Ecuador: Energy – Oil & Gas

The Ecuadorian oil and gas industries are well-developed, and include upstream, midstream, and downstream activities. The current production level is around 500K bbl./day, which has been the average daily production in the last years.

Ecuadorian Oil – proven reserves have been calculated to be 8,273 billion bbls. (1 January 2018).

There are two main pipelines transporting the crude oil from the amazon basin to the Pacific coast: (i) The State-owned S.O.T.E (for its acronym in Spanish); (ii) The private O.C.P (for its acronym in Spanish).

The most important refining infrastructure is located at the northern Pacific Coast, with Libertad and Esmeraldas refineries (45 K and 100 K bbl./day). Other refining infrastructure is located at the Amazon region, Shushufindi refinery (20 K bbl./day).

the past administration was developing a USD$ 2.4 billion project and looking for a private partner and stablish an administration concession in some public refineries. This alternative is intended to enhance the current refining capacity, as well as the quality of the derivates. This project ise expected to be resumed by the current administration.

Oil is undoubtedly the main export product of Ecuador, which still represents about 40% of total exports, with a significant share of GDP, representing 9% in 2019. It has been the fundamental axis of the Ecuadorian economy in the last three decades. Oil remains the backbone on which the finances and the economy depend on continuing to be the fundamental factor in the country’s growth as it is the main source of foreign exchange, balances the trade balance and contributes to financing the budget of the State.

194 million bbl. are produced per year, of which 77 million bbl. are exported, generating a profit of USD$ 6.4 billion a year.

The oil production chain is one of the most important economic chains, at the national level, includes an important national component, it generates 38,122 jobs, which represents 0.5% of total employment in the country.

Through the investment plans established in the contracts with private companies, social compensation plans are included to more than 50 surrounding communities in the areas of influence of the oil fields, with projects to improve the quality of life, such as medical centers, academic centers, geriatric centers, economic entrepreneurship improvement projects, among others.

As of the reform of the hydrocarbons law, since 2010, with the new contract modality, more than 500 million dollars have been delivered by private companies to the State for the development of the Amazon, through the contribution of 12% of profit sharing destined for this purpose in the Law.

Ecuador’s crude oil reserves are the third largest reserves in the South American region, with 8.27 billion bbls. South America is the second region with the highest crude oil reserves, it owns 20% of the world total. Venezuela concentrates almost all crude oil reserves, with 302.8 trillion bbls. which represent 92% at the regional level, and it is the country with the largest oil reserves in the world. Brazil follows with 12.83 billion bbls., 4% of the region, and Ecuador with 2.5% of the region.

As of July 9, 2011, Campo Amistad (Block 6), producer of offshore gas for homes and industries, is operated by the Ecuadorian State, which was formerly granted in concession to the US company Energy Development Company (EDC), that did not reach to renegotiate its contract to the modality of provision of services under the 2010 Amendment to the Hydrocarbon Law. Since then, PETROECUADOR EP has been at the forefront of natural gas production until the January 2, 2013, when, in accordance with Executive Decree 1351-A, Campo Amistad became operated by PETROAMAZONAS EP, all through nowadays. In 2014, its highest production level was reached with a production volume of 20.4 million ft3. In 2016, natural gas production reached a volume of 18,633.35 million cubic feet versus 2015 production of 17,549.52 million ft3., which represented an increase in production of 6%. In 2016, natural gas production averaged 50.9 million ft3/day.

The Ecuadorian government has expressed the need to determine new reserves of natural gas in the country and foresee to carry out an integrated regional study of the Sedimentary Basins of the Ecuadorian Littoral, to better define the gas systems and prospects that allow incorporate this hydrocarbon reserves to the country.

