Ecuador’s Oil Industry

For decades, the South American country of Ecuador has struggled to find a balance between its growing oil industry and its natural environment. Bordered to the north by Colombia, to the east and south by Peru, and to the west by the Pacific Ocean, Ecuador makes up an area of roughly 284 thousand square kilometers and is situated in one of the most biologically diverse parts of the world. With a population of around 17 million, and diverse landscapes that include the Amazon rainforest, the wildlife-rich Galápagos Islands, and the Andean highlands, Ecuador is uniquely endowed with rich cultural and biological diversity. On the other hand, Ecuador is also one of Latin America’s biggest fossil fuel producers. The challenge of finding a balance between the oil industry, cultural diversity, and the natural environment has fueled a long history of conflict in Ecuador.

After Venezuela and Brazil, Ecuador has the third largest oil reserves in South America with 8.3 billion barrels of proven crude oil reserves (EIA, 2017). Because of its fossil fuel reserves, Ecuador’s energy mix is largely dominated by oil. However, since Ecuador lacks a sophisticated and modern system for domestic oil refining, the country hasn’t been able to fully realize its potential to become one of the world’s top oil producers. According to data from the 2017 BP Statistical Review of World Energy, 76 percent of Ecuador’s total energy consumption is fueled by energy from oil. Renewable hydroelectric power provides the second largest source of energy, which is followed by natural gas and other nonrenewable energy sources.

Ecuador is the smallest member of the 14-nation Organization of the Petroleum Exporting Countries (OPEC). With oil production averaging around 548,000 barrels per day, Ecuador’s contribution to the global oil market is dwarfed by Saudi Arabia, Iraq, and Iran, which are OPEC’s largest oil producers, collectively contributing over 20,000,000 barrels of oil per day to the global market. Even as the third largest oil producer in South America, Brazil and Venezuela still vastly outproduce Ecuador with 2,500,000 and 2,300,000 barrels of oil produced per day respectively. Although, Ecuador’s oil sector still accounts for over half of all the country’s exports and roughly 25 percent of all public sector revenue (EIA, 2017). Because of its heavy reliance on oil for both energy and government revenue, Ecuador has been at the center of debates regarding resource nationalism and the socioeconomic impacts of its fossil fuel industry.

OPEC Turbulence

The tumultuous political climate centered around the country’s oil industry has also contributed to a turbulent history with OPEC. While Ecuador first joined OPEC in 1973, the country withdrew its membership from the oil cartel in December 1992, because the country’s leaders felt that the annual $2 million membership fee was unreasonable, and because the country believed that it could produce more oil than it was allowed under the production quota that was limited by OPEC. However, after a nearly 15-year hiatus, Ecuador rejoined OPEC in 2007 after it had failed to achieve meaningful progress in its oil production. Ecuador’s original departure from OPEC was historic because it became the first country to officially abandon the alliance with the oil cartel. A series of challenging political and economic conditions within Ecuador lead to its exit. An oil glut in the 1980s, similar to the global oil glut that began in 2018, caused a harsh economic decline in Ecuador that contributed to falling government revenues. Mounting debt, low oil prices, and political pressure ultimately led Ecuador’s president, Sixto Duran-Ballen, to officially abandon OPEC.

Much like the 1980s, today’s political and economic climate in Ecuador mirrors the symptoms felt when the country first decided to leave OPEC in 1992. In the 1980s and early 90s, Ecuador’s leaders thought that by exiting OPEC, they would be better able to take more control over their oil industry, which would potentially alleviate some of the economic ailments experienced by the country. Political leaders pointed to OPEC-imposed production quotas as one of the reasons that Ecuador was experiencing financial struggles. Although, it is unclear whether Ecuador’s hiatus from OPEC led to any concrete improvements to its oil industry. The lack of progress is one of the reasons that the country rejoined the oil cartel in 2007. Beginning in 2002, the price of oil climbed steeply, quadrupling to around $100 a barrel by 2007 (Maclay & Remington, 2016). Ecuador’s then-president, Rafael Correa, made the decision to rejoin OPEC in an attempt to better work with the organization to keep oil prices high, which greatly benefited the Ecuadorian economy. Ecuador’s 2007 reentry into OPEC demonstrates how fluctuating conditions within the global economy can influence OPEC membership.

Leaving OPEC

As oil prices have fallen vastly from their 2007 highs, the economic impact in Ecuador has been severe. The country’s government has been committed to implementing plans to reduce public spending, while also increasing fiscal revenue. However, as oil prices have remained low in recent years, the country’s political leaders have not had much success in raising incomes. Therefore, Ecuador has decided once again to exit OPEC in 2020. During the fall of 2019, the country’s energy ministry publicly announced the impending departure so that the country could better support internal efforts to achieve fiscal sustainability. In the past few years, Ecuador has not complied with OPEC oil production quotas. Rather than continuing to be at odds with the rest of OPEC’s member nations, a mutual agreement was formed to allow Ecuador to exit in 2020.

