July 17, 2009 / 8:01 PM / 10 years ago

Ecuador unlikely to nationalize oil sector

QUITO (Reuters) - Although Ecuador seized control of Perenco’s oil fields over a tax dispute, the OPEC nation is unlikely to nationalize petroleum companies while it seeks to renegotiate contracts in a bid to increase revenue.

The leftist government of Rafael Correa, a key ally of Hugo Chavez, who has nationalized scores of energy companies as president of Venezuela, seized control of Perenco’s operations on Thursday.

But analysts and oil executives say the move does not signal a desire from Correa to tighten the state’s grip on the oil industry, the country’s biggest revenue earner.

“Correa is not looking for a wholesale nationalization of the oil sector. But he is showing, that when push comes to shove, he is willing to take over the assets of companies that do not go along with his government,” said Patrick Esteruelas, analyst at the Eurasia Group consultancy in New York.

Although close aides describe Correa as “stubborn” and unpredictable, they also say that he is pragmatic and unlikely to press foreign investors too hard, because he knows that the economy could suffer.

However, RoseAnne Franco, lead analyst for Latin America at Country Strategies PFC Energy, said Correa was likely to keep introducing reforms that may alienate investors.

“While the Correa Administration attempts to shy away from outright nationalization, Quito’s efforts to maximize oil revenues are resulting in piecemeal nationalization, triggering the same consternation among foreign companies,” she said.

The government of Correa, a US-trained economist, needs cash to fund the social projects that have helped him become one of the most popular leaders in Latin America. And he wants oil companies to chip in.

Ecuador is negotiating new operating contracts with foreign investors including Spain’s Repsol-YPF (REP.MC), Brazil’s Petrobras (PETR4.SA) and Andes Petroleum which is controlled by China’s National Petroleum Corp.

Ecuador also wants to negotiate a contract with a group of foreign oil companies, including Repsol and Petrobras, that control a key oil pipeline because he says they have been evading taxes.

“The administration has two heads fighting for power, one controlled by the government, which wants more money, and a second head controlled by Petroecuador, which wants more sway over oil production,” former energy minister Rene Ortiz told Reuters.

He said that “there is a high risk” that the government ends up seizing more operations if Petroecuador wins the internal struggle that it has with some government ministers.

The government is also giving more funds to Petroecuador, which this week raised its investment budged for this year by almost 60 percent to $1.7 billion and has landed supply deals with China and Chile.

Last weekend Correa announced that the country is soon to receive a down payment of $1 billion for future oil sales to China, and on Thursday state-run Chilean company ENAP said that Petroecuador will supply the energy-poor South American country with 10 million barrels of crude oil per year.

The deals could help the Ecuadorean government to inject liquidity into the economy, after export revenues fell sharply in the first half of the year due to oil prices.

The country needs alternative financing after defaulting on some of its sovereign bonds last year, a move to cut the country off from the international capital markets.

Last year all foreign oil companies operating in Ecuador but Perenco signed temporary deals with Ecuador and agreed to renegotiate new contracts within 12 months.

Correa wants the companies to sign service contracts, by which the companies will extract oil in exchange for a per-barrel fee.

Editing by David Gregorio

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