CHAPTER 24 OPTIMIZATION, ENHANCED RECOVERY, AND EXPLORATION ACTIVITIES IN MATURE OIL FIELDS: ECUADOR EXPERIENCE

• Jurisdiction: United States

International Mining and Oil & Gas Law, Development, and Investment
(Apr 2015)
CHAPTER 24
OPTIMIZATION, ENHANCED RECOVERY, AND EXPLORATION ACTIVITIES IN MATURE OIL FIELDS: ECUADOR EXPERIENCE
Alvaro Ordóñez
Partner
Bustamente & Bustamente
Quito
Javier Robalino Orellana
Partner
Paz Horowitz Robalino Garcés
Quito

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ALVARO ORDONEZ is a partner with Bustamente & Bustamente, in Quito. He has a law degree from the Catholic University of Quito, and an LLM in law and policy, natural resources, and environment (LL.M.) from the University of Denver. With over 15 years of experience in the extractive industry, Mr. Ordonez is a former Undersecretary of State for Mining Contracts. He is coauthor of the Reformation to the Mining Law of Ecuador, which provides incentives to the mining industry. Additionally, he has advised states in mining policy, is a lecturer on issues prevalent in the extractive industry in Ecuador, has participated as an exhibitor of sustainable development policies in the United Nations Conference on Trade and Development (UNCTAD), and held at the Palace of the United Nations, Geneva, Switzerland, November 2012. He is the chairman the Forum on Energy and Petroleum Law FODEP.

JAVIER ROBALINO ORELLANA is a partner and leading practitioner with Paz Horowitz Robalino Garcés, Quito, one of the foremost firms in Ecuador, and a professor of law. In 2011 Mr. Robalino was recognized by "GAR 45 under 45" as one of the leading practitioners in international arbitration. He is actively involved in the fields of oil and energy, international investment, and commercial arbitration. He is also a foreign associate of King & Spalding. Mr. Robalino has served as director and consultant of the Quito Chamber of Industry, consultant and member of the regulatory streamlining committee of the Office of the President of Ecuador, and assistant to the president of the Supreme Court of Ecuador. He has taught administrative law at the Catholic University of Quito and presently is a professor of administrative and international law and coordinator of the graduate program at San Francisco de Quito University, as well as Professor of the Business Law LL.M at the Instituto de Derecho y Empresa INIDEM in Panamá, and visiting professor at Carlos III University Energy Graduate Program in Madrid. Mr. Robalino graduated as Doctor-of-Laws from the Catholic University of Quito and received an LLM from Duke University School of Law. Mr. Robalino has written numerous publications and books dealing mainly with administrative, tax, and investment law. His recent book is entitled "Global Administrative Law, towards a Lex Administrativa" and was published in London by Cameron May in 2011. He is an arbitrator at the International Arbitration and Mediation Centre, a member of the Energy Arbitrators' List, Chair of the ALArb State Relations Committee, Representative of the Club Español de Arbitraje CEA, and board member of the Ibero-American Forum on Administrative Law and the British School. He has been recognized as a leading practitioner by IFLR, Chambers, Latin-Lawyer Magazine, and The International Who's Who of Business Lawyers in fields such as international arbitration, energy and litigation areas, since 2005.

OPTIMIZATION, ENHANCED RECOVERY AND EXPLORATION ACTIVITIES IN MATURE OIL FIELDS: THE ECUADORIAN EXPERIENCE

RMMLF, Cartagena

April, 2015

Álvaro Ordóñez

CONTENT

I.- BACKGROUND

II.- BUSINESS MODEL

III.- BRIEF OVERVIEW OF THE CONTRACTING PROCESS

IV.- MAIN FEATURES OF THE CONTRACT

V.- CONCLUSIONS

I. BACKGROUND

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• Ecuador has the third-largest oil reserves in South America.

• Oil Reserves: 6,187 (MMbbl).

• Oil Production: approx. 559,240 b/d.

• Ecuador is the smallest oil-producing member of the OPEC.

