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Ecuador hopes new bill will keep oil sector afloat

By Manuela Badawy

NEW YORK, March 9 (Reuters) - Ecuador's new government hopes to alleviate its inherited economic crisis with new legislation, signed Thursday by President Gustavo Noboa, that would increase foreign investment in the country's crucial energy sector.

Noboa's center-rightist administration approved the legislative package, the ``Economic Transformation Law,'' over the objections of the oil workers' union. It will allow Latin America's fourth largest oil exporter to attract greater foreign investment in the oil sector and may even pave the way for privatization of its most productive oil fields, analysts said.

Although crude oil is Ecuador's main export and provides almost 50 percent of the Andean nation's revenues, low oil prices over the past two years have kept the government from investing in a sorely-needed new export pipeline.

That pipeline, which will have a capacity of 290,000 barrels a day, is estimated to cost about $500 million. Under the plan it will open in 2001 and be run for a period of 20 years by a consortium of private companies including Canada's Alberta Energy Co. Ltd. (Toronto:AEC.TO - news), Spanish-Argentine Repsol SA-YPF (NYSE:YPF - news), Agip SpA of Italy, and Occidental Petroleum Corp. (NYSE:OXY - news), Kerr-McGee Corp. (NYSE:KMG - news) and Williams Engineering (NYSE:WMB - news) from the United States.

NEW PIPELINE NEEDED FOR EXTRA PRODUCTION

Experts say that due to pipeline constraints, Ecuador does not produce all the crude oil it is capable of pumping. For companies interested in upstream exploration and development, lack of export pipeline capacity has become a major deterrent to investment.

Government oil company Petroecuador plans to increase crude production by 11 percent annually until 2005, but only if the country manages to build the new pipeline for heavy crude that would draw foreign investment into the sector.

``The reason is very simple: The country doesn't have (funds) to invest. The money has to come from abroad,'' said Khalil del Castillo, president of the private Association of Petroleum Services Companies (ASEMSER) in Ecuador which represents 45 international oilfield services companies like Schlumberger Ltd.(NYSE:SLB - news) and Halliburton Co.(NYSE:HAL - news).

Petroecuador's President Rodolfo Barniol said last month the company will need $90 million just to maintain output at 1999 levels of 260,000 barrels per day. Petroecuador produces 80 percent of the country's crude oil.

UNION OPPOSITION

However, there is opposition to the proposed heavy oil pipeline from the oil union, which says that the government would hand over its principal source of wealth to private hands.

``We oppose the government selling some assets of Petroecuador to the private sector because the government wants to sell them at a very cheap price,'' said Diego Cano, secretary general of Petroecuador's National Federation of Petroleum Workers union, Fetrapec.

Under the new legislation, private companies would partner with Petroecuador to construct an oil pipeline to transport heavy crude from the eastern Oriente region to the Pacific coast. The pipeline would add capacity to the existing system, the Sistema de Oleoducto Transecuatoriano (SOTE), which currently transports both light and heavy crude.

SOTE transports light crude of 29 API gravity, but also carries heavy crude of 24 API from 12 private companies because there is currently no other pipeline.

Mixing the two reduces the quality of the lighter crude, shrinking the revenues of Petroecuador by $3 per barrel, according to some estimates.

The Economic Transformation Law also encourages private investment in Ecuador's Ishpingo-Tambacocha-Tiputini (ITT) oil fields in the the eastern jungle region of the Oriente region, and it would seek foreign capital to revamp refineries in Esmeraldas, La Libertad and Shushufindi refineries.

As an incentive to foreign companies, the government said it is likely to stop subsidizing gasoline in July, which would drive prices up to compete in the international market, ASEMSER's Castillo said.