In 2019, EP PETROECUADOR shipped more than 1,198 million kg. of liquefied petroleum gas (LPG) to the domestic, industrial, agro-industrial and vehicular sectors, which represented a 3.5 percent increase compared to the previous year. However, the national production of natural gas is insufficient to cover all the country’s demand. It is estimated that Ecuador produces less than 20% of the LPG it consumes, so the remaining percentage must be covered with imports, the vast majority from Mexico, Venezuela, Panama, the United States, Argentina, Peru and Nigeria. The Ecuadorian refining centers located in Esmeraldas, Shushufindi and La Libertad produced 166,446 Metric Tons (MT) of LPG last year, while the imported volume was 1’011,470 MT. For this year, EP PETROECUADOR estimates that it will import around 998,762 MT of LPG, at an approximate budget of USD$ 197 million, while the scheduled production is 234,193 MT.

Notwithstanding, these figures are under review due to certain efficiency losses and damage registered at the Esmeraldas Refinery, which have affected the production capacity of oil derivatives at the plant. Something similar happened with the La Libertad and Shushufindi refineries. The first, suspended its operations for 14 days due to a high risk of COVID-19 infections from its workers, and the second, also was paralyzed for more than three weeks due to the isolation it suffered after the rupture of a section of the pipeline in the San Rafael sector. Meanwhile, the state-owned company estimates that by 2020 the demand for liquefied petroleum gas at the national level will have an increase of 4%.

The main reason why the national production of LPG has not grown significantly, is because the gas is produced jointly with oil in the fields of the Amazon region. “To boost local production, it is necessary to stop burning gas and industrialize it to obtain LPG,” some experts say. In addition, during the period from 1982 to 2018, the Shushufindi gas plant processed just over 11 % of the extracted gas. Recently, the current administration abrogated the ban existing as of 2005 for the private sector to invest in infrastructure for the transport and storage of LPG. New investments are also expected as a result of the liberation of the market in this segment.

According to the Hydrocarbon Law, hydrocarbon deposits and associated substances, belong to the Ecuadorian State and consequently, is in charge of the exploration and exploitation of oil and gas resources. However, by exception, local or foreign companies, could be delegated to develop these activities under different kinds of contracts such as association, participation, provision of services for the exploration and exploitation of hydrocarbons or through other contractual forms of delegation provided by Ecuadorian law.

Ecuadorian hydrocarbon main legislation provides no different regime for offshore exploration and exploitation. Thus, the applies for both onshore and offshore. The particularities of each modality are ruled by secondary regulations.

Furthermore, the State-owned company, PETROAMAZONAS EP (in merger process with EP PETROECUADOR) may hire production services under a Contract for the Provision of Services with a fixed rate with private companies. This contract may include different types of activities like optimization activities, secondary recovery, maintenance, and constructions activities (in general terms CAPEX activities) and the production maintenance activities (in general terms OPEX activities) are reserved to PETROAMAZONAS EP.

The contractual regime, in effect as of 2010, has been however, ineffective in terms of attracting fresh investments. In Ecuador, 19 private companies operate 27 oil blocks, contributing 20% of the total extraction. The remaining 80% is contributed by the State-operator PETROAMAZONAS EP.

One of the reasons for this low participation of private operators in the overall national production, is the limited openness to private investment, which does not allow the development of the fields namely due to the lack of investment incentives. However, it should be noted that in the period 2012 – 2018, the investments of the private companies exceed USD$ 2.000 billion, and a value chain in local contracts exceeding USD$ 1.5 billion in the same period.

The modality of the Contract for the Provision of Services with a fixed rate is another limitation for incentivize more investment. Private companies, under these contracts, receive a fee from the State for the extraction of each bbl. of crude, but do not benefit from the international price. That is, if the price of oil increases, the operating company does not benefit from the increase, but if the prices fall, it assumes the generated loss.

The current contract modeling protects the Ecuadorian State from the international price drop and without assuming any disbursement of financial resources. On the other hand, private contractors assume all the risks, commercial, and financial, and are obliged to put all the resources of investments and prayer costs.

Another disadvantage is that the available income to pay the contract fees is reduced with the fall of the oil prices and has been historically not sufficient to pay the agreed rates. In fact, to settle the full value of the average rate 37 USD$ / bbl., of the current service provision contracts, the WTI is required to exceed USD$ 55 / bbl.

