New Ecuador Contracts To Take 25% Of Oil Company Profits

August 12, 2010

QUITO (Dow Jones)--New model service contracts delivered to private oil companies in Ecuador say the state is to take a "sovereignty" payment to equal 25% of their net profits.

A copy of the new contract was seen by Dow Jones late Thursday. Last month Ecuador passed a new hydrocarbons law which aims to expropriate foreign-company operations unless they sign the new service contracts, which increase state control of the industry.

Under the new contracts, private oil companies will be paid a production fee, while the government will own 100% of the oil and gas produced.

The contract says that after deducting the 25%, the state will "cover" operational and production costs via two kinds of tariff. No tariff rates are given but the first tariff is called a "production" tariff, and the second an "incremental production" tariff. The first tariff will cover the actual cost of production, while the second will cover the so-called new costs of production after the contract is signed.

In a telephone interview, Ecuador's minister for Nonrenewable Natural Resources, Wilson Pastor, said the fees, the time periods of the contracts and the investments by private oil companies will be discussed during negotiations with private oil and gas companies, which are to be held shortly.

Earlier this month Pastor said the new contract negotiations with private oil companies will have two priorities: setting the flat rate fee the state will pay to private companies for oil extraction, and examining companies' investment plans. Pastor said this did not mean establishing minimum investment levels, but rather examining projected investment projects to see if they suited "state interests."

The new contract allows for the possibility of paying the fee in dollars or in oil, "if it is convenient to the interests of the state."

The new law, passed July 27, set a deadline of 120 days from that date for major operators to make the changeover to the new service contracts. Smaller petroleum companies have 180 days.

The new contract also states that any eventual conflicts between the state and private oil companies will be handled by the United Nations Commission of International Trade Law.