MercoPress. South Atlantic News Agency

Ecuador moves to increase state control over the oil industry

President Rafael Correa promises to pay reasonable compensations

OPEC member Ecuador says it will start renegotiating contracts with private oil companies as it moves to increase state control over the sector. Under the new hydrocarbons law, the current production-sharing agreements will be replaced by a flat fee.

The Ecuadorean state will own 100% of the oil and gas produced. Foreign oil firms in Ecuador, which produces an average of 470,000 barrels per day, are currently responsible for 44% of output.

The new legislation stipulates that the first 25% of gross income from oil sales must go to the state. Costs, including fees to the companies, will come from the remainder.

Ecuador's minister for non-renewable resources, Wilson Pastor, said the government would pay a “fair price” to private companies that did not sign a new contract. The government had been pressing the companies to give up concessions that give them a share of oilfield profits and accept service contracts instead.

Critics say that the new law may deter investors from Ecuador's oil and gas sector, the country's main source of income.

The law automatically came into effect on Tuesday after the Ecuadorean Congress failed to meet the time limit set to vote on it.

President Rafael Correa, speaking on Saturday, said: “With this law, petroleum companies that do not abide by the policies of the state will have their fields nationalised and they will leave the country.”

Among the foreign companies operating in Ecuador are Brazil's Petrobras, Repsol-YPF dominated by Spanish and Argentine capital, Agip Oil from Italy and Andes Petroleum, a consortium led by the Chinese National Petroleum Corporation.

However it was reported that Anglo-French company Perenco Corp. is analyzing Ecuador's decision to end its contracts and is hoping a tribunal will order compensation.

Rodrigo Marquez, Perenco's Latin America manager, said the Ecuadorian government should compensate Perenco for “expropriation” of its fields and for the “illegal collection“ of a windfall tax, he said.

According to Marquez, the Ecuadorian government has not only confiscated Perenco's property, but has also violated the company's fundamental ownership rights.

”Experts would determine the amount of damages caused to the company“ added Marquez.

Perenco should also be compensated for the ”illegal collection” of a windfall tax, he said. The government's decision followed a long tax dispute with Perenco after the company refused to pay around 330 million USD of a windfall tax.

In October 2007, President Rafael Correa increased the state's share of windfall taxes on oil to 99% from 50%. Correa then lowered tax rates for companies that agreed to eventually sign new service contracts.

Perenco and Burlington have filed separate claims over the case at the World Bank's International Center for Settlement of Investment Disputes, or ICSID.