The country left the cartel in order to expand its pumping, but the Covid-19 crisis has cut extraction volumes by 10.8%.
Construction of a variant of the oil pipeline that crosses the Andes, from the Ecuadorian Amazon to the Pacific [Petroecuador].
ANALYSIS / Jack Acrich and Alejandro Haro
Ecuador left the Organization of Petroleum Exporting Countries (OPEC) on January 1, 2020 to avoid having to continue to join the production cuts imposed by group and which it agrees to in order to provoke a rise in the world price of crude oil. Ecuador preferred to sell more barrels, even at a lower price, because by exporting more at the end written request it could increase its income and thus get out of its serious financial situation status , which the coronavirus emergency has only accentuated, with a fall in GDP in 2020 at the moment estimated at 9.5%.
However, domestic economic difficulties and the difficult international situation have not only prevented Ecuador from expanding pumping, but oil production has fallen by 10.8% in the last year. average Ecuador extracted 472,000 barrels of oil per day in 2020, especially burdened by the sharp reduction in activity in April with the start of the confinement and then not compensated for the rest of the year. agreement This is a volume below the 500,000 line that had always been exceeded in recent years (in 2019 production was 528,000), according to figures from Petroecuador, the state hydrocarbons company. The reduction in world consumption during the Covid-19 year also had its correlation in a decrease in the consumption of derivatives in Ecuador, especially gasoline and diesel, which fell by 18.5%.
International investment constrained by the pandemic context and reduced consumption marked a status that could hardly lead to an increase in production. In 2020, Ecuador had a drop in the value of oil exports of 42.1% (double that of total exports), which combined with a deterioration in the price of the barrel meant a 40.9% reduction in public revenues from the oil sector, according to data of the International Monetary Fund (IMF).
Figures for the first two months of 2021 indicate an accentuation of the fall in crude oil production (-4.73% compared to January and February 2020) and derivatives (-7.47%), as well as their export (-22.8%).
expense cut and search for oil revenues
The exit from OPEC did not pose any particular risk for Ecuador, which had already left the organization in a previous period. Its scant weight in OPEC and the progressively diminishing strength of the cartel itself meant that Ecuador's attempt to go it alone was not particularly costly. The absolute priority of Lenín Moreno's government was to rebalance the country's macroeconomic picture - battered by the high public expense of his predecessor, Rafael Correa - and for that it urgently needed an increase in state revenues, an important part of which in Ecuador normally comes from the hydrocarbons sector.
When he became president in 2017, Moreno set out to steer the country toward more market-friendly energy policies. The president was determined to break with the nationalist approach of his predecessor, whose policies discouraged foreign investment in the oil industry while increasing public debt significantly. Among the most costly programs undertaken by Correa was to maintain high subsidies for energy consumption, with especially low prices for fuels.
In order to overcome the financial status in which Ecuador found itself when he took office, Moreno approached the IMF to apply for financial aid financial, and committed to structural reforms, among which was the gradual dismantling of subsidies. These reforms, however, were not well received and the social unrest that spread throughout the country put even more pressure on the oil industry.
In February 2019, Moreno negotiated an IMF loan to help reduce the country's large fiscal deficit and huge external debt, which by the end of 2018 had reached 46.1% of GDP and twelve months later would reach 51.8%. The committed "bailout" was US$10.2 billion, of which US$6.5 billion came from the IMF and the rest from other international agencies.
As part of austerity measures agreed with the IMF, Moreno was forced to end government subsidies that had kept gasoline prices low for decades. In early October 2019 he announced a plan of cuts to save $2.27 billion a year, essentially withdrawing the fuel subsidy. The advertisement of the decree, which would later be annulled, immediately provoked massive protests, both from transporters and low-income sectors, as well as very singularly from indigenous communities. The street violence forced the president to leave Quito for a few days and settle in Guayaquil.
To solve the need for income, Moreno sought to rely on the oil industry, which represents approximately one third of the country's total exports. He initially expressed the intention of seeking to increase from the 545,000 barrels per day of crude oil then being produced to almost 700,000 barrels per day.
One of the measures taken in this direction was to promote the development and the exploitation of the Ishpingo-Tiputini-Tambococha field, with the goal to increase oil production by 90,000 barrels per day. This decision met with social rejection due to the environmental damage it could cause, since the Yasuní National Park, in the Ecuadorian Amazon, has been declared a protected area. The government then decided to postpone the expansion of production, first to 2021 and then to 2022. The civil service examination was especially led by the indigenous communities, in a mobilization that partly explains the success in the 2021 presidential elections of the indigenous movement Pachakutik, of Yaku Perez, who almost made it to the second round.
