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Cablegate: Falling Petroleum Production

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

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