Lowering the price reduces the available income to pay the fee; and the difference between the value of the agreed rate and the amount actually paid could be settled only if the price per bbl. exceeds USD$ 55 and if production levels allow the contractor to go recovering those accumulated amounts at the time of the contract. If they are not recovered during the term of the contract, this contingent expires, and the State has no obligation to any payment.

One of the possibilities that must be analyzed is to make the contractual modality to give more option to private companies to migrate to other forms that allow to alleviate the financial burden faced by companies in downward price scenarios, and allow to reschedule investments.

At the moment the industry and the Ecuadorian government analyze the possibility of renegotiating the contracts for the provision of services with a fixed fee and the provision of specific services with financing to the modality of participation contracts. The success of these negotiations will depend on the conditions that are established by the parties. The fundamental thing is to be able to encourage companies to carry out greater investments, reducing the tax and contribution burden on the industry, as well as the straitjacket on their cash flows due to the accumulation of the amount not paid for the fall in oil prices, which do not allow it to cover operating costs.

It should be noted that there is no specific contract model for the different kinds of contracts that could be used for the exploration and exploitation delegation. However, in the last 10 years the Ecuadorian State has commonly used participation and provision of services contracts for the exploration and exploitation of hydrocarbons for these purposes. The last bidding round and the next one in agenda would apply a participation contract modality (production sharing) with the following key features:

• The new contractual model allows companies to obtain a share on the field production.
• A total of 24 – 26 years between Exploration (4 – 6 years) and Production (20 years) Phases.
• A Social and Environment license is required.
• ADR clause is provided, and it considers both, local and international arbitration, depending on the amount of the dispute.
• Taxes to be considered: Amazónica Law, Law 40, 15% Labour Participation Tax, Income Tax, Tax on Outbound Remittances.
• A Sovereign Adjustment may apply, under the understanding that the State shall participate in the benefits of the exploitation of hydrocarbon resources in an amount not less than the one of the operating contractors. This means no less than the 50% as provided in the Ecuadorian Constitution. This adjustment, if applicable, will be calculated monthly. In this scenario, the cap and the floor thresholds for contractor’s share is defined depending on Oriente Blend Price.
• Company’s share will and it will be calculated based on a formula fixed to Oriente Blend Oil Price and production.

As mentioned in the previous question, it is likely that the Ecuadorian State will apply a very similar contract model for the future bidding rounds.

The abovementioned conditions have proved to be ineffective to attract new investments, therefore the current administration is considering private firms’ suggestions to reform the regime conditions and make it more competitive in international markets. Furthermore, consider that this issue is not only due to the contract’s model but also due to the assets offered by Ecuador. In low-price scenarios with high marginal costs, as it is in new areas where new exploration activity is to be developed, these conditions are not suitable to investors. The industry expects the State to offer other kind of assets where improved recovery (secondary recovery) is possible. In this scenario, the State is considering allowing the option of migrating the different service contract types to the production sharing model so that they can be monetizable in global markets.

Ecuadorian hydrocarbon production traditionally focuses on crude oil and only primary recovery, but Ecuador has potential options to develop secondary recovery in some fields. During the last years exploration and production has been expanded to natural gas in the offshore field Amistad (Guayas province).

Even when there is no unconventional hydrocarbon resources exploitation nowadays in Ecuador, there are important unconventional reserves to be considered, such as the Block 20 (Pungarayacu) among others. Furthermore, certain shale activities have also been carried out but have not been successful in order to make it economically profitable yet.

Regarding the regulatory regime, in general terms, it is the same. However, the hydrocarbon authorities are advised that economic conditions for unconventional cannot be the same than conventional exploitation. For this reason, there is in agenda for the approval of an economic planning for the development of Extra-heavy Crude Oils less than 15º API, as they require the application of special techniques for exploration, exploration, and transformation on site. There are also expectations that a new regulatory framework and contract modelling are developed to be applied to the Littoral region.

Key regulators to be considered for the upstream oil and gas industry Ministry of Non-Renewable Natural Resources, Energy and Non-Renewable Resources Regulation and Control Agency (former Hydrocarbon Regulation and Control Agency – ARCH-), Ministry of Environment and Water (MAE), Internal Revenue Service (IRS) and Municipality Government of the oilfield location.

