The exit of French oil company Perenco from Ecuador has heightened concerns about the investment climate in the Andean nation. Announced earlier this week, the move comes after the seizure of oil concessions as part of a tax dispute. Officials from PetroEcuador, the state oil company, took control of concessions 7 and 21 in the country’s northeastern Amazon region last week, after Perenco warned it was about to halt production in response to Ecuador’s refusal to comply with a tax dispute ruling issued by an international arbitration body.
Rodrigo Marquez, head of the French oil group’s Latin American division, says the seizure amounts to an expulsion, leaving President Rafael Correa’s leftist administration exposed to billions of dollars in compensation claims. “We’ve been expelled and our assets have been taken over,” Mr. Marquez said. “They are trying to say they didn’t really take over the facilities because they didn’t send the army in, but the fact of the matter is that before we were due to start the suspension of activities, government officials went in and started to persuade the employees not to carry out their instructions. You would appreciate that an employee caught in that situation would feel somewhat intimidated.”
Luis Jaramillo, president of PetroEcuador seemed to think that the fact that authorities had not militarized the oil fields made it all OK. Although the explanation he gave Reuters did not aid his case: “We have had a dialogue with the workers and we have told them that if they stop the production they would affect the national economy.”
Perenco’s tax dispute with Ecuador dates back to October 2007, when the Organization of the Petroleum Exporting Countries (OPEC)-producing nation increased the windfall tax on oil from 50 percent to 99 percent. Although it later reset the tax at 70 percent, Perenco and its minority partner, Burlington Resources, a subsidiary of ConocoPhillips, have taken the dispute to a World Bank arbitrator, the International Centre for Settlement of Investment Disputes (ICSID). In May, ICSID ordered Ecuador to stop expropriating oil from the concessions, but Ecuador refused to comply, saying it had the right to recover a tax debt in crude.
Ecuador has now pulled out of the ICSID, a worrying development for international investors, although many analysts say ICSID’s rulings related to the Perenco concessions will still be enforceable.
Luke Peterson, of Investment Arbitration Reporter, makes the good point that enforceability will be difficult, however, pointing out that Ecuador could well follow the example of Argentina. “When it comes time to pay the awards [ordered by ICSID] Argentina hasn’t paid anything. Instead you see a cat-and-mouse game where multinationals chase Argentine assets around the world.”
While foreign oil operators in Ecuador such as Repsol, Andes Petroleum and Petrobras have largely accommodated the escalating demands of Rafael Correa’s administration for revenue sharing and control, Perenco is bucking the trend, according to Ramiro Crespo, of Quito-based Analytica Securities. “Instead of capitulating to the President’s high pressure take-it-or-leave-it offers, Perenco seems resolved to outduel Correa in his favorite game: chicken,” he said. Crespo, in a prescient note before the seizure of Perenco’s fields, said Mr. Correa, perhaps emboldened by a belief that any credit he is missing out on from traditional sources such as the markets and multilateral lenders will be available through China or India, was motivated increasingly by ideology.
One of the reasons Correa seems to be unfazed by private-sector complaints about his policies is that he may have concluded that he does not depend on the private sector to generate economic growth. “The government seems to believe that the public sector is the motor of the economy and that the public sector is attracting generous credit and investment from strategic allies and regional multilaterals,” he said.
The government, in other words, may not feel it is killing the goose that lays the golden eggs, as it has another such goose: a public sector awash in foreign funds. While these expectations are erroneous, they may very well be shaping economic policy.
Foremost among these new possible sources of income for Ecuador would be a deal with China’s state oil company, which would see a $1 billion loan in exchange for 95,000 barrels of oil per day, about a fifth of Ecuador’s daily output. Crespo says the China deal may not be wishful thinking, but even so, the question remains: will it be enough to offset damage created by President Correa’s policies toward Ecuador’s more traditional investors and sources of credit?
Naomi Mapstone is a contributing blogger to americasquarterly.org. She is a journalist based in Lima, Peru.