GENERAL BACKGROUND
Ecuador experienced a tumultuous year in 1997. In February, the year began with a major political and constitutional crisis. At one point, the situation became so confused that Ecuador had three people (President Abdala Bucaram, Vice President Rosalia Arteaga, and speaker of Congress Fabian Alarcon) simultaneously contesting the Presidency. The crisis ended with the ouster (by Congress, with the army's support) of Bucaram -- the decisive winner of national elections in July 1996 -- for "mental incompetence," and his replacement with Alarcon. Bucaram's downfall was brought about by several factors, including widespread unhappiness (and popular unrest) with his economic austerity program, as well as with the regime's notoriously high level of cronyism and corruption. Finally, many people were angered and embarrassed by Bucaram's eccentric public behavior, which earned him the nickname "el loco" (the crazy man). As 1997 came to a close, Ecuador's political and economic situations remained unsettled, with most major decisions apparently on hold until a new round of elections is held in 1998 and a new government takes power in August.

Ecuador's unsettled political situation has negative implications for the country's economy. At the least, political uncertainty has made agreement on economic policy nearly impossible, and little progress on economic reform and privatization has taken place. Overall, gross domestic product (GDP) grew between 2.9% and 3.5% in 1997. GDP growth is expected to increase slightly in 1998, to 3.2%-3.8%. Ecuador's inflation rate increased from 25% in 1996 to 31% in 1997. A decline to 26% is expected during 1998. The United States is Ecuador's largest trading partner, the major market for Ecuador's top exports (including oil and agricultural products), and the main supplier of both consumer and capital goods.

Ecuador's main economic problems are a large fiscal deficit, near 5% of GDP, and a high debt-service burden (45% of the country's budget). President Alarcon's goal is to reduce the fiscal deficit to 2.7% through a variety of measures "which do not have great social costs." Solving this problems is made more difficult by the public's low tolerance for austerity and other reform measures, as evidenced by periodic public-sector strikes. There are also divisions within the government on the issue of whether or not to raise fuel prices and taxes in order to reduce the deficit. Meanwhile, many companies appear to be postponing investment decisions until the political situation is clearer. Foreign direct investment in Ecuador fell during the first nine months of 1997 by one-third from the same period in 1996.

In other developments: 1) in late November 1997 Ecuador reached a provisional agreement with the International Monetary Fund on renegotiating its debt, of which about $300 million represents past-due principal and interest; 2) on November 25, 1997, constitutional reforms, which penalize workers for disrupting public-service companies and which allow for privatization of the oil and electricity sectors, took effect; 3) Ecuadoreans voted for a temporary National Assembly that is tasked with further reforms to the Constitution, including creation of a Senate and setting rules for privatization of state enterprises.

Tensions continue to flare up periodically between Ecuador and its southern neighbor, Peru. For more than 50 years, the two countries have disputed a large swath of rain forest now part of Peru. This dispute has resulted in three wars, including a brief one in 1995 in the disputed Cordillera del Condor region along Ecuador's southeastern border. Peru claims (and Ecuador disputes) that the two countries' border was set under a 1942 treaty known as the Rio Protocol. In early 1997, a round of peace talks between Ecuador and Peru concluded without success. In late November, a second round began. Meanwhile, Peru's President Alberto Fujimori has stated that his government wants a permanent settlement with Ecuador before the end of the century. At the same time, Peru has accused Ecuador of trying to "socially and culturally infiltrate" indigenous communities along the disputed border, and has purchased a fleet of advanced MiG-29 jets from Belarus, sparking fears of a regional arms race.

OIL
Ecuador contains approximately 2.1 billion barrels of proven oil reserves. Combined proven and probable reserves are roughly 3.6 billion barrels. Most of the country's reserves contain heavy, sour crude oil with gravities in the 25^o API to 30^o API range. The bulk of current exploration and production activity is focused in the Oriente, or Ecuador's Amazon basin region. Ecuador's oil has become increasingly heavy in recent years as new reserves have had higher gravities than reserves in older, declining fields. Under Ecuador's constitution, all subsurface resources are property of the state, but foreign oil companies are allowed to assist in production activities.

