Ecuador’s state oil company, Petroecuador, recently signed a crude oil supply agreement with Thailand’s state-run PTT, in which the country will receive a $2.5 billion payment.
Low oil prices have hit Ecuador hard, leading it to seek new funding sources in order to maintain public investments planned for 2015.
Ecuador’s recent oil-for-loans agreement with Thailand was signed on favorable financial terms, states President Rafael Correa, as he assures the nation that they have sufficient oil production to carry out the deal. To date, Ecuador produces around 550,000 barrels of oil per day.
Ecuador’s state-run Petroecuador signed a crude supply agreement this past June with The Petroleum Authority of Thailand (PTT) to supply around 116.6 million barrels of oil in exchange for an up-front payment of $2.5 billion.
President Correa has stated that the interest rate is favorable, at around 7 percent, with a loan term of at least five years, adding the deal will help the country cope with low oil prices.
Expanding Ecuador’s oil obligations
The PTT transaction can potentially expand Ecuador’s oil obligations beyond China’s influence. As of 2010, Ecuador had agreed to three separate loans, valued at over $5 billion, with the China Development Bank $5 billion. The agreements require Petroecuador to supply crude oil to the state-owned CNPC subsidiary Petrochina and state-owned Sinopec’s trading arm Unipec, rather than provide cash payments.
“What Ecuador wants are sources of capital with fewer political strings attached, and that goes back to the personal history of Rafael Correa, who holds the United States directly or indirectly responsible for his father’s death and suffering,” notes R. Evan Ellis, professor of Latin American studies at the United States Army War College Strategic Studies Institute. “But there is also a desire to get away from the dependence on the fiscal and political conditions of the I.M.F., World Bank and the West.”
In 2008, China became Ecuador’s main source of credit after it defaulted on $3.2 billion of sovereign debt. In addition, Ecuador’s capitol Quito owes China $5.2 billion, extending roughly two-thirds of its total bilateral obligations to finance a list of unspecified projects that it will submit.
These agreements give Chinese companies a large portion of Ecuador’s crude exports as debt agreements being repaid with oil. In continuation, China has a firm hold on close to 90% of Ecuador’s oil exports, which mostly goes to paying off its loans.
Under the PTT agreement, oil to be delivered to Thailand will come from state-run oil fields, where production has been sustained despite unfavorable conditions.
The PTT agreement seeks to finance Petroecuador’s investment plan for 2015 in order to offset lost income from the decrease in oil prices. A key priority is to complete an upgrade of Ecuador’s largest Esmeraldas refinery, which produces 110,000 barrels per day, but has been on a 13-month limited shutdown since last year.
Work on the refinery is scheduled to end in August and resume full operations by October of this year. The Esmeraldas refinery has been operational at half capacity during most of the project turnaround.