Ecuador Demands Oil Revenue

By MERCEDES ALVARO

QUITO—Ecuador, following in the footsteps of its ally Venezuela, has threatened to expropriate the holdings of foreign oil companies unless they agree to hand over more oil revenue to the cash-strapped government.

President Rafael Correa said Saturday that his government will submit legislation to congress to facilitate the expropriation of private oil operations if companies refuse to sign new services-based contracts.

Companies at risk include China's Andes Petroleum Co. and Petroriental, Brazil's state-run Petroleo Brasileiro SA, Eni SpA of Italy and Repsol YPF SA of Spain. There was no immediate reaction from any of the companies.

Mr. Correa's government has been pushing to tear up contracts that allow private oil operations to benefit directly from the oil they produce, and substituting contracts that pay oil companies a production fee and reimburse them for investment costs.

While the government announced the change nearly three years ago, it took until last year to send draft contracts to the companies. The companies, meanwhile, have resisted the changes and, to reduce their risks, have been investing just enough to maintain output at their existing fields.

"My patience with this is up," Mr. Correa said during a weekly radio address. "The oil companies are playing around with us."

He added that for every day that passes without the new contracts, "there are millions of dollars going to these companies that should be going to the Ecuadorian state."

Private oil companies in Ecuador are responsible for 42% of the country's production of about 466,000 barrels per day.

A populist and close ally of Venezuela's Hugo Chavez, Mr. Correa has ramped up state intervention in major areas of the economy, such as energy, mining and banking, and has increased spending to try to reduce poverty. But economic growth has been anemic and Mr. Correa's popularity has begun to suffer.

Ecuador's former minister of strategic sectors, Galo Borja, said recently that the state has infrastructure and technicians to assume operations from private oil companies if agreements can't be reached with them, although some analysts disagree with that assessment.

On Thursday, the current strategic-sectors minister, Jorge Glas, said the government expects to sign the new contracts in no more than 60 days.

The new draft contract prevents private companies from using the option of international arbitration at the World Bank's International Center for Settlement of Investment Disputes. Instead, legal conflicts would be settled at the United Nations Commission on International Trade Law, or Uncitral.

Some Ecuadorians are pursuing an environmental-damages case against Chevron Corp. in a long-running suit estimated by an expert appointed by the Ecuadorian court at $27 billion.

According to the draft services contract, before the state pays production fees to private companies, it will retain 25% of gross income from sales of extracted oil. A previous draft had put the amount at 20%.

The draft also has the government retaining transport and sales costs incurred by state-run Petroecuador, while monthly fees for operational reimbursement costs and new investment would be adjusted according to Ecuador's Producer Prices Index.

Write to Mercedes Alvaro at mercedes.alvaro@dowjones.com