If a Specific Services Contract is signed with the State-Owned Company, the same key regulators will apply plus the State-Owned Company itself.

It must be mentioned that Ecuador has made reliable efforts to provide a situation easier to comply by contractors by centralizing regulators. Few years ago, former Hydrocarbon Secretary, main regulator at that time, was merged with the Hydrocarbon Ministry. On 2019 Hydrocarbon Ministry and other ministries were merged in the Ministry of Non-Renewable Natural Resources.

It is also to be considered the merging process that the State-owned company, PETROAMAZONAS EP, is passing through in order to concentrate upstream, midstream and downstream State-owned companies, which, as mentioned above, has a considerable number of service contracts with private companies.

As explained above, Ecuadorian State is in charge of the exploration and exploitation of oil and gas resources and is the State-Owned Company that handles the upstream hydrocarbon activity in at least 22 fields at the Amazon region and 1 offshore field.

Also, some private operator´s companies have some concessions in at least 20 fields in Amazon region. On the other hand, EP PETROECUADOR is in charge of midstream and downstream activities, including transportation, refining and commercialization of oil and gas.

There is no legal restriction or requirement for foreign oil and gas companies. An important thing to be considered is a formal requirement about the Corporate Guarantee that the oil and gas companies must give to the government before signing any type of oil and gas contract. Also, it is required to set up a subsidiary or branch company under Ecuadorian law in order to sign the oil and gas contract.

The most important thing to be considered is that upstream oil and gas activities always require an environmental license before any type of jobs in the fields. The procedures to obtain such licenses are established in the environmental law. The environmental authority has been struggling to improve the timing for the expedition of the licenses, though there is a long way to go to reach efficiency levels for licencing or approvals to be timely issued.

In addition, the option for environmental licenses to be issued by non-public entities has been discussed. To do this, clear rules and respect for international practices on environmental licensing must be established, so that in this way, the environmental licensing process is more expeditious and with the highest quality standards taking care of the environment, as well as respect to the communities of the area of influence.

About health and safety regimen, our labour law is very clear about the obligations before labour authorities that the operating companies assume. Evidently, there are specific regulations applicable to the oil industry that must be observed.

Finally, in general terms, the national government is working on optimizing the forms of hiring employees. Within the oil sector, job hiring alternatives are being sought that allow optimizing the costs of oil operations due to oil costs it is necessary to improve production costs. This includes, for example, the possibility of outsourcing MAE regulations so that they are non-profit institutions that can take over and decentralize these processes.

Ecuadorian legislation provides for a royalty for the oil and gas delegation regime, defined as Sovereign Margin, that has already been explained in previous questions.

Production sharing may vary depending on each contract, however, as stated above, the current contract provides a variable share to be calculated based on a formula fixed to Oriente Blend Oil Price and production.

The taxes to be considered are Amazónica Law, Law 40, 15% Labour Participation Tax, Income Tax, and Tax on Outbound Remittances. A Sovereign Adjustment may apply (same conditions as explained above apply to this case).

The Hydrocarbon Law does establish an obligation to industrialize locally produced crude oil within the Ecuadorian territory. Therefore, exports are conditioned to satisfying the demand of local refineries and derivate consumers. Besides this, Ecuador does not have any type of restrictions on crude oil or derivates export activities. Local content obligations or domestic supply obligations are established by the law and by the oil and gas contracts, providing for local preferences when the operating companies hire or import some equipment.

Also, the Hydrocarbon Law establishes a preferential regime regarding the hiring of local personnel, and for this it sets certain minimum percentages that operating companies must comply with. In addition, recent legal reforms also establish certain parameters on the hiring of personnel belonging to the communities or localities near the oil project, especially unskilled workers.

Confiscation is not allowed by constitutional principle. On this subject, the Constitutional Court has ruled in several constitutional court decisions where confiscation has been expressly prohibited.

