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November 5, 2018

Ecuador government seeking oil sector recovery

Since Ecuador’s adoption of service contracts in 2010, the country has struggled to attract major new investment in its oil sector.

By GlobalData Energy

Since Ecuador’s adoption of service contracts in 2010, the country has struggled to attract major new investment in its oil sector. To promote new investment in the sector, the government has reverted to the previously used production-sharing framework with the introduction of a new model Production Sharing Agreement (PSA) for crude oil. This new regime will first be tested through the XII Intracampos Licensing Round that opened in September 2018. In the medium-to-longer term, four additional rounds are planned in the country’s effort to find new resources.

In September 2018, the government published the new model PSA to accompany the launch of the XII Intracampos Licensing Round. The model does not include any cost recovery provisions or royalty payments by the contractor; instead, gross production is shared directly between the contractor and the state depending on the Oriente Crude oil price, and the volume and quality of crude produced from the asset. Contractor’s share of gross production ranges between 40 – 87.5% and is a biddable element under the new terms. Income from the PSA is subject to income taxes and a ‘sovereign adjustment’ mechanism will ensure that the contractor’s cumulative income from the project does not exceed that of the state. The new terms are more competitive than Ecuador’s previous service contract regime, yielding mid-range returns compared to neighbouring countries.

Regional state take comparison

Source: Upstream Economics, GlobalData Oil and Gas                                                                                                                        © GlobalData

Ecuador is seeking to trial its more competitive terms and investor-friendly approach through the XII Ronda Petrolera Intracampos Licensing Round. The country is looking to secure investments of $1 billion from the round, which includes eight onshore blocks located within lower risk areas of the Oriente Basin. The final investor appetite remains to be seen with the licensing round results that are scheduled to be announced in January 2019.

Following the Intracampos round, the government is planning a further four licensing rounds between Q4 2018 and 2020, these are: Intracampos 2, Subandino, Suroriente, and the Litoral. Large offshore areas will be included in the Litoral Licensing Round, which is considered to be frontier and higher risk. It is possible that further fiscal incentives may be required to balance the risk when these more frontier areas are offered.

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