On November 18, 1997, Luis Roman Lazo was appointed to head Petroecuador following the dismissal of Rafael Almeida. Also in November, a report was being considered by the Ministry of Energy and Mines which offered proposals for modernizing Ecuador's hydrocarbons sector. One major proposed change would place petroleum policies, plans, control and contracts under the Ministry of Energy and Mines, rather than Petroecuador. Petroecuador would become the executing agency involved in the oil exploration and production process, while at the same time becoming a more efficient and technically-managed company. Currently, Petroecuador is operating under a large debt burdern. In May 1997, Petroecuador switched its pricing benchmark from West Texas Sour to West Texas Intermediate (WTI). Effective December 9, Petroecuador again changed its pricing formula.

Production
After leaving OPEC in 1992, Ecuador's crude oil production rose from 321,000 bbl/d in 1992 to 346,000 bbl/d in 1993, and 378,000 bbl/d in 1994. By late 1997, output stood around 390,000 bbl/d. State oil company Petroecuador, which produces the bulk of Ecuador's oil, intends to spend roughly $2 billion in upstream and downstream investment before 2000. Continued exploration and potential gains from new technology eventually could boost oil production to about 470,000 bbl/d by early in the next century. Under current Petroecuador forecasts, output is then expected to decline naturally, to 200,000 bbl/d, by 2007. However, the short-term boost in production will be accompanied by a decline in average crude oil quality from 28^o API to 24^o API. Petroecuador predicts that the country could become a net oil importer by 2010. Currently, Ecuador exports about 118,000 bbl/d, or about 45% of its total net oil exports, to the United States. Ecuador also exports oil to the Far East, the Caribbean, and Latin America.

Virtually all of Ecuador's oil production comes from the Oriente region. About 40% of Ecuador's oil production comes from the 90,000-bbl/d Shushufindi-Aguarico, 55,000-bbl/d Sacha, and 21,000-bbl/d Auca fields in the Oriente. These fields contain 28^o API to 30^o API oil and form the basis for Ecuador's Oriente crude export blend. Ecuador has around 60 operating oil fields. However, almost two-thirds of output is accounted for by these three fields as well as smaller fields like Secoya, Cononaco, Jivino-Laguna, and Bogui-Capiron.

Meanwhile, Ecuador's government is looking to develop the Ishpingo, Tiputini, and Panacocha heavy oil (10^o-15^o API) fields. The three fields, in the northeastern part of the country, constitute Ecuador's largest known reserves of heavy oil, with more than 710 million barrels of recoverable reserves, according to Petroecuador. Developing the fields, located in northeastern Ecuador, could cost $1 billion, with production potential from the fields estimated at around 125,000 bbl/d.

In November 1997, Energy and Mines Minister Raul Baca (who replaced President Bucaram's controversial Energy Minister, Alfredo Adum) announced that Petroproduccion, a branch of Petroecuador, had discovered a 50 million barrel crude oil deposit 115 miles east of Quito. The field, called Huamayacu I, is expected to produced 2,000-4,000 bbl/d in the short- term. In October, Petroproduccion found 150 million barrels in oil reserves in the Yuturi field, in the Amazonian province of Napo. Development of Yuturi is scheduled to begin in early 1998, and should result in around 40,000 bbl/d in production. Petroproduccion is to develop Yuturi in association with Occidental Petroleum's Oxy Ecuadorean unit.

Argentina's YPF has plans to double production from Block 16 and neighboring fields in the southern Oriente basin. Currently, production from the fields is 31,000 bbl/d. YPF hopes to increase this to 62,700 bbl/d by 1999. YPF bought Maxus Energy, the original operator of the field, in 1995. In another development, Atlantic Richfield Co. (Arco) and Agip have signed a 20-year contract with Petroecuador to develop 160 million barrels of 16^oAPI oil from another field, Villano, in eastern Ecuador. Meanwhile, the seven-member Euroamerican Energy Consortium has proposed to build a pipeline from the Villano fields to carry heavy crude oil to a new, 30,000 bbl/d refinery and a 240-megawatt electric power plant.

