In Ecuador, One Slippery Oil Patch

Oxy is out and PetroEcuador is in, but can the state company keep things flowing

Six months ago, Carlos Blum was an operations chief at Occidental Petroleum Corp.'s (OXY ) huge oil field in Ecuador's Amazon jungle -- a plum job. Over its 21 years in the country, Oxy had become Ecuador's largest private oil producer, its most profitable company, and its biggest taxpayer. Oxy even won credit for hiring an anthropologist to maintain relations with the indigenous population. And thanks to high oil prices and Ecuador's profit-sharing laws, Blum and 300 fellow Oxy employees took home bonuses of more than $200,000 apiece last year -- on top of salaries that were already generous by local standards.

But on May 15, Ecuador booted Oxy out of the country. The government rescinded Oxy's contract, saying the company illegally transferred an interest in its fields to another company in 2000 without obtaining permission. Oxy disagrees and is seeking $1 billion in damages. Meanwhile, the state-owned oil company, PetroEcuador, is scrambling to keep the crude flowing at more than 132 wells scattered across 770 square miles of jungle. And 50-year-old Blum, a six-year Oxy veteran who spent 19 years with Texaco and Halliburton, has suddenly found himself in charge of it all. "We're not trying to reinvent the wheel. We're just trying to sustain production," he says.

Ecuador is the third Latin American country this year to kick out foreign oil companies or demand a bigger cut of their profits. Venezuela led the way, hiking taxes and forcing companies such as Chevron Corp. (CVX ) and Royal Dutch Shell PLC to turn over control of their projects to the state oil company. Then Bolivia nationalized its oil and gas industry in May, shocking big investors such as Brazil's Petrobrás (PBR ). Now Bolivia is having trouble coming up with enough cash to run its fields.

Will Ecuador run into the same problems? Much could depend on the winner of an election on Oct. 15 to choose Ecuador's eighth president in a decade. Former Finance Minister Rafael Correa, 43, who holds a PhD in economics from the University of Illinois, is favored to win. An ally of Venezuelan President Hugo Chávez, he's calling for greater state control over the oil industry and higher royalties on foreign players. That could make Oxy's woes just the start of bigger troubles for foreign players in Ecuador.

PetroEcuador already has its hands full with the former Oxy fields, known as Block 15. Since PetroEcuador assumed control in May, production has fallen by 4%, to 96,000 barrels per day. Blum says that's due to routine maintenance and that output should bounce back. He's lining up two rigs to start work on 35 new wells that Oxy planned to complete this year but barely started. PetroEcuador has also hired ex-Oxy employees on temporary contracts, paying them top salaries to keep them on board. And the government is creating a special unit inside PetroEcuador to run the former Oxy fields like a private enterprise. The goal, says Energy & Mines Minister Ivan Rodríguez, is to shield the operation from the "terribly corrupt" and inefficient practices of the company, which has suffered an oil spill every two days this year. "Block 15 will be an island," he says. "We are doing things right there, with technically qualified people who are not politicized."

If it can manage the operations, Ecuador stands to benefit handsomely. The former Occidental field, which accounts for nearly 20% of Ecuador's output, holds some 522 million barrels of proven reserves. At current production levels, that translates into nearly $1.9 billion in gross annual revenues if crude prices stay at $50 a barrel. A new law that requires companies to share revenues with the government when oil prices top $22 a barrel will only add to the take. The Ecuadoran treasury is expecting a windfall of $950 million this year and around $1.3 billion in 2007.

The question is whether PetroEcuador can keep the oil flowing. Oxy had planned to invest $400 million in Block 15 this year -- nearly double the $221 million PetroEcuador expects to spend. That means the state company may not be able to pump as much as the Americans did. "Operating these fields requires working capital," says Jed Bailey, senior research director for Latin America for Cambridge Energy Research Associates Inc. in Cambridge, Mass. "You need quite a lot of investment."

A more pressing question for the 20 international players still operating in Ecuador is the attitude toward outsiders. That will be clearer after the election. With Oxy's departure, Spain's Repsol is now Ecuador's No. 1 private producer but will "end up just breaking even" in 2006 because of the new tax regime, says country manager Carlos J. Arnao. Adds René Ortiz, president of the Hydrocarbons Industry Assn.: "Ecuador has lost a lot of its appeal for foreign companies."

By Geri Smith

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