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Correa Sets Deadlines

President Correa stands before an oil rig in Ecuador's Amazon region. (AP Images)

January 29, 2008

During a recent weekly radio address, President Rafael Correa set a March 8 deadline for oil firms operating in Ecuador to renegotiate contracts. He offered companies three choices: accept payment for oil extraction, pay the government a 99 percent tax for windfall profits above contracted price, or leave. In the last case, Ecuador would reimburse firms’ investments and state company Petroecuador would take over departing firms’ fields.

Correa’s announcement built on a January 22 statement by the Minister of Mines and Petroleum Galo Chiriboga Zambrano about stepped-up efforts to renegotiate contracts with firms Repsol, City Oriente, Andes Petroleum, Petrobras, and Perenco. It came as the government also announced it would revoke nearly 600 mining concessions.

The move to put greater control over the country’s oil in state hands has precedent in recent years. Correa signed an October 2007 decree (PDF) stating that his government would take 99 percent of profits, raising the figure from the 50-50 split set during the previous year. Before Correa took office, his predecessor Alfredo Palacio canceled a contract with and took state control of fields under operation by U.S. oil company Occidental. 

These actions lead to charges that the Ecuadorian government has followed in the footsteps of Venezuela and Bolivia, both of which nationalized their energy industries in recent years. A recent editorial poses a question: “Venezuela, wallowing in anti-American populism, is a lost cause. But is Ecuador destined to go down the same chute?” In the latest issue of Financial Times’ “Latin America Agenda,” Richard Lapper suggests Ecuador must take care of its image to attract necessary investment. But he also notes Correa is not “headed irreversibly towards the imposition of a radical nationalist regime.” 

In fact, Petroecuador President Fernando Zurita last week announced intentions to work with foreign companies, including U.S. firms Halliburton and Schlumberger, to draw some $1 billion in investment for the country’s oil industries. A few days earlier he declared that Petroecuador would also invest $1.7 billion with the goal of boosting production. The bid for more investment came after Ecuador experienced nearly a 9.8 percent drop in its 2007 rate of oil production. The country is South America’s fifth biggest crude oil producer and the region’s second main supplier to the United States in 2006, according to a report by the Energy Information Administration.

The renegotiation of oil contracts comes a year into Correa’s presidency and as he faces mounting pressure from the opposition over proposals put forth by country’s Constituent Assembly. Ecuadorians have grown increasingly doubtful about the assembly, a legislative body charged with drafting a new constitution. Opposition leader Jaime Nebot, mayor of Guayaquil, led a January 25 protest of thousands against the assembly's reforms, which opponents say will give the central government too much authority. However, Correa holds a majority of supporters in the Constituent Assembly.