Pipelines, are regulated by the Hydrocarbon Law, the transport of hydrocarbons by pipelines (polyducts and pipelines) their refining, industrialization, storage, and commercialization, could be delegated to domestic or foreign companies of recognized competence in those activities. In this case, private companies shall assume the sole responsibility and risk of the investment.

Through Executive Decree No. 258, the Executive ordered the creation of the National System of Attraction and Facilitation of Investments (SNAFI for its acronym in Spanish) and the Single Platform of Investments (VUI for its acronym in Spanish), to guarantee compliance with the public policy of promotion and attraction of national and foreign investment, as well as to promote the simplification, facilitation and optimization of investment processes.

One of the benefits of this Platform is that all the paperwork will be managed in one place. Thanks to this, there will be an improvement in logistics, transparency in the processes, time and cost savings, and greater legal certainty and permanent attention will be achieved. The entity in charge of these two entities is the Ministry of Production.

The Ministry of Telecommunications will support and supervise the raising of the technological structures to develop the Platform. There will also be the support of the General Legal Secretariat of the Presidency for the regulatory development that this initiative merits.

On the other hand, with the signature of Executive Decree No. 259, the Executive creates the Technical Secretariat of Public-Private Associations and Delegated Management as a public law entity, attached to the Presidency, with legal personality and its own assets, endowed with administrative and financial autonomy.

Its objective is to coordinate and articulate inter-institutional actions to attract, facilitate, and maintain private investments associated with the generation of infrastructure and the provision of public services through the different modalities of delegated management.

The functions and attributions of this entity are the coordination of the execution of policies related to the investments made through delegated management, including the public-private associations, taking into consideration the previous experiences of the country’s international best practices. In the same way, it will manage and contract the support and technical assistance of international organizations.

This secretary was created so that investors have an interlocutor with the government and to facilitate processes.

On September 24, 2020, Ecuador has approved the Executive Decree No. 1158, which establishes the mechanism that allows the import of hydrocarbon derivatives by privates seeking a progressively rising of the costs of importing derivatives and, in this way, the country has compromised in the future fuels under the Technical Standard of Emissions Euro V and IMO 2020. Furthermore, Minister of Energy confirmed that prices of liquefied petroleum gas (LPG) for domestic, agricultural, or vehicular use are frozen. “That is, LPG is kept focused on cylinders used by households, as well as LPG for public transport vehicles of legally organized taxi drivers and LPG for drying agricultural products such as corn, rice and soybeans,” he said.

This regulation will allow private firms to import and export freely, making available the terminals of Monteverde, Esmeraldas and eventually La Libertad. In the future, it is expected to provide private players in the industry with enough facilities to have a competitive price. Although another regulation is pending to regulate leasing conditions and prices on EP PETROECUADOR infrastructure.

Terminals to be considered in the Ecuadoran jurisdiction are Monteverde, Balao and La Libertad. Moreover, there is a liquefaction plant located in Bajo-Alto (El Oro Province), which by 2011 was planned to be first liquefaction plant in Latin-America. Although it was intended to process 200 MT it hasn’t reached that production level yet.

Same Executive Decree No. 1158, applies for storage facilities according to free market principles, allowing private firms to import and export hydrocarbon derivates. However, as we mentioned, it is expected to provide private players in the industry with enough facilities in the short term in order to allow them to have a competitive price. Although another regulation is pending to regulate leasing conditions and prices on EP PETROECUADOR facilities.

Regarding the regulatory regime that applies to gas storage (not LNG), the Hydrocarbon Law provides the general terms that apply to this part of the industry. There is also a secondary regulation issued by the Energy and Non-Renewable Resources Regulation and Control Agency, that clarifies the main requirements for their authorization, and the renewal of the authorization.

There are some gas transmission and distribution systems built in Ecuador, such as the Sushufindi – Quito gas pipeline which allows to transport gas from the Amazon region to the distribution canters.

We must remember, as mentioned before, that according to the Hydrocarbon Law the transport of hydrocarbons by pipelines (polyducts and pipelines), their refining, industrialization, storage and commercialization, could be delegated to domestic or foreign companies of recognized competence in those activities. In this case, private companies shall assume the sole responsibility and risk of the investment.

