Experimental feature

Listen to this article

00:00
00:00
Experimental feature
or

The US said on Tuesday it was “very disappointed” at Ecuador’s decision to revoke the operating contract of Occidental, the country’s biggest foreign investor, and take over $1bn of the US-based oil company’s assets.

The move comes weeks after Ecuador imposed a 50 per cent tax on the “extraordinary profits” of foreign oil companies, and follows a more hardline approach towards foreign investors in Bolivia and Venezuela.

The California-based company warned on Tuesday that it could pursue Ecuador in court. An Occidental spokesman told the FT that international arbitration “is one option open to us that our legal team is looking at”. He added that the Ecuadorean government’s actions sent a damaging sign to potential foreign investors. “If you were looking to invest in Ecuador, you certainly wouldn’t see this as a favourable or encouraging development.”

Ecuador has drawn up a shortlist of international bidders that it may now offer Occidental’s contract to, including Brazil’s Petroleo Brasileiro, Venezuela’s PDVSA, Colombia’s Ecopetrol and Mexico’s Petroleos Mexicanos.

A potential purchaser could also come from China. In March EnCana sold its assets in Ecuador to Andes Petroleum, a Chinese consortium, for $1.42bn, the biggest transaction in the history of the country’s oil sector.

Announcing the decision to cancel Occidental’s contract on Monday night, Ivan Rodriguez, Ecuador’s energy minister, said Occidental had improperly transferred a 40 per cent interest in its fields to EnCana of Canada in 2000.

The government was under intense pressure to take action against Occidental following mass protests. Leftwing members of Congress had also threatened to have Alfredo Palacio, Ecuador’s president, prosecuted for treason should be settle with Occidental, which is thought to have offered a $1.7bn package to try to secure the operating contracts.

A spokesman for the president said Mr Palacio “fully supported” the energy minister’s decision to cancel Occidental’s contract.

Walter Spurrier, a political analyst in Guayaquil, said the case should be seen both in the international context of growing resource nationalism in other Andean countries such as Venezuela and Bolivia as well as the domestic context of October’s upcoming elections. “There’s a general feeling of nationalism, and bashing oil companies always goes down well.”

Fernando Gonzalez, head of Petroecuador, the state oil company, went to Occidental’s offices on Tuesday to take control of the company’s Ecuadorean operations. “From today Petroecuador is taking effective possession of the fields,” Mr Gonzalez said. However, the Occidental spokesman told the FT that for the moment the company was still operating its fields. “We don’t know how long it will take to transfer them to the state,” he said.

Occidental produces about 100,000 b/d in Ecuador out of the country’s total daily output of 538,000 barrels. Ecuador is South America’s second largest exporter of crude to the US.

Business leaders who depend on current trade preferences with the US - due to expire at the end of this year - for their exports lamented the action on Tuesday.

“This was a decision taken more with nationalist gut instincts than with the head,” said Gonzalo Correa of the Federation of Ecuadorean Exporters. “In time we will see the consequences of what the government is doing.”

Copyright The Financial Times Limited 2017. All rights reserved.
myFT

Follow the topics mentioned in this article

Comments have not been enabled for this article.