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Ecuador muddling on

The South American producer needs an overhaul to spur new oil growth. Its new president isn't likely to deliver

Ecuador, Opec's smallest producer until Equatorial Guinea recently joined the group, has a new president sitting atop its troubled oil industry. Lenín Moreno, the leftist successor to Rafael Correa, won a narrow victory over his opponent, the conservative former banker Guillermo Lasso, and took office in May. While much of the rest of the region has rejected the rise of the "pink tide", a crop of left-leaning populists in the mould of Hugo Chavez, Ecuador's voters chose continuity.

That bodes ill for Ecuador's oil industry, the country's economic engine, which desperately needs a reset. Correa leaves behind an oil industry headed in the wrong direction amid a dearth of investment, low prices and a commitment to Opec production cuts. Oil output has been stagnant at around 0.55m barrels a day for the past decade. An annual survey of oil investors put out by the Fraser Institute, a think tank, consistently puts Ecuador near the bottom of places to invest. Last year's survey put it in the bottom eight, alongside war-torn Libya, crisis-wracked Venezuela, Bolivia and California.

Correa's worst misstep was the 2010 nationalisation, which forced international operators to ditch their production-sharing agreements for enhanced-service contracts. Those deals, which pay a fee of as high as $35 for each barrel produced, were enticing enough that most oil companies stuck around at their existing projects. But the contracts offered no incentive for them to invest in the risky business of exploration or the long-term development of the industry. That task was left to the state-run companies, which have proven to be not up to the task.

Cash catastrophe

It was far from Correa's only mistake. He launched a failed gambit to get the world's rich nations to pay Ecuador $3.5bn to leave potentially billions of barrels of reserves in the oil-rich but environmentally sensitive Ishpingo-Tambococha-Tiputini (ITT) blocks in the Amazonian Yasuni forest. A $12bn refining megaproject known as the Refinería del Pacífico, touted as Ecuador's largest single project, has failed to attract investors and shows little hope of moving forward. A decision in 2008 to default on Ecuador's international loans left the country heavily reliant on China for external financing. Much of the country's oil exports have been pledged to Chinese state oil companies to pay back loans totaling around $17bn. The cash-strapped government has run up huge unpaid bills to Schlumberger, Halliburton and other service companies. A corruption scandal at Petroecuador has plunged the national oil company into crisis.

Moreno does not look like the man to turn things around. He has promised a more pragmatic approach on economic matters, and his early days show some evidence of that. He has said he is working on a new financing agreement with the World Bank, a sign that he wants to bring Ecuador back into the international fold. He has also chosen a seasoned international oil executive, Carlos Perez, who led Halliburton's Ecuador business for 13 years, to head up the oil ministry.

But to lure investors back Moreno would need to overhaul the industry's investment framework, like regional rivals Mexico and Brazil have done. Given the low oil price, and more enticing opportunities elsewhere, there will be little appetite for Ecuador's stingy fiscal terms today. There is no evidence so far that Moreno intends to go down that road. Instead he and Perez will push for expanded state-led drilling by PetroAmazonas to lift output from the ITT fields. Perez has said that flows from ITT have reached 51,000 b/d and put the cost of production at less than $3/b. Perez also hopes to work out a deal with Schlumberger, which says it is owed $1.2bn in Ecuador, and other service providers to boost drilling. But the government proposes paying off the debts in a mix of government notes, bonds and cash, and wants to extract concessions on contract terms as part of a deal.

Perez says that Ecuador's oil output could be increased to 0.7m b/d, up a third, over the next four years under the right conditions. Without an overhaul of the industry, that looks like wishful thinking.

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