In order to carry out any of these activities, private companies need to obtain an authorization granted by the Energy and Non-Renewable Resources Regulation and Control Agency (former Hydrocarbon Regulation and Control Agency – ARCH-). These companies may also be authorized to carry out pipeline transport activities, building or operating them through related companies alone or in partnership with companies specialized in such activities.

Ecuadorian Constitution states that trade policy will aim to avoid monopoly and oligopolistic practices, particularly in the private sector, and others that affect the functioning of markets. For this reason, the legal regime is intended to have a competitive downstream market. Unfortunately, there are not many gas suppliers stablished in Ecuador. We can mention few of them such as ENI, ESAIN, AGAS and DURAGAS. There are also minor players such as AUSTROGAS, CONGAS, MENDOGAS and LOJAGAS.

As mentioned above, the subsidy for the importation of industrial gas has already been eliminated seeking to diversify the market. Furthermore, private industry will be allowed to use EP PETROECUADOR’s infrastructure to commercialize oil and gas. Despite the above, the subsidy for domestic, agricultural and in some cases for vehicular use is maintained.

There is a regulation pending issuance to determine the costs of EP PETROECUADOR’s infrastructure. An attractive price is expected for private companies to be competitive. DURAGAS has recently been authorized to import and distribute LPG, and to use the existing infrastructure to operate, prior to investing in additional facilities.

The downstream gas market is regulated by Ministerial Agreement 127 of 2008, as amended and regulated. This regulation applies, at national level, to legal entities, national or foreign, legally established or domiciled in the country, or associations of these, who carry out natural gas commercialization activities in the residential and commercial sector.

This regulation establishes that the commercialization of natural gas for use in the residential and commercial sectors, includes the following activities of acquisition; import; storage; transport; and distribution and commercialization of natural gas, through any distribution system, to consumers. These activities may be exercised as a whole or individually, for which purpose the entities engaged in them, shall observe specific requirements. All-natural gas commercialization activities, for use in the residential and commercial sector, carried out by national or foreign legal entities, or associations of these, which have or do not have contracts for the exploration and exploitation of hydrocarbons, will assume responsibility and exclusive risks of investment, without committing public resources, in accordance with the rules and criteria provided for in this regulation.

The commercialization of natural gas for the industrial and vehicular market, primary storage activities, primary transportation of natural gas through pipelines and / or in cryogenic vessels, are regulated by different instruments.

The Regulation issued by the Energy and Non-Renewable Resources Regulation and Control Agency (former Hydrocarbon Regulation and Control Agency – ARCH-) on November 28, 2018, regulates the activities for the commercialization of natural gas (NG) and liquefied natural gas (LNG) for the industrial segment. This regulation applies at the national level to individuals or legal entities, national or foreign, public, private or mixed economy, who are subject to control and authorization by the Sectorial Minister or the Executive Director of the Energy and Non-Renewable Resources Regulation and Control Agency (former Hydrocarbon Regulation and Control Agency – ARCH-) as the case may be; and, are registered at the Agency for the exercise of activities for the commercialization of natural gas (NG) or liquefied natural gas (LNG) in the industrial segment, in the cases in which EP PETROECUADOR as the exclusive responsible for the distribution of NG and LNG nationwide according to article 69 of the Hydrocarbons Law, is unable to carry out this activity.

In order to carry out refining and industrialization activities of NG, the provisions of the “Regulation for the authorization and control of the refining and industrialization of hydrocarbons” must be observed.

Construction and operation activities of private main gas pipelines must comply with the provisions of the “Regulation for the Construction and Operation of Main Private Pipelines for the transportation of hydrocarbons”, issued by Executive Decree No. 592, published in Official Gazette No. 129 of July 27, 2000 and in Ministerial Agreement No. 126 “Provisions for the construction and operation of Main Private Pipelines” published in the Official Gazette Supplement No. 267 of February 15, 2001, as amended and or regulated by other legal instruments.

