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IHS Global Insight Perspective
Ecuadorian president Rafael Correa is expected today to enact a new legal framework for the all-important hydrocarbons sector.
The law steps up pressure on oil companies to go ahead with transforming current production sharing agreements into service contracts. But the legislative victory comes with a high price tag, as the way the bill was fought through Congress will likely accelerate the deterioration of the political environment.
While the new hydrocarbon law is unlikely to reverse the trend of falling investment and falling production in the oil sector, President Correa remains headed for troubled times, with an increasing likelihood that he might dissolve parliament in an effort to break the current legislative deadlock.
Ecuadorian president Rafael Correa is expected today to enact sweeping reform of the all-important hydrocarbons sector, even though the reform bill has not been approved by lawmakers in the National Assembly. In the eyes of the president, the move is justified by the failure of Congress to approve the measure, classified as emergency legislation, within 30 days of its submission, a deadline which expired yesterday at midnight. In "strict defence of the Constitution", the bill will become law of the republic today, President Correa said on Saturday (24 July). In what initially appeared to be a last-ditch effort to approve the already much-delayed piece, the president of Congress, Fernando Cordero, from the ruling Proud and Sovereign Fatherland Alliance (PAIS), had called for a congressional session to complete the necessary second reading of the bill on Sunday. But in the event, this did not happen. While lawmakers from PAIS—theoretically holding 59 votes, the largest bloc in the 124-seat unicameral legislature—came to Congress, they did not enter the plenary, thus denying the necessary quorum and, consequently, forcing the entry into law of the bill without full legislative approval. Amid rumors in local press that neither PAIS nor the opposition would have mustered the necessary votes to either vote or reject the bill, this strategy has infuriated opposition lawmakers, who slammed the law as an "assault on the country" and who accused Cordero and the ruling party of blindly obeying orders from the presidency.
But in reality, President Correa’s congressional position is far weaker than this episode suggests, as problems in pushing through a demanding legislative agenda have been multiplying over the last few months. Only last week, Cordero suspended for the fourth time an equally delayed higher education bill. This was ostensibly to give more time to discuss the highly controversial measure, which has raised concerns that it could pave the way for increased government intervention in academic affairs, but opposition lawmakers have argued the postponement has chiefly been motivated by the desire to avoid a looming painful legislative defeat. Increasing divisions within PAIS mean that the executive can count on only 53 or 54 votes in Congress, leaving the ruling party at the mercy of shifting and unstable alliances to get legislation passed. The failure to get the higher education law passed is all the more embarrassing as the bill is part of a series of bills that the new government-sponsored constitution mandated to approve within the first year of the entry into force of the 2008 fundamental law—another deadline that the government has been unable to meet. This group of laws also includes a contentious new communication law, which the opposition has argued will restrict freedom of expression, and a highly contentious water bill. The latter currently lies on ice, after indigenous protests forced the suspension of the legislative approval process.
Outlook and Implication
PAIS lawmakers yesterday celebrated the approval of the law as a milestone towards recuperating "sovereignty" over Ecuador’s hydrocarbon reserves. In particular, the approval of the law increases pressure on oil companies to transform their current production contracts into service contracts. This has been required by the government since 2007, but the clock is now ticking for oil companies, which, under the new law, have between 120 and 180 days to renegotiate their contracts. Foreign direct investment in the oil sector and output from foreign oil companies have both fallen in recent years as a direct result of increased legal and regulatory uncertainty. Fields operated by private companies produced 204,496 b/d in 2009, and their output is expected to fall by 7.7% this year, according to recent comments by Ecuador's minister for non-renewable natural resources Wilson Pástor. The promise of new investment will be a precondition of the new contracts, but the legal framework as established under the hydrocarbons reform is unlikely to establish the foundation for significant production growth in the years to come.
Industry concerns over the new law were evident in a recent hearing before the National Assembly in which the president of the Association of Hydrocarbon Industries José Luis Ziritt warned that the fixed tariff offered under the proposed new contract model will not provide incentives for companies to invest. Companies themselves have generally refrained from criticising the changes publicly, but several have already voted with their feet, either returning smaller blocks that are no longer considered economically feasible under the new terms or exiting the country all together. The real test of investor confidence, however, will come with the contract renegotiations and a proposed new licensing round next year. Those that have already signed transition accords—such as Petrobras, Repsol and Chinese-owned Andes Petroleum—are likely to stay, especially if the number of years remaining on their contracts is extended, but the prospects of foreign companies embarking on any new exploration projects in the country are very slim.While President Correa got what he wanted this time around, the way the bill was forced through Congress will, if anything, accelerate the deterioration of the political climate, which has been marked by increasing partisan confrontation and polarisation. Faced with growing headwinds, President Correa yesterday mulled over the possibility of dissolving Congress, if lawmakers continued to block his left-wing reform agenda with "unscrupulous maneuvers". This would give the president the power to pass emergency decrees until a new assembly has taken office, but it would also force new presidential elections to be held at the same date as legislative elections. Correa, an experienced and skilled campaigner, would certainly be hard to beat in the electoral arena, despite flagging approval ratings and signs that the otherwise weak and heterogeneous opposition has started finding ways to collaborate more efficiently. But the move would not be without risk. Unless he won a substantial parliamentary majority, he could well remain hampered by a fractured Congress with low discipline, while at the same time being devoid of his most powerful weapon to force legislative co-operation, as the assembly can only be dissolved once in the first three years of the (four-year) presidential term.