• Two state-owned companies:

• Petroamazonas EP (PAM) upstream

• Petroecuador EP downstream

Ecuador: Oil Production vs. Consumption

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Ecuador: Energy Consumption

• 75% comes from petroleum

• 19% comes from hydroelectric

• 4% comes from natural gas

Ecuador: Institutional Structure

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Ecuador: Oil Production

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Ecuador: E&P Investment

II. BUSINESS MODEL

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? Contract: Integrated Services with Financing

? Principal Services: OPT / EOR - IOR

? Supplementary Services: WO / LA / WL / SL / Q

? Mature Oil Fields: 5 Groups

? Investment: Based on investment plan of PAM EP

? Tariff: OPT / EOR / IOR

II. BUSINESS MODEL: Goals

Increased domestic production	Reversing the decline of mature fields
New income from oil sector
Project financing through new foreign investment	Creation of a new business model
New opportunities with new players
Be a part of and share technology
Transfer of technology
Tool to diversify investments in public companies	Planification, establish priorities

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• A private company is contracted to execute the activities agreed by the two parties in a work program.

• Any new activity in the future has to be agreed upon.

• There are no discretionary activities of exploration and exploitation by the private company.

SHUSHUFINDI-AGUARICO

III. BRIEF OVERVIEW OF THE CONTRACTING PROCESS

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PETROAMAZONAS MATURE OIL FIELDS

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COMPANIES THAT EXPRESSED INTEREST

• ECOPETROL

• FOR OIL

• HALLIBURTON

• INTERPEC SERTECPET

• EDINPETROL

• GENTE OIL

• PETROMINERALES

• ENERCANA

• SCHLUMBERGER

• SINOPEC

• TIORCO

• BELORUSNEFT

• ONGC VIOESH

• BAKER HUGHES

• BAKRIE KALILA

• ICC

• YPF

• WEATHERFORD

• HAICHENG

• PLUSPETROL

• OMIMEX

• GREENGASCOM

• AMAPEC

• PETRO TIGER

• TECPETROL

• PETROFAC

• AKER SOLUTIONS

• ENAP SIPEC

• REPSOL

• BARON OIL

PROCES OPT - EOR

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ENVELOPE NO. 1

QUALIFICATION CRITERIA OF OFFERS

Bidders were required to qualify based on the following criteria:

NEGOTIATION

IV. FEATURES OF THE CONTRACT

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FEATURES OF THE CONTRACT

Parties

Parties of the Contract:

• PAM EP

• Contractor

• Private or public, national o international companies.

• E&P companies

• Service companies with experience

• Joint Ventures

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Term

Term of the Contract:

• 15 years from effective day

• Parties may agree to an extension of 5 additional years

Services

• The contractor must provide the following services, activities and investments to PAM, at contractor's sole risk and expense:

• Production Optimization Services / Activities:

• Aimed at increasing production through optimization activities over the Base Production Curve

• Includes (among others): drilling, flowlines, dual completions, zone changes, provision of facilities, infrastructure and equipment support for incremental production

• The contractor has exclusivity for the provision of these services in the contract area.

• The fee for these services shall be as provided in the Contract

• Pilot Projects EOR-IOR Services /Activities

• Includes the preparation of studies

• Implementation of Pilot Projects of EOR-IOR

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• Supplementary Services:

• Refers to the provision of services for the operation in which the contractor has the "first option".

• These are:

• artificial lift

• wireline

• slickfine

• chemical and pulling BES

Capex y Opex

Opex:

• PAM EP is responsible for all Opex regarding the maintenance of the Base Production Curve.

Capex:

• The Contractor is responsible for all Capex to be carried out during the contract period for the replacement of existing facilities and equipment that are necessary in order to maintain the Base Production Curve, according to the committed investments regarding the replacement of equipment and facilities.

• The Contractor is responsible for all Capex associated with incremental production resulting from the Production Optimization Services / Activities.

Tariff

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• PAM pays the Contractor on a monthly basis and in US dollars the amount obtained by multiplying the OPT tariff by the number of barrels of audited net crude oil that exceeds the "Production Base Curve".

• Additionally, if EOR pilot projects result successful and as a result the parties agree on a plan for implementing such project, PAM shall pay the Contractor on a monthly basis and in US dollars the amount obtained by multiplying the EOR tariff to be agreed by the parties by the number of barrets of audited net crude oil that exceeds the "Referential Production Line".

• The internal rate of return (after tax) for the Contractor is in the range 15-20%.

• Supplemental Services will be paid in US prices according to the lowest price for such service according to the existing other service orders between the Contractor (or its related companies) and PAM, or when such service orders do not exist, the prices agreed by the parties.

Trust for Payment

• Payments to the Contractor are made through a trust at the Central Bank of Ecuador, with proceeds from the sale of the incremental oil production.

Executive Committee

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• Executive Committee consisting of three (3) regular representatives and three (3) alternate representatives appointed by each of the parties.

• The Chairman of the Executive Committee is appointed by PAM, and the Secretary of the Executive...