QUITO -(Dow Jones)- Ecuador's Minister for Nonrenewable Natural Resources Wilson Pastor said Wednesday that oil companies have the will to negotiate contract changeovers.
In July, Ecuador passed a new hydrocarbons law that aims to expropriate foreign-companies' operations unless they sign new service contracts.
On Wednesday, the formal meetings between about 40 private-sector oil company executives and the government began to change the contracts.
"The private companies are willing to negotiate. They have the predisposition to negotiate, but we cannot anticipate the result of the negotiations," Pastor told journalists.
The aim of changing the contracts is to replace current production-sharing deals with service contracts under which private oil companies will be paid a production fee while the government will own 100% of the oil and gas produced.
"The outlook is uncertain. The important thing will be to know the fee for each contract," a representative of an oil company, who asked that his name not be used, told Dow Jones Newswires after the meeting.
In general, companies have expected that the per-barrel fee would be linked to the price of crude oil in the international market and adjusted periodically, but Pastor said that this won't be possible.
"The negotiation process, without doubts, will be long and difficult. The negotiations will be tough," said another executive of an oil company, who also requested anonymity because of a government request for the talks to remain confidential.
One of the biggest concerns for the companies is the stipulation that any conflicts between the state and private oil companies be handled by the United Nations' Commission of International Trade Law, or Uncitral.
Fernando Santos, former minister of energy and an oil consultant, said that, while the decision to submit disputes to Uncitral looks positive, a provision that excludes from arbitration any tax issues and the ability to revoke contracts makes this option less viable.
"The majority of oil companies have gone to arbitration either for issues involving the revoking of their contracts or for tax issues. By excluding these items from the arbitration process, this becomes only an academic concept," he said.
The government also wants companies to renounce any previous arbitration claims, but Santos said that, for most companies, this will be unacceptable.
As part of the renegotiation process, companies also must return some of areas that have already been awarded if they aren't being exploited, the government has said.
The government is due to renegotiate 33 contracts, grouped into 13 negotiation processes because some companies have more than one contract.
Julio Jose Prado, an analyst with IDE Business School, said the renegotiation in the short term would be a political triumph for the administration of President Rafael Correa. However, in the long run, the country will experience problems with lower investments and efficiency in the oil sector.
The deadline to sign new contracts is November 23 for large companies and January 23 for small companies.
Private-sector oil companies have until next week to make additional observations on the contract model. According to Pastor, the final contract model could be ready by mid-September.
The first company to begin negotiating the fee will be Spain's Repsol YPF SA.
Italy's Eni SpA, Repsol YPF , Brazil's state-run Petroleo Brasileiro SA and China's Andes Petroleum Co. and PetroOriental are the major oil companies operating in Ecuador.