Katherine Velastegui

Seminarios VII
Summary: Petrobras in Ecuador

In October 2017, Rafael Correa –Ecuador’s now former president- promised during
election campaign, to increase State control over the countrys’ oil industry. He intended
to migrate Petrobras’ existing contracts to exploit oil in blocks 18 and 31 to “servicing
agreements under which Petrobras would be paid a production fee and reimbursed for
investment costs but all recovered oil would belong to the government.” (Musacchio,

Goldberg and De-Reisen Pinho, 2009).

Every foreign oil company in Ecuador would be likewise affected by these reforms and
any company who refused to accept the new services agreements would face a 100% tax
on profits.

Petrobras is a Brazilian oil company founded in 1953 as a state – owned company.

Several years later, it built a portfolio of upstream assets. However, with Brazils’ 1977’s
so called “petroleum law”, the company found itself in the need to expand abroad, so in
that sense, Petrobras became partially privatized through a listing of shares on the
NYSE. To further its diversification and international expansion goals, the company
enhanced its governance model, strengthened its ownership structure and modernized its
management decision process. The main goal of this was to transform Petrobras from a
State-owned company to a State and investor-owned company that was able to compete
with the same agility and freedom as privately held or public companies.

The company had a huge advantage in Latin America since the late 1990s’ because
most of the regions’ countries were stablishing a neoliberal agenda and including
democratic elections. Moreover, free trade agreements were created in order to integrate
and strength economic ties throughout the Americas, as well as International
Organizations such as MERCOSUR and CAN.

Petrobras presence in Ecuador begun in the early 2000’s. The company started
operating in Ecuador in 2002, since the acquisition of the argentinian company Perez
Compac.
Petrobras controlled Ecuadorian assets such as: exploration rights in blocks 18 and 31,
as well as a stake in Oleoduto de Crus pesados, a pipeline operator.
Still and all, the game changed since 2007, with Rafael Correa risking the companys’
future in the country by proposing to increase the governments’ shares in oil revenue.
This left some companies in arrears on tax payments and led other countries to leave
Ecuador. From then on, all recovered oil would belong to the governement.

This happened not only in Ecuador, but in many of the regions’ countries, such as
Venezuela, Brazil, Bolivia, and more, whom in 2000s’ first decade started harboring
leftist governments (Hugo Chávezs’, Lula Da Silvas’, Evo Morales’) with the same
proposal and ideology as Correas’: all recovered oil would belong to the government
and their main industries -including gas, iron, and oil- would be nationalized, which
meant a huge risk for Petrobras’ stay in these countries.

Ecuadors’ government wasn’t very fond of Petrobras’ presence in the country. The
brazilian oil company had been involved in a contract dispute with Ecuadors’
government since 2005 because of transferring a 40% stake in the contract of block 18
to Japans’ Teikoku Oil without authorization. Aditionally, oil explotaition in block 31 –
where Yasuní National Park is located- was heavily criticized by civil society due to the
enviromental damage that was produced. Not surprisingly, Petrobras denied those
accusations.

Petrobras’ CEO had a very difficult decision to make: Would the company decide to
change the contracts that provided payment to the Ecuadorian government of a fixed
percentage of profits from oil production, and replace them by servicing agreements
where oil companies would be paid a production fee but all recovered oil would belong
to the government? Or would the company decide to leave the country as it had done
before in other Latin American countries?

References:

Musacchio, A. Goldberg, L. De-Reisen Pinho, R. (2009). Petrobras in

Ecuador. Harvard Business School. pp.1-23.