports of limited exploration activities around the blocks in question, and questions persist about the credibility of a commitment by this or future Ecuadoran governments not to develop the resource in the future after accepting payments in the present. As a result, although Yasuní-ITT represents an innovative approach to replacing the negative externalities of oil production in favor of projects designed to have positive ones, the prognosis for it is uncertain.
Ecuador exported 333,500 bbl/d of crude oil in 2011, according to statistics from its central bank. It markets two grades of oil: Oriente, which accounts for two-thirds of total exports, and Napo, which is a heavier grade. Aside from the United States, which was Ecuador’s largest crude oil customer, trade data and an analysis of tanker discharges reported in Lloyd’s List Intelligence’s Analysis of Petroleum Exports database suggest that other leading destinations for Ecuadoran crude are Panama, Peru, and Chile. Despite reports of tightening bilateral relations between China and Ecuador, China was not a large importer of Ecuadoran crude in 2011. However, preliminary data imply a moderate increase in flows to China in 2012.
The United States imported 203,000 bbl/d of crude oil from Ecuador in 2011, down from a peak of 276,000 bbl/d in 2005. Ecuador was the 11th largest supplier of foreign oil to the United States, and was responsible for only 2 percent of total U.S. crude oil imports. However, Ecuador was the second-largest source of foreign oil for the West Coast (Petroleum Administration for Defense District V), which was the destination for almost all Ecuadoran oil exports to the United States. Consequently, Ecuador is a more regionally significant source of supply for the West Coast, which is relatively isolated from other parts of the continental United States due to a dearth of overland pipelines, than it is for the United States as a whole.
Despite its status as a crude oil exporter, Ecuador is a net importer of refined oil products. In general, Ecuador exports heavy refined products, such as fuel oil, and imports lighter products, including gasoline, diesel, and liquefied petroleum gas (LPG). According to data from the central bank, Ecuador exported 32,000 bbl/d of refined products in 2011, while importing approximately 100,000 bbl/d. Of the total imports, the United States was the source of 59,000 bbl/d, most of which was gasoline and distillate fuel oil.
Ecuador has two major oil pipeline systems. The older and more widely used one is the Sistema Oleducto Trans-Ecuatoriano (SOTE), which was built in the early 1970s. The 310-mile, 400,000-bbl/d SOTE runs from Lago Agrio to the Balao oil terminal on the Pacific coast. Ecuador’s second oil pipeline is the Oleducto de Crudos Pesados (OCP). The 300-mile, 450,000-bbl/d OCP mostly parallels the route of the SOTE. The OCP began operations in September 2003, and its completion immediately doubled Ecuador’s oil pipeline capacity and facilitated increased production.
Approximately 70 percent of the country’s crude travels through SOTE, with the remainder transported through OCP.
Ecuador utilizes one international pipeline, the TransAndino. The 50,000-bbl/d pipeline connects Ecuador’s oil fields with the Colombian port of Tumaco. The TransAndino pipeline has occasionally been the target of rebel attacks in Colombia. Although the security environment has improved in recent years, the pipeline has been compromised as recently as July 2012.
According to OGJ, Ecuador has three commercial oil refineries, with a combined capacity of 176,000 bbl/d. The largest refinery in Ecuador, Esmeraldas (110,000 bbl/d), is located on the country’s northern Pacific coast. Esmeraldas and two smaller refineries, La Libertad and Shushufindi, are operated by Petroecuador.
The Ecuadoran government is actively seeking opportunities to increase refining capacity, particularly to enhance domestic production of lighter petroleum products. Plans include an upgrade of the Esmeraldas refinery to process Ecuador’s heavy domestic crude. South Korea’s SK Engineering is currently under contract to repair, overhaul, and upgrade the Esmeraldas refinery, which has occasionally experienced unscheduled downtime due to operational problems. There have also been discussions between Ecuador and Venezuela about the construction of a new refinery in Ecuador. The two countries established a joint company to build a facility on the Pacific Coast in Manabi province, with a crude distillation capacity of 300,000 bbl/d. Only a small portion of the project has been completed to date due to lack of external financing. According to recent industry reports, China’s Sinopec and/or CNPC might fund a portion of the project.
Ecuador consumed an estimated 201,000 bbl/d of oil in 2011. According to the International Energy Agency, roughly one-third of Ecuador’s oil consumption is diesel fuel and another one-fourth is motor gasoline. Fuel prices are controlled by the central government.
Ecuador has relatively small proven natural gas reserves and a limited natural gas market.
According to OGJ, Ecuador had 282 billion cubic feet (Bcf) of natural gas reserves as of the end of 2011, one of the smallest endowments in Latin America. Ecuador produced roughly 50 Bcf of natural gas in 2010, almost all of which was associated with oil production, and only 12 Bcf of which was marketed as dry natural gas. Ecuador vented and flared 17 Bcf, which is among the highest flaring rates in South America according to the National Oceanic and Atmospheric Administration. Its low natural gas utilization rates are due mainly to a lack of infrastructure to capture and market natural gas.
The only noteworthy natural gas project in Ecuador is the Amistad field, located in the Gulf of Guayaquil, which produces an estimated 24 million cubic feet per day (MMcf/d). Petroecuador took over the Amistad project after U.S.-based Noble Energy decided to exit the country rather than renegotiate its production contract. All of Amistad’s natural gas production flows to the Machala facility, a 130-megawatt (MW) onshore, gas-fired power plant that supplies electricity to the Guayaquil region.
Ecuador generated 17 billion kilowatthours (kWh) of electricity in 2009, the most recent year for which complete EIA estimates are available, from 4.9 gigawatts (GW) of capacity. Hydroelectricity accounted for over 50 percent of the country’s generation, but a somewhat smaller share of total nameplate capacity due to hydro’s high capacity utilization rates. The other large source of electricity supply is the country’s suite of conventional thermal power plants, which in Ecuador are mostly equipped to burn oil. There is also a small amount of bagasse-fired thermal power and limited wind and solar capacity, which are supported through feed-in tariffs. Ecuador has transmission grid interconnections with Colombia and Peru, and is a small net importer of electricity.
The electricity grid does not reach all of Ecuador’s people. Urban electrification rates in Ecuador are approximately 95 percent according to Consejo Nacional de Electricidad (CONELEC), and possibly higher according to other sources. However, the International Energy Agency (IEA) reports that 1.1 million people — or almost 8 percent of the population — lack access to electricity, mostly in rural areas. Residential users are responsible for approximately one-third of electricity demand, according to CONELEC statistics, closely followed by the industrial sector.
Most of Ecuador’s hydro capacity is located in Azuay province, in the south-central highlands. Paute-Molino is the country’s single-largest hydroelectric complex, and alone claims almost 1.1 GW of capacity. Droughts in late 2009 affected flows in Paute River and caused the government to implement rolling blackouts from November 2009 to January 2010. To address capacity shortages, Ecuador plans to build six new hydroelectric power plants in the coming decade. Financing for all of the new projects will come from China.