During 1997, two new taxes -- one on production and the other on imported oil equipment -- angered foreign oil companies operating in Ecuador. In addition to the taxes, foreign oil companies operating under service contracts continue to ask the government to pay them more than $100 million owed for services provided during 1997.

Texaco has faced a series of lawsuits stemming from environmental damages allegedly caused by its oil exploration and production activities in Ecuador between 1972 and 1992. During that period, Texaco produced an average of 220,000 bbl/d from the Shushufindi region, accounting for more than two-thirds of Ecuador's oil production during those years. Texaco disposed of its oil interests in Ecuador in 1992.

The first lawsuit against Texaco was filed on behalf of 500,000 Ecuadoreans soon after Texaco disposed of its oil interests in Ecuador in 1992. The suit was dismissed in January 1994. In November 1993, a $1-billion lawsuit was filed against Texaco for about 30,000 Quechua Indians, who claimed that the oil company had caused irreparable damage to the Oriente rain forest. This suit was dismissed in November 1996 by the New York federal court. In July 1994, the municipality of Lago Agrio, a small town in the Amazon oil-producing region of northeastern Ecuador, filed a $2 billion lawsuit for alleged environmental damages. Texaco settled this suit in September 1996 for far less money -- about $1 million -- without any admission of liability and releasing Texaco from any further liability.

In May 1995, Texaco signed an agreement with Ecuador's government to undertake cleanup activities in northeastern Ecuador in return for releasing the company from future responsibility related to its former oil operations. Under the deal, Texaco will treat polluted water, clean and reforest production sites, build schools and medical centers at three sites, and provide river boats and an airplane to local communities. Texaco also agreed to negotiate with several regional municipalities, including Lago Agrio, which had raised their own claims against the company. In late 1996, Ecuador's Attorney General Leonidas Plaza attempted to annul this deal, but this attempt failed after President Bucaram's government was removed from power.

Pipelines
Possibly the most important and controversial issue presently confronting Petroecuador is the proposed expansion of the Transecuadorean crude oil pipeline (SOTE), which transports 85% of Ecuador's oil to the port of Esmeraldas. The expansion would increase SOTE's capacity from 330,000 barrels per day (bbl/d) currently to 410,000 bbl/d or possibly more with the use of chemicals. Pipeline expansion also would permit increased production of heavy crude oil. In early 1997, a consortium made up of Oryx Energy, Atlantic Richfield, Occidental Petroleum, Canada's City Investing, and YPF's Maxus was invited to finance the expansion. In September 1997, however, the government decided (under pressure from the military and others opposed to foreign involvement) to reject the consortium in favor of a domestic bond issue. On December 17, 1997, Petroecuador awarded awarded a $164 million contract to expand SOTE to the Army's engineering corps.

The 312-mile long SOTE pipeline connects the oil-rich Oriente region to the Balao export terminal located near Esmeraldas. The 250,000-bbl/d line was completed in 1972. By 1992, capacity had been expanded gradually with the use of additional pumping units to 325,000 bbl/d. SOTE runs through the Andes, reaching elevations of 13,200 feet. Pressure reducing stations are employed on the Pacific side of the mountains as the oil is carried through lower elevations to the Balao terminal. SOTE is currently operating above capacity. This has put a strain on the line not only because of the higher volumes, but because Oriente crudes are becoming heavier and more viscous as new fields in the area are brought online. In December 1997, the five oil companies (Elf, YPF, Oryx, Occidental, and City Investing) that operate in Ecuador's Amazon basin announced their willingness to invest $400-$500 million per year in oil development if Ecuador expands its oil transportation capacity.

Until November 1995, Ecuador was planning a $600-million expansion of the SOTE pipeline. This would have boosted capacity to 450,000 bbl/d through the construction of a parallel pipeline, a spur line from Triunfo Nuevo to Condijua, added storage capacity at Lago Agrio and Balao, and the installation of a fully-automated control system. Although this plan was never carried out, a pipeline is now under consideration which would run parallel to SOTE. This new pipeline, known as the Centro-Oriente Private Oil Pipeline, (SOCO), would transport 180,000 bbl/d of exclusively heavy crude oil, and would be constructed by the private sector. Total cost is estimated at $400 million.

