Will Ecuador’s New President Shake Up the Energy Sector?
Among his first promises as Ecuador’s president-elect, Guillermo Lasso pledged to seek new risk-sharing contracts with private companies in the oil sector, a major pillar of the Andean nation’s economy. At the same time, Lasso said he was wary of oil drilling in the Yasuní national park in the country’s Amazon region, adding that he backed an audit to determine the environmental costs and profitability of extraction from oil wells located there. What will be the Lasso administration’s main priorities for the oil sector, and what will they mean for the country’s economic recovery? Is the new government likely to continue or significantly change the energy policies of current President Lenín Moreno? In what ways will the rise of Ecuador’s Indigenous movement, whose coalition now has the second-largest presence in the National Assembly, influence the incoming administration’s energy policy?
Ramiro Crespo, president of Analytica Securities in Quito: “Guillermo Lasso’s oil policy aims to apply principles of good corporate governance to an industry that has suffered immensely from corruption and whose output at the same time has barely treaded water for the past 15 years. While production-sharing agreements already exist, Lasso wants to modify the contract scheme to make it more attractive for private companies to invest, while at the same time making companies take on a greater share of entrepreneurial risk. He recognizes that oil production isn’t easy to ramp up, hence his interest in attracting investment as soon as possible. His goal of increasing oil output to 700,000 barrels a day from the present 500,000 or so probably won’t be reachable by the end of his term. He will probably face stiff opposition if he attempts to list Petroecuador in the United States and locally, similar to what happens in Brazil with Petrobras or Colombia with Ecopetrol. This would strengthen corporate governance and provide revenue from a company that doesn’t even have an audited balance sheet. Eventually, Petroecuador could expand internationally, such as Chile’s Enap, reducing the pressure to expand production on Indigenous lands, and thus perhaps softening opposition to privatization. At the same time, he is offering Indigenous organizations an unusually strong say by offering binding previous consent to new oil and mining projects. Whether this will succeed in defusing, or instead exacerbate, existing conflicts over natural resource development will depend to a high degree on his administration’s abilities to negotiate, as well as on Indigenous organizations’ willingness to compromise.”
Sebastián Maag Pardo, senior consultant on energy and natural resources at FTI Consulting: “As Guillermo Lasso prepares to take office on May 24, priority issues facing the oil and gas sector mirror Ecuador’s governability challenges—to name a few: opposition from renewed political forces, fragile government finances, widespread mistrust in institutions and growing activism. Addressing the country’s economic and governance crises will hinge on actions that build credibility for structural reforms. Oil is no exception. Crude exports and royalties from new upstream contracts will be an essential source of fiscal revenue, especially as Lasso pledged to eliminate the $4-5 billion yearly fiscal deficit by 2025. To boost crude production and ensuing revenues, he will look to attract foreign investment.
Addressing the country’s economic and governance crises will hinge on actions that build credibility on structural reforms.”
Sebastián Maag Pardo
This market-oriented push includes: 1.) realigning public and private incentives; 2.) deleveraging Petroecuador, to avoid overreliance on public finances; and 3.) strengthening accountability -environmental, financial and administrative- across the fuels value chain. But before risks can be shifted from the Ecuadorean taxpayer to investors, the administration needs to tidy up the image of a sector mired in various corruption probes. With the recent Petroecuador-Petroamazonas merger, the time is ripe to undergo a transparency overhaul -not only through an audit of operations in the mega-biodiverse Yasuní, but also stronger environmental impact assessments at large, adding to financial valuation and compliance audits that help attract investors. This would generate the public confidence Lasso needs to deepen actions that his predecessor started. If Fernando Santos -who closely advises current Energy Minister René Ortiz – is confirmed as energy minister, markets can expect more than continuity: Ecuador faces the opportunity to gather all stakeholders and have a historic rethink of the state’s involvement with oil. Done right, this could pave way to adequately eliminating fossil – fuel subsidies, opening competitive bidding rounds and moving toward other international best practices that free up public resources best devoted to priority social issues.”
Paola Carvajal, senior manager at Roland Berger: “President-elect Guillermo Lasso is facing a complex situation in Ecuador. The country’s economic crisis requires the reactivation of multiple sectors, including oil and gas operations, as the economy depends heavily on crude oil exports and revenue. President Moreno started to open the hydrocarbons industry to private investors, conducting bidding rounds under production-sharing contracts, and the new administration is likely to continue pushing to secure new private investment in this sector. However, Lasso’s intentions of injecting new funds into the hydrocarbon sector will likely face significant challenges. The first one will be the energy transition trend toward low-carbon fuels and sustainable operations. Oil and gas extraction, operators and investors in areas such as the PPT field in the Amazonian region will be subject to more significant and growing national and international scrutiny. Internally, the election process demonstrated the importance of the Indigenous movement, which will reject extended oil and gas operations in the PTT. Moreover, President-elect Lasso will also need to focus on diversifying the economy toward lower-carbon intensity activities. The support for developing other sectors, including the nascent mining sector, will be essential to transform and strengthen the Ecuadorean economy for the future.”
Marc Becker, professor of history at Truman State University: “It is too early to tell what the gap between Lasso’s campaign promises and his actual policies will be, but given his previous track record of actual implemented policies and the patterns of similar politicians, we can expect quite a dramatic right-wing turn. Recognizing that he only polled 20 percent of the vote in the first round, and that this is the extent of the support he can count on from his CREO party in the legislature, Lasso made promises to gain the backing of those who otherwise would oppose his neoliberal economic policies. Now that the elections are over, we can expect his true colors to shine through his rhetoric. But even during the elections he promised to deepen Ecuador’s dependency on resource extraction, which historically has only proven to underdevelop the country’s economy.
Lasso can expect to face significant resistance… from organized social movements … and Pachakutik’s electoral representatives in Congress.”
Marc Becker
A saying from the 1970s oil boom was that Ecuador became a dollar poorer for every barrel of oil it exported, and nothing has changed significantly since then to alter that equation. Lasso can expect to face significant resistance to his politics of privatization and resource extraction both from organized social movement mobilizations on the streets and Pachakutik’s electoral representatives in Congress. Although his proposed draconian policies will be easy to confront, sectors of the Indigenous movements share some responsibility for them because of their tacit support for Lasso in the second round of the election that grew out of their opposition to the previous Rafael Correa administration’s similar reliance on resource extraction.”
[Editor’s note: The Energy Advisor requested a commentary from the Yaku Pérez campaign as well as from a National Assembly representative of the Pachakutik party but received no response from either.]
The Advisor welcomes comments on its Q&A section. Readers can write editor Gene Kuleta at gkuleta@thedialogue.org.
Fuente: LATIN AMERICA ADVISOR