Petrobras in Ecuador

Petrobras in Ecuador – By Rosa Bolivar

BACKGROUND

• Petrobras controlled significant Ecuatorian assets including exploitation rights in two promising areas known as Blocks 18 and 31 since 200
• In 2007 President Correa decided to implement a campaign to increase state control over oil industry
• Correa’s proposal was to replace existing contracts with service agreements where international oil companies would be paid a production fee and reimbursed for investments cost but all recovered oil would belong to the government; Also, it would prohibit international oil companies from filing arbitration claims
• Any company refusing to renegotiate their contracts would face a 100% tax on profits

SWOT ANALISIS

Strengths

• Robust market position in 23 countries and 4 continents
• Highly diversified portfolio of assets
• Upstream and downstream revenues
• Overall positive financial performance

Weaknesses

• Existing disputes with Ecuador government regarding Block 18 contract irregularities
• Existing disputes with Ecuador government regarding Yasuni Reserve – location of Block 31-environmental damage
• Ecuador withdrawn from ICSID

Opportunities

• Expansion plans in Africa, Middle east, Asia, Mexico and Peru
• Growing pool of investors in addition of access to inexpensive Brazil Banks lines of credit

Threats

• Growing nationalism tendencies in Latin America
• Increasing oil expropriation by Latin American’s governments
• Environmental Regulations in Block 31
• Political and Economic Instability
• Potential rise of Venezuela due to conflicts between Ecuador and Brazil

How should Petrobras respond to Ecuador’s unilateral revision of its contract?

There are some options to consider:

• Seek compensation through local court battle or international arbitration
• Petrobras withdrawal from Ecuador through a mutually beneficial agreement with Ecuador government

The first alternative has the disadvantage of potentially creating tension  in diplomatic relations between Ecuador and Brazil governments. Also, international arbitrations are typically lengthy, consequently it would be a long-term solution.

The second alternative would be a more conciliatory approach. Petrobras could attempt an agreement with Ecuador government for early termination on Blocks 18 and 31 contracts and be compensated for damages accordingly.

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