The activities of construction and operation of private secondary gas pipelines for the transportation of natural gas, as well as transportation in the national territory, must comply with the provisions of Ministerial Agreement No. 048 published in Official Gazette No. 74 of April 30, 2007, as amended and or replaced by other legal instruments.

The authorizations to carry out the activities of transportation, storage and commercialization, of NG and LNG, in the Industrial segment, will be issued by the Sectorial Minister or the Executive Director of the Energy and Non-Renewable Resources Regulation and Control Agency (former Hydrocarbon Regulation and Control Agency – ARCH-), depending on the case.

National or foreign individuals or legal entities that carry out activities for the industrialization, transport, storage and commercialization of NG and LNG in the industrial segment, by delegation of the State, will carry out their activities, assuming the responsibility and risk of their investment, without compromising public resources, that is, without the State or its organs and entities having to make investments in capital, finance or guarantee credits required for such purposes and will be subject to the common tax regime.

According to Executive Decree No. 95 of the Ministry of Energy and Non-Renewable Resources, Ecuador is aiming to improve the daily national production of oil in a rational and sustainable way. It is bases in 4 mainstays, that will help to attract more investment to the country. The first column of this strategy is to give legal security trough new contracts with a new regulatory law that benefits in better ways to the parts. The second part of this schedule is to become more inviting and interesting for the investors, so Ecuador become a main point to sign contracts. The third main point is to improve the efficiency of Public Entities, and last but not at least to have more clarity and transparency in the process of the contract, so all Ecuadorians feel the changes in their economy not only as State. This change wants to reform the regulatory framework of the legal security, attract investment through transparency.

As part of the reforms to the regulatory legal framework, on November 29, 2021, the government enacted the ORGANIC LAW FOR ECONOMIC DEVELOPMENT AND FISCAL SUSTAINABILITY AFTER THE COVID-19 PANDEMIC, which includes some changes to the Hydrocarbon Law:

• To include and accept different kind of exploration and/or exploitation contracts according to those that are usually uses in the industry at the international level as long as they do not contravene Ecuadorian legislation.
• Allow the creation of specific refining regulations, which will include refining contracts, without this implying delegation of public powers.
• The participation contracts for the export and / or exploration of hydrocarbons, in their participation calculation formula, will include a factor that reflects the variations in the price of crude oil.
• To eliminate the regulation of association contracts.
• Allow the hydrocarbon exploration and / or exploitation contracts to migrate to other types of contractual modalities, by agreement of the contracting parties and prior approval of the Hydrocarbon Bidding Committee (COLH).
• Allow the contracts for the provision of specific integrated services with financing from the contractor in fields operated by EP PETROECUADOR to migrate to participation or other contractual modalities, with prior authorization from the Ministry of the Industry.
• Reaffirm that transactions between parent companies, affiliates, or subsidiaries, are not considered as a transfer of contractual rights to third parties; having only the obligation to inform the Ministry and without place to collect premiums.
• Exempt from foreign trade taxes all imports of derivatives for domestic consumption in the country are

In line with the public policy contained in Executive Decree 95, the organic law project for economic development and fiscal sustainability after the COVID 19 pandemic, published on November 29, 2021, in the third supplement No. 587 of the Official Registry, included significant changes in oil policy, seeking to increase fiscal return in the short term. The first remarkable would allow current service provision contracts to participation contracts, prior a mutual agreement and if suitable for both, the State, and the oil companies. As of 2010 Ecuador mandatorily changed participation to service provision contracts. These were dramatically affected by a continuous drop in the prices of oil in the international market, which prevented the State from being able to pay the agreed fee for extraction. Returning to participation models shall ensure not only additional investment, but evidently a compensation in oil production, which is by far more liquid (monetizable) than the expectation to be paid in legal tender, subject to the cash flows of the fiscal yield and State budget planning. This amendment may allow the State and private companies to adjust several service provisions contracts currently in effect, (22 of them executed with former PETROAMAZONAS EP, now merged into EP PETROECUADOR, and at least 13 additional service provision contracts executed with the former Hydrocarbons Secretariat, now merged into the Ministry of Energy and Natural Resources).