In mid-October 1997, Petroecuador was forced to shut in production from 8 oil fields after protesters occupied the first pumping station on the SOTE pipeline. This temporarily (for several days) reduced daily oil output by 15%, or 59,000 bbl/d. The demonstrators, who included oil workers, civil authorities, settlers, and native Indians, were demanding more investment in the Amazon region.

Petroecuador has opened talks with Colombia's state oil company Ecopetrol to acquire more space on the Trans-Andean pipeline, which currently carries 50,000 bbl/d of Ecuadorean crude for export from Tumaco on Colombia's Pacific coast. The Trans-Andean pipeline generally has been reliable, but pumping limitations mean that it cannot carry heavy crude oil.

In August 1997, Ecuador authorized Canada's Pacalta Resources to build a 50-mile, 50,000 bbl/d crude oil pipeline in the Amazon at a cost of $11 million. The pipeline is to stretch from Tarpoa to Lago Agrio, and enable a doubling or tripling of production in the area over the next four years.

Refining & Downstream
Ecuador has three refineries with a total capacity of 148,000 bbl/d. The largest is the 90,000-bbl/d refinery at Esmeraldas, which became operational in 1978. In June 1997, Esmeraldas began a 2-month shutdown for upgrading work to be completed (by Spanish company Tecnicas Reunidas). As of November 1997, however, the work had not been completed and was over budget. Work was to include rebuilding the plant's 16,000-bbl/d fluid catalytic converter, enabling the refinery to process 24^o API instead of 28^o API Oriente crude oil. In addition, overall refining capacity was to be expanded to 160,000 bbl/d, with improved overall product quality and increased unleaded gasoline production capability. To date, $40 million has been spent in upgrading Esmeraldas, and Petroecuador officials now estimate another $17 million and 3 months of work will be needed to complete the job. Meanwhile, Ecuador has been forced to import above-normal volumes of oil products, costing the country significant amounts of money.

Plans are also underway to expand the 47,000-bbl/d La Libertad and 10,000-bbl/d Amazonas refineries through future privatization. The refinery expansions will allow Ecuador to meet its 130,000 bbl/d domestic oil product market, which is growing at an estimated 15% annual rate. In other downstream activity, Petroecuador is planning to build a $75-million, 100-mile products pipeline from Pasquales to Cuenca. The company also is planning to receive bids for a $45-million liquefied petroleum gas (LPG) storage tank.

In September 1997, Ecuador's wholesale fuel marketing companies called for the government to rescind price controls and a freeze on sales margins imposed in August. Since the market was liberalized in 1995, private retailers and wholesalers have pumped more than $500 million into modernization of Ecuador's fuel distribution system. Since August 19, 1997, the government has set the gross margin between purchases of fuel from state oil company Petrocomercial and retail stations at 18%. According to Fendisdepe, the fuel retailers association, this is costing $1.3 million per month in lost sales revenues.

NATURAL GAS
Ecuador has an estimated 3.8 trillion cubic feet of natural gas reserves, but the country lacks the infrastructure necessary to utilize these resources. For that reason, there is currently no gas market of any significance in Ecuador. This could change, however, with development of gas fields in the Gulf of Guayaquil and the Oriente.

In August 1995, a consortium comprised of BHP and King-Ranch obtained permission to build a $32-million, 100-Megawatt (MW) gas-fired power station. The plant will be fueled by the 241-billion cubic foot Amistad gas field located offshore in Block 3 in the Gulf of Guayaquil. As of November, 1997, U.S.-based Energy Development Corp. (EDC) had completed a 3D seismic survey of Amistad. Meanwhile, Noble Affiliates Inc. was planning to produce some 60 million cubic feet per day of gas, at a total cost of about $104 million, at Amistad. Initial production could begin by late 1999, with a 12-inch subsea pipeline to Playas and then on to power plants in Guayaquil.