Another measure was to reverse some of the emblematic policies of his predecessor. For example, he eliminated the service contracts introduced under President Correa, thus restoring the model production sharing contract. This reform was more favorable to international oil companies, as it allowed them to retain a share of crude reserves; it also offered them financial incentives to invest in the country. The new model was first applied in the bids awarded during the twelfth Intracampos oil round, in the Oriente region, which is rich in oil reserves. Under this contract modality , the Moreno administration awarded seven of the eight exploration blocks on offer with a total investment of more than US$1.17 billion.
Drop in production
Due to the urgency of increasing revenues, Ecuador resisted the production cut plan that OPEC has been imposing on its members at various times since the abrupt drop in oil prices in 2014. Initially, the organization accepted that some of its members, with moderate or very low production volumes compared to previous figures, as was the case of Venezuela, maintain their extraction rates. But since it could no longer be an exception, Ecuador preferred to announce at the end of 2019 its departure from OPEC and not have to reduce its production to 508,000 barrels per day in 2020, which was the quota set for it.
What is striking is that last year production finally fell from 528,000 barrels per day in 2019 to 472,000 (a drop of 10.8%), and no longer because of decisions taken at OPEC headquarters in Vienna but because of the difficulties of various subject brought about by the Covid-19 crisis. Petroecuador's oil exports fell from 331,321 barrels per day in 2019 to 316,000, a 4.6% drop that in monetary terms was greater, since the price of a barrel of Ecuadorian mixed oil went from $55.3 in 2019 to $34.7 in 2020.
One element that makes it difficult for Ecuador to take better advantage of its hydrocarbon potential is that it has insufficient infrastructure for refining crude oil. The country has three refineries, whose capacity does not reach the volume of domestic consumption of oil derivatives, so it must import diesel, naphtha and other products. This means that in times of high crude oil prices Ecuador benefits from exports, but must also pay a higher invoice in imports of derivatives. In 2020, Petroecuador had to import 137,300 barrels per day.
The complicated situation caused by the pandemic has continued to put pressure on Ecuador's public debt, which reached 66.4% at the end of 2020, despite all the attempts made by the Moreno government to reduce it.
The next president, who is due to take office at the end of May 2021, will not have much room for maneuver due to these debt volumes and will have to continue relying on higher oil revenues to balance public finances. The expansionary policies of expense during Correa's presidency took place in the context of the commodity super-cycle, which benefited South America so much, but that does not seem likely to be repeated in the short term.
OPEC weight loss
With its departure from OPEC, Ecuador left an international organization that was created in 1960 with the aim of regulating the world oil market and controlling crude oil prices to some extent, goal . The founding countries were Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Over time other countries joined OPEC and today it is made up of thirteen members: Algeria, Angola, Republic of Congo, Equatorial Guinea, Gabon, Libya, Nigeria, United Arab Emirates and the five founding countries. When it was created, the organization sought to establish, acting as a cartel, a kind of counterweight to a series of Western energy transnationals, mainly from the United States and the United Kingdom. OPEC members account for around 40% of the world's oil production and contain around 80% of the planet's proven oil reserves. To be admitted as a member of the organization it is necessary to have considerable oil exports and to share those of the member countries.
Ecuador joined OPEC in 1973, but suspended its membership in 1992. Subsequently, in 2007 it returned to active participation until its leave in January 2020. Considering that Ecuador was one of OPEC's smaller members, it did not really have a great influence in the organization and its exit does not represent any substantial detriment to the organization. However, it constitutes a second departure in just one year, as Qatar, which had a greater specific weight in the cartel, left it on January 1, 2019. In its case, its divorce from OPEC was due to other reasons, such as its tensions with Saudi Arabia and its desire to focus on the gas sector, of which it is one of the world's largest producers.
These movements are an example of the moment of loss of influence that OPEC is going through. This has led it to establish alliances with producers that are not part of the organization, such as Russia and some other countries forming OPEC+. With the decline of oil production in Venezuela and the decrease in the capacity of other members to control their production and exports, Saudi Arabia has become increasingly consolidated as the leader of the cartel, representing close to a third of its total production, with approximately 9.4 million barrels per day. In a way, Saudi Arabia and Russia remain, hand in hand, as the main countries seeking to cut production in an attempt to increase prices. Additionally, thanks to fracking, the United States has become the largest oil producer, representing a great influence in the international crude oil market, affecting the power that OPEC may have.