Another significant change in this reform is the extraordinary concessions that the government could give to national or foreign companies for the exploration or exploitation of oil fields. The third remarkable reform about contracts is the possibility to delegate to private business some oil blocks that are already in production. There is already a similar precedent in the industry, the Shaya Project, concluded in 2015, where OPEX and CAPEX activities were transferred to the private sector, nowadays being a clear example that public private cooperation may result in considerable benefits for the industry.

Ecuador experienced relative normality until March 17, 2020, when the President of the Republic issued Executive Decree 1017 establishing a state of exception basing his decision on the suggestion of the OMS about quarantine due to the pandemic thus restricting constitutional rights to free mobility and association.

As of this normative act, working days were suspended at a national level, except for activities related to providing food, medicines, supply chains, communication services, among others. The Ministry of labour also acted over the pandemic and issued specific resolutions to protect the right to work and help business owners if they could no longer continue with the production based on the organic law of humanitarian support. With this law, three significant changes were introduced, as the possibility of signing agreements to modify the economic conditions of the employment relationship, the appearance of a new fixed-term contract, and a further reduction in working hours. Variations were also issued to the regime of termination of the employment contract due to force majeure.

In some spaces, as in oil fields, where they could not work from home, employees were held to the Occupational health, industrial safety, and environmental control policy to be able to continue with the production of oil and gas. This policy is a Compliance with the SSA policy. The aspects related to it are the responsibility of Petroamazonas EP employees and Contractors, and it is verified through periodic self-evaluations and audits. This was an excellent complement to the pandemic since Petroamazonas EP assured the commitment to a continuous improvement in the performance of the SSSA, through technological innovations in its projects, pollution prevention, implementation of training programs and promotion of industrial safety and health.

With the issuance of the two decrees, the government has a plan with mostly private investment and is asking the industry to invest with capital, technology, and investment. Also, the Ministry of Energy, Natural No Recover Resources and Electricity has shown a portfolio of at least $9.800 million of investment in the oil industry. The project portfolio offered by the Ministry include the concession of the maritime gas storage terminal Monteverde, with an investment of $250 millionAlso, the concession of the refinery of Esmeraldas for $2.733 million. The Ministry introduced the initiative of the Thirteen Ronda Intracampos II for over $968 million, and Ronda Extremo Suroriente that represents $ 5.000 million. This is to encourage private investors to participate with stock, technology, or investment in the Hydrocarbon sector.

Finally, on November 29, the Organic Law For Sustainable And Economic Development was enacted. It includes some interesting amendments as the temporary contribution for individuals and entities with assets from 1,000,000.00 and 5,000,000.01, respectively. Another potential investment appealing reform is the creation of a single and temporary tax for the regularization of financial assets held abroad.

Ecuadorian government is aligned to international policies as the Paris convention and Glasgow with COP26, regulations trend towards the low-carbon energy transition. The National Development Plan 2017 – 2021 among the Ecuador 2030 Long-Term Vision, includes general policies that among others, seek to:

• Ensure the rights of nature for current and future generations.
• Manage resources with intergenerational responsibility.
• Maintain environmental remediation processes.
• Increase gasoline quality
• Promote domestic production with social and environmental responsibility, enhancing the efficient management of natural resources and the use of durable and environmentally clean technologies, to ensure the supply of quality goods and services.

Regulations ARCERNNR 001/2021 and ARCERNNR 002/2021 seek to promote and expand renewable energies in the Country, with photovoltaics being one of the most accessible technologies to implement and which is also the technology that can provide the greatest generation of jobs.

In the Country, there are several incentives for the development of this type of projects, including those mentioned in the Organic Law of Energy Efficiency of 2019 and the authorization by the Ministry of the Environment for tax deductions.

Beyond the above-mentioned policies, there have not been set requirements for the oil and gas industry to reduce their carbon impact. There are no strategies or proposals relating to the production of hydrogen, or the development of carbon capture and storage facilities. Although Ecuador has a long term to cover all the requirements that the conventions ask, in 2020 Ecuador exchange of diplomatic notes with the German Government to find a way to reduce the burning of associated gas in torches.