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Ecuador cannot afford falling prices or an Opec output cut

Opec’s smallest group has limited sway over policy

Ecuador is a minnow swimming with Opec’s sharks. The country’s 560,000 barrels a day (b/d) of oil production is the smallest in the organisation, making up just 2% of its overall output, and the country has limited sway over Opec policy.

Ecuador has had a rocky relationship with Opec. It suspended its participation in 1992, when Opec’s other members refused to lift the country’s production quota while the group as a whole was being forced to lower output. Ecuador only returned to the cartel in 2007 as president Rafael Correa overhauled the country’s oil policy, which also included re-negotiating the government’s oil contracts.

Since its return, the country has typically sided with its hawkish regional ally Venezuela, though Ecuador did not back Venezuela’s recent call for an emergency Opec meeting.

Like the other members of the group, Ecuador will be hit by falling crude prices. High prices in recent years have fuelled strong economic growth and allowed Correa’s government to spend heavily on anti-poverty and other social programmes. The government needs an oil price of around $120 a barrel to fund its current spending. While it could cut back on this expenditure, such a move would hurt Correa’s popularity. Bond markets, to which Ecuador has now returned five years after its default, could provide some relief.

Falling prices could also scupper Ecuador’s production growth plans if Opec looks to cut output. Production has risen by about 40,000 b/d this year and the government wants that to go further.

State-owned Petroamazonas in October signed deals with international service companies and upstream players that will see more than $2 billion invested over the next five years to help squeeze more oil out of some of the country’s mature fields. Halliburton said that it plans to invest around $1 billion over the next five years to bring new technologies to a group of nine mature fields, including the Lago Agrio and Palo Azul fields. Schlumberger, China’s Sinopec and Argentine firms YPF and Tecpetrol also won contracts.

The Ecuadorian government is also trying to drum up interest for the billion-barrel IPP field in the Amazon after pulling out of an international agreement that would have kept the ecologically sensitive area off limits to oil drilling.

Nearly all of Ecuador’s oil exports are pledged to China’s state oil companies under the terms of several oil-for-loan deals worth around $9bn. But little of the country’s oil actually makes it to China. Instead China’s state firms market the crude around the world, with the US remaining by far the largest buyer. 

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