ELECTRICITY
In October 1997, Ecuador's government announced nationwide electricity rationing of up to 8 hours per day. This situation was caused in part by a drought affecting operations at the 1,075-megawatt (MW) Paute hydroelectric power station (Paute normally provides around 60 percent of the country's electricity supply). In addition, however, the situation was exacerbated by Petroecuador's failure to import sufficient diesel and fuel oil to fire thermal power plants. At one point, diesel stocks dropped to as low as 2 days worth of supply. The rationing announcement came despite repeated assertions by the government that it would impose no more power cuts. In response to the crisis, Congress threatened impeachment proceedings against Energy Minister Baca, who submitted his resignation. As of early December, however, Baca's resignation had not been accepted by President Alarcon.

Overall, Ecuador currently faces an electricity deficit of up to 1.4 terrawatthours, with demand growing at a 6%-10% annual rate. It has been estimated that this demand increase will require investments of $3.5 billion to install 2.2 gigawatts at 9 power plants through 2010. Negotiations between power developers and the government to increase capacity have been stalled over the question of power purchase guarantees and fuel prices. Meanwhile, it has been estimated that Ecuador wasted the equivalent of $131 million in electricity during 1996 due to transmission losses.

In May 1997, National Electricity Institute manager Miguel Calahorrano confirmed that he has approved a power plant project which will be fueled by oil from Arco's Villano fields (see above). The plant is to be located either in Puyo, in the Oriente region, or Ambato, in the central highlands. Other electric power projects which the government would like to develop (all on a Build-0perate-Transfer basis) are: 1) the $245-million, 230-MW San Francisco hydroelectric power plant; 2) the $372 million, 180-MW Mazar hydroelectric plant; and 3) the $200 million, 180-MW Toachi Pilaton hydro plant.

On December 3, 1997, President Alarcon said that his administration would not have time to privatize the electricity sector. Alarcon initially had planned to split the state electricity company Inecel into several transmission and generation units. The separate companies would have been sold 39% to private bidders, 10% to employees, and 51% to a state privatization fund. In the past, Inecel employees have opposed such a sale. In a related development, Ecuador's Constitutional Court declared in December that six articles in the nation's electricity law were unconstitutional, possibly making it easier for Ecuador to move ahead with privatization efforts.

COUNTRY OVERVIEW
President: Fabian Alarcon Rivera (since February 1997)
Vice President: Rosalia Arteaga Serrano de Cordova
Independence: May 24, 1822 (from Spain)
Population (1997E): 11.9 million
Location/Size: Northwestern South America/105,037 sq. mi., slightly smaller than Nevada
Major Cities: Quito (capital), Guayaquil, Cuenca, Machala, Portoviejo, Manta, Ambato, Santo Domingo, Esmeraldas
Languages: Spanish (official), Quechua and other Indian languages
Ethnic Groups: Mestizo (mixed Spanish and Indian) (55%), Indian (25%), Spanish (10%), Black (10%)
Religion: Roman Catholic (95%)
Defense (8/96): Army (50,000), Navy (4,100), Air Force (3,000)

ECONOMIC OVERVIEW
Currency: Sucre
Official Exchange Rate (12/15/97): US$1 = 4,410 sucres
Gross Domestic Product (GDP - market rates) (1997E): $21.0 billion
Real GDP Growth Rate (1997E): 2.9%-3.5% (1998E): 3.2%-3.8%
Inflation Rate (consumer prices)(1997E): 31% (1998E): 26%
Current Account Balance (1997E): -$0.2 billion
Major Trading Partners: United States, Japan, Italy, Colombia, Spain
Merchandise Exports (1997E): $5.2 billion
Merchandise Imports (1997E): $4.3 billion
Major Export Products: Petroleum, bananas, shrimp, cocoa, coffee, flowers
Major Import Products: Transport equipment, vehicles, machinery, chemicals
Oil Export Revenues (1996E): $1.75 billion
Oil Export Revenues/Total Export Revenues (1996E): 36.5%
International Reserves (1997E): $2.33 billion
Total Disbursed External Debt (1997E): $15.0 billion

