VZCZCXYZ0015
OO RUEHWEB

DE RUEHQT #0394/01 0472115
ZNR UUUUU ZZH
O 162115Z FEB 07
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6344
INFO RUEHBO/AMEMBASSY BOGOTA PRIORITY 6443
RUEHCV/AMEMBASSY CARACAS PRIORITY 2373
RUEHLP/AMEMBASSY LA PAZ FEB 0420
RUEHPE/AMEMBASSY LIMA PRIORITY 1413
RUEHGL/AMCONSUL GUAYAQUIL PRIORITY 1894
RHMFIUU/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS QUITO 000394 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR WHA/EPSC FAITH CORNEILLE 
TREASURY FOR SGOOCH 
 
E.O. 12958: N/A 
TAGS: ECON EPET EFIN EC
SUBJECT: FALLING PETROLEUM PRODUCTION 
 
REF: A.  QUITO 321 
 
     ¶B.  06 QUITO 1722 
 
¶1.  (SBU) Summary:  Petroleum production in Ecuador will fall 
appreciably in 2007.  The GOE projects production will decline by 
six percent in 2007; one private sector consultant expects the drop 
will be eleven percent.  The decline is due to falling production in 
state firm Petroecuador's fields and the former Oxy fields, which 
have suffered from insufficient investment.  Increased production by 
private petroleum firms had more than offset falling Petroecuador 
production over the past decade, but in 2007 private sector 
production may also decline slightly.  Most private companies have 
frozen investment while awaiting potential forced contract 
renegotiations.  End summary. 
 
Falling Production 
------------------ 
 
¶2.  (SBU) In the obscure world of Ecuadorian petroleum, even 
accurate production numbers are hard to come by.  The Central Bank 
reports 2006 production totaled 195.6 million barrels, with average 
daily production of 536,000 barrels per day (bpd).  Of that, 90.4 
million barrels were produced by Petroecuador, and 105.2 million 
barrels were produced by the private sector (note: as of May 16 oil 
from the former Oxy fields is considered Petroecuador production). 
However, according to Petroecuador internal data, production was 
only 188 million barrels in 2006 (90 million Petroecuador; 98 
million private sector), with average daily production of 520 bpd. 
 
 
¶3.  (SBU) According to estimates for the GOE budget, total petroleum 
production in 2007 will fall to 183.7 million barrels (a 6 percent 
decline).  Petroecuador projects that its fields (excluding Oxy's 
former Block 15) will produce 62 million barrels, a decline of 8 
percent from its 2005 production.  It also forecast that production 
from the former Oxy fields will total 33 million barrels in 2007, 
for a combined Petroecuador production of 95 million barrels.  This 
implies an increase in total Petroecuador production over 2006, but 
only because it will have control of the former Oxy fields for the 
entire year.  For the former Oxy fields, Petroecuador projects 2007 
production at 90,000 bpd in 2007, compared to 100,000 bpd when Oxy 
controlled the field, a 10 percent decline (Oxy maintains its actual 
production capacity had been higher, around 110,000-120,000 bpd so 
the effective decline in capacity has been higher under Petroecuador 
mismanagement). 
 
¶4.  (SBU) Subtracting forecasted Petroecuador production from total 
estimated 2007 production suggests that the GOE expects private 
companies to produce approximately 88.7 million barrels in 2007. 
For comparison, after subtracting Oxy production from 2006 Central 
Bank data, private sector companies produced approximately 93.2 
million barrels, implying a 5 percent decline in 2007. 
 
¶5.  (SBU) However, former energy minister and energy consultant 
Fernando Santos predicts an even steeper decline than Petroecuador 
has projected, mainly due to a rapid decline in production from the 
former Oxy fields.  He expects total Petroecuador production to fall 
to 85.8 million barrels (58.4 million barrels from regular 
Petroecuador fields and 27.4 million barrels from the former Oxy 
fields).  Folding in the estimate for private sector production, 
this would put total 2007 oil production at 174.5 million barrels, 
which would represent an 11 percent decline over 2006. 
 
Lack of Investment Causing Decline 
---------------------------------- 
 
¶6.  (SBU) Petroecuador took control of most of its productive fields 
from Texaco Petroleum in 1990.  Only limited maintenance or repairs 
have been done since.  The Ministry of Finance controls 
Petroecuador's revenues and does not give the state company enough 
money to invest in substantial maintenance.  In addition, the fields 
were initially installed in the 1970s so the infrastructure is old 
and obsolete.  Block 15 is a very high-tech block with a high 
concentration of water (wells are quickly saturated with water and 
unusable) and new wells need to be drilled regularly in order to 
maintain production. Oxy had planned to invest USD 300 million in 
the block, and had three drilling rigs and a workover planned for 
2006; Petroecuador reportedly wants to drill more wells but the 
hiring of rigs scheduled for October 2006 is still awaiting 
government approval.  Former Oxy manager Carlos Blum had been 
running Block 15 since Oxy's contract was nullified but now Wilson 
Pastor, an old Petroecuador hand, will manage the block. 
 
Private Sector In Holding Pattern 
--------------------------------- 
 
¶7.  (SBU) Over the past decade, petroleum production in Ecuador has 
increased by approximately 40 percent.  During that time the private 
sector share of production has increased from 20 percent of 
production to 55 percent in 2006.  Oxy had been the largest private 
producer; with its departure the largest private producers are now 
Repsol (Spanish) and Andes Petroleum (Chinese); each pumps close to 
25 percent of private sector production.  Other important firms 
include Petrobras (Brazilian) with 15 percent, and Perenco (French), 
Agip (Italian), and Sipec (Chilean, each with close to 10 percent of 
private sector production.  Given the uncertainty in the sector, 
most firms are expecting to hold production steady this year, or 
even decline slightly. 
 
¶8.  (SBU) Repsol is the only private sector company planning 
significant additional investment in 2007, with plans to drill 33 
wells this year.  Our understanding is that other companies will 
only do minimal investment to maintain their current fields. 
 
¶9.  (SBU) President Correa and Energy Minister Acosta have 
criticized the current production sharing contracts between the GOE 
and private sector producers (reftel A).  However, they have not 
been clear on how they would restructure the contracts, which the 
prior government was already renegotiating due to the 2006 revision 
to the hydrocarbons law requiring companies to share "at least 50 
percent of extraordinary revenues" with the government (reftel B). 
This contractual uncertainty, which has now spread across two 
administrations, has largely paralyzed private sector investment, 
and if the uncertainty continues we could see a further decline in 
private sector production. 
 
Comment 
------- 
 
¶10.  (SBU) With last year's heavy-handed interference by the Palacio 
administration, it was to be expected that oil production would 
suffer, given that the private sector has been the dynamic half of 
Ecuador's petroleum industry.  There are already dramatic 
indications of the consequences of those actions, and we don't see 
any signs that the current government will take actions to reverse 
the trend.  The Correa government rhetoric suggests that it might 
even exacerbate the problem, but given inconsistent signals 
elsewhere in the economy, it's hard to predict how this government 
will proceed in the oil sector. 
 
¶11.  Falling oil production will clearly hamper Ecuador's economic 
growth and trade balance.  However, for at least the next few years, 
government petroleum revenues will be higher than they otherwise 
would have been as a result of seizing the Oxy fields and forcing 
additional revenue sharing.  Even so, given weaker oil prices and 
declining production, the government's petroleum revenues are now 
going to start declining from this "high point." 
 
JEWELL