05-04-06
Ecuador's Finance Minister Diego Borja defended a new law passed by the
country's Congress that would hike the state's share of windfall oil profits
from private oil firms.
"The government will earn an additional $ 600 mm each year," Borja told during
the annual meeting of the Inter-American Development Bank.
Ecuador's Congress passed a modified version of a law proposal brought in by
President Alfredo Palacio that gives the government 60 % of windfall profits
from high oil prices. The windfall profit tax kicks in when companies sell oil
above benchmark prices set in their operating contracts.
Palacio has a few days to either pass the proposal into law, or veto parts or
all of it. Borja said he couldn't tell exactly which decision Palacio will take,
but said that, with the law, "historical damage" was being repaired.
Ecuador has always had a bad deal through its contracts with foreign oil
firms and was now gaining a "second chance," Borja said. He added current
operating contracts were drafted when oil prices stood at $ 15 a barrel and
therefore don't take into account the reality of current high oil prices. Light
sweet crude traded in New York at $ 66.7 per barrel.
Oil analysts believe the measure may scare foreign oil firms away from new
investments in the Andean country, at a time when Ecuador is already suffering
from a lack of investment in the industry.
"This measure drives oil companies away. They will look for more profitable
exploration locations," Luiz Broad, an oil analyst with the Agora Senior
brokerage in Rio de Janeiro, said.
Private oil companies produce about 340,000 barrels of oil per day out of the
country's total output of about 540,000 bpd. Brazilian state-run oil company
Petroleo Brasileiro, or Petrobras, which produces some 11,000 bpd in Ecuador,
had no immediate comment on the new law. But a company official said that
Petrobras has no major new investment plans in Ecuador, while it has earmarked
billions of dollars for expansion plans in other countries, such as the US and
Nigeria.
Petrobras also faces changes to oil and gas contracts in Bolivia and Venezuela.
Other foreign oil firms operating in Ecuador, such as US firm Occidental
Petroleum have earlier said the new oil law is a "heavy blow to the private oil
firms" and that they may reconsider its investment plans for Ecuador. Occidental
currently produces around 100,000 bpd in Ecuador.
Ecuador's Borja, however, doesn't think investments will go down as a result of
the change in legislation. He claims the windfall tax will only reduce
companies' profits from oil operations in Ecuador to about 60 % or 70 %, from
120 % before.
"Which other legal business in the world gives you such a return," Borja said.
"Oil remains a very good investment (opportunity) in Ecuador."
Borja, who has won praise for his handling of the economy since taking office in January, said the extra revenues cannot be used for current government spending, and will go into a special fund set up to "reactivate" the country's economy via investments in social and ecological projects, and technological research.
Source: Dow Jones Newswires