The Minister of Energy warns that there will not be enough money for fuel imports or other goods due to the closure of the ITT.
Wells in the Ishpingo field, which is part of the ITT oil block. Photo of June 21, 2023.
The Government accepted the victory of the Yes vote in the popular consultation that provides for the closure of all oil activity in the ITT block, located in the Yasuní National Park.
The Minister of Energy, Fernando Santos, says it in an interview with PRIMICIAS, who announces that the state oil company Petroecuador, which is in charge of the ITT, will have to prepare a plan to close activities.
This plan will be coordinated with the Ministry of the Environment, added Santos, who acknowledges that it will be titanic and an unprecedented event that will take time.
Santos anticipates that the design of the plan alone could take three months, “if we do not want to cause damage to the environment.”
From the environmental side, the Minister believes that the victory of Yes is a wake-up call for Petroecuador and the foreign oil companies that operate in the country that the value of caring for the environment is above the income that the activity can generate.
From the economic point of view, Santos says that it constitutes a hard blow to the economy, which will be difficult to compensate. Petroecuador had already warned that the abandonment of the ITT would cost the country USD 16.470 million.
This, among other values, includes the costs of removing the infrastructure, compensation to communities, international arbitration and the oil that will not be extracted for the next 20 years.
The authorities warn that there will be negative impacts not only on the General State Budget, which will stop receiving USD 1.2 billion a year, but also on the trade balance.
The most worrying thing, says Santos, is that if there is less income from oil exports, the country will not have enough money to pay for all imports of fuel or consumer goods or inputs for the industry.
Petroecuador will abide by the decision.
Petroecuador reported that it is awaiting the official results that will be proclaimed by the National Electoral Council.
In a statement released on August 21, 2023, the country’s largest oil company also said that it will coordinate all relevant actions “to fully comply with the sovereign decision of the Ecuadorian people in block 43.”
And that it will do so in coordination with State institutions with participation in the future effects of the referendum.
Production from the block is now 58,016 barrels of oil per day. That is, the ITT produces 12% of national production, which is 481,000 barrels per day.
How to offset the ITT
The Minister of Energy explains that to replace the 58,000 barrels of oil that ITT now produces, new oil explorations will have to be made in the southeastern part of the Amazon, but there is opposition from indigenous communities there.
Another option is to delegate the Sacha field to private investors to increase oil production.
On the other hand, a new exploration and exploitation plan will take at least a decade, according to Santos.
For this reason, to compensate the ITT, the next Government must seek fiscal measures, such as an increase in tax revenues or a reduction in fuel subsidies.
Nobody is going to want to lend Ecuador USD 1.2 billion every year, constantly, to compensate for the loss due to the non-exploitation of the ITT, concluded Santos.
Below, read the complete interview with the Minister of Energy of Ecuador, after the results of the popular consultation:
How does the Government receive the victory of the Yes in the popular consultation to leave the oil on land in the ITT – Yasuní?
The decision of the citizens must be respected. It is seen that among young people, who are the majority of voters, there is great environmental awareness. It is a message for Petroecuador and the oil companies that caring for nature is a much more important value than oil income.
From the financial aspect it will be a hard blow to the General State Budget and the country’s trade balance. A huge fiscal gap opens, of USD 1,200 million a year. In addition, it puts the trade balance, which is the pillar of dollarization, in deficit.
The next government will have to analyze compensatory measures.
What’s next from an operational point of view? When will the oil wells close?
It is necessary to make a plan to close the wells and another to dismantle the infrastructure. Amazonian communities will be consulted and will be greatly affected by the closure of Yasuní operations.
Just as permits were obtained to install the oil structures, it is necessary to obtain them to remove the block.
It is a process that will take time. It is not a question of going with a bulldozer and destroying the infrastructure and doing worse damage to the environment than continuing to produce.
The Constitutional Court gave one year for the closure, can that deadline be met?
The plan must be made quickly, it will take 90 days and it must be approved by the Ministry of the Environment. There you will see the stages.
As long as you don’t have that, the block will have to keep operating. Starting a decommissioning without a plan would be catastrophic.
Petroecuador has anticipated that it will need USD 467 million to dismantle the oil facilities. Does the oil company have those resources?
It is a complicated problem, because the 2024 budget will be the same as 2023, since due to the early presidential elections there will be an extended budget.
That amount of money does not appear in the budget. Without that budget, a step towards dismantling cannot be taken.
The new Assembly will have to issue a special item to increase Petroecuador’s budget.
How likely is it that there will be international arbitration by Petroecuador’s contractors in the ITT as has been warned?
We will have to negotiate with the contractors. It is the first time in the history of the country that an extractive activity has to be suspended suddenly.
It is something new, we will go along the way analyzing the solutions.
What alternatives are there to compensate for the USD 1,200 million that ITT will stop producing?
The field currently produces about 58,000 barrels of oil per day. The delegation of the Sacha field, with the incorporation of new techniques, could make it possible to increase production by around 20,000 barrels of oil per day or 25,000 barrels per day.
Another alternative is to start exploring the southeast where there could be interesting reserves, but that is a process that will take a long time.
It’s going to take a long time to make up for ITT production. Ecuador is less and less an oil country, while fuel imports are devouring state resources.
I accept the majority decision of the citizens, but as an Ecuadorian it hurts me that a serious blow has been inflicted on the national economy, which will take years to recover.
Will there be a lack of money to import fuels?
If oil revenues decrease, the trade balance becomes unbalanced. There will not be enough money for fuel imports and other goods that the country needs.
Money is taken from a dollarized country, which depends on the surplus of its trade balance.
This is going to have effects in all orders, not only in the importation of fuels, but for the importation of all the goods that are necessary for the country’s economy.
In fiscal terms, how is the loss of the ITT compensated?
The next government will only have to see how to compensate for those losses. It could be through reducing the fuel subsidy or through an increase in the Value Added Tax (VAT), which are the fastest measures to obtain income.
But these are measures that will hit the majority of Ecuadorians because I don’t think anyone will constantly lend us $1.2 billion a year to make up for this decline.
The next Government will have to be creative to compensate for the loss due to the ITT in the least traumatic way possible.
After the consultation, is the door open for new consultations to limit extractive activity?
There is always that possibility. These victories are going to be painful because, in order to compensate for the resources that are not received, the governments are going to have to take harsh measures, which are going to affect the population.
There is nothing free, if the possibility of income in a country with a fiscal deficit and dollarization is closed, you have to compensate it somehow. No environmental measures, no economic consequences.
The country will learn that it is very nice to demand care for the environment, but at a very high cost for Ecuadorians. I think it will serve as a lesson.
