On a recent official visit to the United States, Ecuador’s Minister of Hydrocarbons Carlos Pérez Garcia was interviewed by JPT Features Editor Joel Parshall. Pérez was appointed to his position in May. Over the previous year, he was the owner and general manager of PEMEC Energy Consultants in Quito, Ecuador. From 1999 to 2016, Pérez held various positions at Halliburton, including geographic integration manager, new ventures advisor, Ecuador senior country manager, and human resources manager. Previously, he worked at Schlumberger and NASA. Pérez has also served as president of the SPE Ecuador Section. The following transcript of the interview has been lightly edited for length and clarity.
Oil is critical to Ecuador, given the amount of national export income and government revenue that the oil industry generates. What are the biggest needs of your upstream sector?
Mainly we’re looking for private investment for companies to come in and develop additional resources and infrastructure for the industry. So that is part of the agenda of this trip to interest companies in going into the country and investing in areas. We want to diversify our portfolio a little bit because we’re nowadays a little heavily loaded toward the Chinese investment, and we would like to see additional investment from US companies in the country.
Are there specific technology needs in upstream that would especially benefit Ecuador?
Yes. One of the things that we are looking for is IOR [improved oil recovery] and EOR [enhanced oil recovery] technology to be implemented. Our fields are starting to require secondary and tertiary recovery, so we need to increase our recovery factor. Some of them have been producing for over 40 years.
And in addition to that, something that the country has very little experience in is the fracturing business. And there are companies, such as the major service companies—especially in the US—with quite a bit of experience in that area. So we’re looking at tapping into that type of knowledge. We’ve done a few things here with good results, and I think that if companies come in with that expertise, certainly it will help.
Ecuador’s known hydrocarbons in place are essentially conventional resources. Are you mostly interested in fracturing to develop those or to start unconventional development?
We want to apply fracturing in existing fields. There are certain fields where we have tight limestones where we require that type of work. We have not looked at unconventionals yet. I’m pretty sure that there are some, but it’s not our primary area of interest.
We have right now over 4 billion barrels of reserves. And we expect to increase those reserves, especially with ITT coming on board in the next year or so. [The ITT complex comprises the Ishpingo, Tambococha, and Tiputini fields, where existing production will be supplemented by new development.] And at minimum we are probably looking at an additional 2 billion barrels of reserves coming from those fields.
ITT is in the heart of the Amazon jungle. And it’s a very sensitive area, so we have to be very careful how we develop that field with the compliance needed to address all the environmental and social issues. But that is going to be our main focus for the state oil company Petroamazonas.
Have you been using horizontal drilling?
We do quite a bit of that because we do pad drilling in the jungle to reduce footprint. And we drill anywhere from between 30 to 70 wells, and it goes all the way from highly deviated to horizontal wells. Because of the type of reservoirs that we have, horizontal wells are a good technology.
What are your plans for development based on private-sector investment?
There are new things coming up. We are currently negotiating minor fields. We received 34 offers for 10 fields, and 23 of them have been qualified. Contracts are being negotiated with expected signature in November 2017 [at time of writing]. And they’re bringing about a billion dollars of investment into the country. There are both national and international companies coming in and looking at those opportunities.
Then in the first part of January we will come out with another eight blocks called Intracampos. And that will come out differently from the past projects. This will be production-sharing type contracts instead of services contracts. And the next two rounds coming up will be production-sharing or—what we call—participation contracts.
Intracampos is in the Oriente Basin, which lies within the Amazon rainforest area, and is very close to existing infrastructure, such as roads, facilities, and pipelines. So that should be coming out, and we expect another billion-dollar investment in those eight fields.
Could you elaborate on the decision to offer some contracts based on a production-sharing model, as opposed to the services contracts you have been using?
Those are options that are provided by law. So it’s just a portfolio of different schemes that are contemplated within the law.
We use specific services contracts with fields where we retain the operation with the state oil company. And basically, a specific services contract is where you bring in a contractor to develop the field, do the investment, and they get paid by incremental barrel produced.
Then we have the services contract, which is a different type of contract where operators are responsible for the total operation. They do the Opex and Capex investments, and they get paid by the delivered barrel, a tariff that is set at a certain amount.
And then the third option that is still contemplated in the law is what we call a participation contract, which is no more than a production-sharing type of contract. The company can invest in Opex and Capex, and it’s responsible for running the operation. And the difference there is that instead of getting paid a tariff on the production, the company gets a participation in the actual production and the percentages are negotiated through the contract.
In the specific services contract, we cannot pay in kind. In both the services contract and the participation contracts, we can pay in kind so companies can be paid in oil. And in a participation contract, companies can book reserves versus the services contracts where they cannot.
We’re trying to find a way for contracts to be attractive to both sides with the variations in the price of oil, with WTI [West Texas Intermediate oil]. So the contacts—of all types—are now going to be indexed to WTI.
Ecuador exports approximately 70% of its crude oil production. Do you see exports continuing to dominate the country’s crude oil market?
Yes. We belong to OPEC, although we are a small member. We will continue to export. My personal target for the next 4 years is to increase production for the country to 700,000 barrels per day. A big part of the government budget is financed through oil exports and oil sales. So we depend on that quite a bit.
But you are looking to spread those exports to a wider customer base?
Yes. Today a lot of our production is tied to long-term contracts with China, PetroChina, Unipec, and PTTP from Thailand. We’re trying to diversify that, release some of the oil committed to them or have more production to be able to sell to other markets.
How has Ecuador managed the decline in oil prices since 2014?
We’ve really worked on our operational and production costs. We’ve been able to reduce production costs from 30-odd dollars per barrel. Now they’re down to $17 per barrel. Through the specific services contracts, we’ve renegotiated lower tariffs with the companies, and that has brought down our production costs.
A big part of our cost reduction—at least $2 per barrel—will come from energy-saving, power-generation savings. We are moving to the national grid, which is hydroelectric power generation, instead of using diesel oil which is much more expensive. The difference is 4 cents per kilowatt hour for hydroelectric versus 30 cents per kilowatt hour for diesel. That has a big impact.
Also, for the national economy, we import diesel. So when we generate with hydroelectric, and also when we don’t have to flare gas, we reduce imports of diesel and avoid taking dollars out of the economy. Ecuador’s local currency is the US dollar, so we have to protect the dollar economy by reducing imports.
And reducing flaring is also part of your program?
It’s another big effort. By the end of 2018, our plans are to have zero power generation coming from diesel and zero flaring to the environment resulting from power generation. All those plans are in place, and we should be done and implemented by then.
What are the major educational institutions within Ecuador that provide engineering and geoscience professionals to the country’s upstream sector?
There are very good schools, including four that specifically have petroleum engineering. We have the National Polytechnic University, the Central National University, the Salesian Polytechnic University, and ES-POL, which is a technical university managed by the army. So the educational resources and human capital are very strong. We have good schools and good people who have gone through them. These schools have student chapters of SPE, which are very active in Ecuador.
What would you like to see the Ecuador upstream oil and gas sector be in 10 years?
My medium-term plans for the next 4 years are to increase the production to 700,000 barrels per day from 530,000, which is our current production. And the minimum expectation is to keep up with the field declines, to be able to offset them through the additional investments in production that we are planning. I think the country has the capacity to go to at least 800,000 barrels of daily production. We do have the pipeline facilities already built to address that level of production to pump the oil to the refineries and to export.