Ecuador hikes royalty rate to 99%

This is what happens when governments can arbitrarily change the rules. As they get away with changing the rules with impunity they get more outrageous with time. It is nothing to do with fair; it is to do with stealing.

It is noted that Ecuador was a jurisdiction that Alberta was compared to in the so-called "Fair Share" report. The philosophy of that report was that "if other guys get away with it, we can too". Well, here's the next step in what they are getting away with. Alberta petroleum producers take note; what comes to Ecuador will soon visit our doorstep too.

Move expected to cost industry $830M a year

Alonso Soto, Reuters

Published: Saturday, October 06, 2007

Ecuador on Friday pushed for talks with oil companies over their contracts, a day after President Rafael Correa sharply raised the government's share of oil revenue in a signal of more state control over the economy.

The shock announcement followed similar moves by his left-wing ally, Venezuelan President Hugo Chavez, who has used soaring crude prices to renegotiate better terms for his government and nationalized multibillion-dollar oil projects.

Correa, armed with a strong mandate from an election win this week, Thursday decreed companies such as Spain's Repsol and Brazil's state-owned Petrobras must hand over 99 per cent of extra oil revenue they earn when oil prices climb above an agreed benchmark price.

They had previously paid only half of those revenues.

"This is probably like a bucket of cold water over them because they were taking a good quantity of money in a way that was not in the best interest of the state," Oil Minister Galo Chiriboga told local television.

"I don't think they will leave the country; we are going to look for negotiations that will allow them to stay under terms that are favourable for the country," he said.

Companies working in South America's No. 5 petroleum producer were caught off guard by a decision the government says will cost them about $830 million a year.

The industry denounced the unilateral move.

"This modification is equivalent to a nationalization," the head of an association of private oil firms working in the country, Rene Ortiz, told Reuters.

Chiriboga said on average, the benchmark price Ecuador has agreed to is around $23 per barrel, meaning the companies now must hand over extra revenue from sales above that value.

Ecuador's crude averages above $60 a barrel.

Correa, a U.S.-educated economist, is already spooking Wall Street with populist rhetoric and talk of debt restructuring as he joins Andean allies in a shift to the left.

Chiriboga says the government wants foreign companies to switch from current deals, which allow firms to have part of the oil they extract, to new contracts where the state will sell the crude itself and pay the companies a service fee.