ENERGY OVERVIEW
Minister of Energy and Mines: Raul Baca Carbo
President of Petroecuador: Luis Roman Lazo
Proven Oil Reserves (1/1/97): 2.1 billion barrels
Oil Production (Jan.-Sept. 1997E): 388,000 barrels per day (bbl/d), of which about 380,000 bbl/d is crude oil
Oil Consumption (1996E): 127,000 bbl/d
Net Oil Exports (1997E): 260,000 bbl/d
Major Crude Oil Customers (1995E): United States (50%), South Korea (20%), Peru (15%), Chile, Panama, Taiwan, Cuba, Costa Rica, Guatemala
Oil Exports to the United States (1997E): 118,000 bbl/d
Crude Oil Refining Capacity (1/1/97): 148,000 bbl/d
Natural Gas Reserves (1/1/97): 3.7 trillion cubic feet (Tcf)
Natural Gas Production (1996E): 4.2 Billion cubic feet (Bcf)
Natural Gas Consumption (1996E): 4.2 Bcf
Electric Generation Capacity (1/1/96): 2.5 gigawatts (59% hydroelectric, 41% thermal)
Electricity Production (1996E): 8.5 billion kilowatthours

ENVIRONMENT OVERVIEW
Total Energy Consumption (1996E): 0.34 quadrillion Btu
Energy Consumption per Capita (1996E): 28.7 million Btu (vs. 351.9 million Btu in U.S.)
Energy Consumption per $1987 of GDP (1995E): 23.9 thousand Btu (vs. 16.7 thousand Btu in U.S.)
Energy-related Carbon Emissions (1996E): 5.1 million metric tons (0.1% of world carbon emissions)
Energy-related Carbon Emissions per $1987 of GDP (1995E): 0.35 metric tons (vs. 0.26 metric tons in U.S.)
Carbon Emissions per Capita (1996E): 0.4 metric tons (vs. 5.5 metric tons in U.S.)
Major Environmental Issues: Deforestation, land desertification, industrial and urban pollution

OIL AND GAS INDUSTRIES
Organization: Petroecuador, formerly CEPE, serves as the holding company for all state­owned petroleum operations. Petroecuador's four subsidiaries manage all upstream and downstream activities in the country.
Major Foreign Oil Company Involvement: Arco, Elf Aquitaine, Maxus, Occidental, Oryx, YPF
Major Oil Fields: Shushufindi/Aguarico, Sacha, Jivino/Laguna, Auca, Secoya, Bogui/Capiron, Cononaco
Major Refineries (capacity-bbl/d)(1/1/97): Esmeraldas (90,000), La Libertad (47,000), Amazonas (10,000), Lago Agrio (1,000)
Major Pipelines (capacity - bbl/d) (1997E): Transecuadorean (330,000), Lago Agrio-Balao, Pindo-Auca, Trans-Andean (to Tumaco, Colombia)(40,000)
Major Terminals: Guayaquil, Esmeraldas/Balao, La Libertad, Tumaco (Colombia - for export of 40,000 bbl/d of Lago Agrio crude oil via Trans-Andean pipeline)

For more information from EIA on Ecuador, please see:
EIA - Country Information on Ecuador

Links to other sites:
CIA 1997 World Factbook - Ecuador
U.S. State Department Consular Information Sheet on Ecuador
Library of Congress country study on Ecuador
U.S. Department of Energy's Office of Fossil Energy's International section - Ecuador

The following links are provided solely as a service to our customers, and therefore should not be construed as advocating or reflecting any position of the Energy Information Administration (EIA) or the United States Government. In addition, EIA does not guarantee the content or accuracy of any information presented in linked sites.

LatinWorld's section on Ecuador
Information on Ecuador from the Latin America Network Information Center
U.S. Trade and Development Agency - Latin American Projects

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File last modified: December 18, 1997

Contact:

Lowell Feld
lfeld@eia.doe.gov
Phone: (202)586-9502
Fax: (202)586-9753

URL: http://www.eia.doe.gov/emeu/cabs/ecuador.htm