Increasing fiscal deficit, coupled with hefty foreign debt, have contributed to tight economic liquidity within Ecuador. In February 2019, Ecuador reached a $4.2 billion deal with the International Monetary Fund to allow the country to receive an urgent disbursement of $652 million, while it also opened the door for $6 billion in supplementary loans (Valencia, 2019). These funds will be used to alleviate some of the economic pressure that Ecuador has been experiencing as a result of low oil prices. Moreover, support from the International Monetary Fund will also allow Ecuador to dedicate some investments towards the expansion of its oil industry, which leaders hope will also contribute to eventual fiscal sustainability. Rene Ortiz, the former secretary general of OPEC, has said that Ecuador’s exit from OPEC will not have any adverse impact on the organization. Given the country’s relatively small amount of oil production when compared to other OPEC countries, the exit will be seen as a political issue rather than one that could have wide-reaching effects on the rest of the oil cartel.

Oil Production and Environmental Concerns

Ecuador’s political leaders hope that leaving OPEC will help to spur new growth in some of its promising oil production wells. The top-producing Ishpingo-Tambococha-Tiputini well has achieved production growth of 82,658 barrels per day (Valencia, 2019). With Ecuador out of the grasp of OPEC leadership, the country hopes to be able to increase oil production within some of its top-producing wells, along with new wells that are already under development. Ecuador’s most productive oil wells are located in the northeastern part of the country. The Shushufindi and the Auca are the country’s two most profitable oil fields and have accounted for much of Ecuador’s oil production growth in recent years. The Ishpingo-Tambococha-Tiputini well alone is set to provide nearly $603 million in government income in 2020, which assumes that the price of oil will remain at $57 per barrel (Valencia, 2019). Overall, Ecuador’s political leaders hope that its departure from OPEC will send a message to the international community that Ecuador is open for business in terms of expanding investment in its oil industry.

As Ecuador has battled OPEC, the country is also waging a battle with internal groups and international organizations dedicated to cultural diversity and environmental quality. The country’s signal that it is open for business has caused a great deal of anxiety for those that are dedicated to cultural and environmental conservation. In terms of cultural amenities, Ecuador has long been known for its unique and isolated indigenous cultures. Moreover, its capital city of Quito was declared as a United Nations Educational, Scientific and Cultural Organization (UNESCO) World Heritage Site for having one of the best preserved and least altered historic centers in Latin America. From an environmental perspective, Ecuador is one of the most biodiverse areas of the world. Its Amazonian region is home to an outstanding array of unique mammals, amphibians, reptiles, birds, marine life, bats, and exotic vegetation. These rich cultural and environmental amenities have long been at odds with Ecuador’s extractive industries, especially oil production.

Ecuador’s first productive oil well, known as Ancon 1, is located in the tranquil Santa Elena Peninsula. Since oil production first began here in 1921, it has been in conflict with the region’s environmental quality and historic cultural sites. As the country has continued to develop its oil resources in the decades following the development of Ancon 1, oil drilling operations have expanded into Ecuador’s environmentally sensitive Amazonian region, which is also home to at least nine indigenous nationalities. Since the 1970s, when oil was first discovered under the heart of Ecuador’s Amazon rainforest, the region became exposed to numerous social and environmental impacts. Only 14 percent of the Ecuadorian Amazon’s most species-rich region is listed as protected land, while 79 percent of the region has been dedicated to active and proposed oil drilling sites (Lessmann et al, 2016). The transformation of the Amazon into regions dominated by oil production has raised imperative concerns throughout the international environmental community.

Cultural and Environmental Risks

Between 1994 and 2001, over 29,000 barrels of crude oil were spilled throughout the Ecuadorian Amazon, much of which was never recovered (Lessmann et al, 2016). In the spring of 2016, much to the displeasure of the international community, Ecuador started to extract oil from one of its most biologically and culturally diverse areas, the Yasuní National Park. Located on the country’s easternmost flank with Peru and just south of Colombia, the Yasuní National Park is a 6,101-square-mile area that is home to a vast ecosystem of plants, animals, amphibians, and insects. However, beneath the fragile ecosystem lies nearly a billion barrels, which is representative of around 20 percent of Ecuador’s total oil reserves (Goldman, 2017). Despite the environmental risk associated with oil production in this region, the Ecuadorian government has given the green light to oil companies to intensify oil extraction in the region.

The conflicts between fossil fuel companies, economic interests, and environmental protection have contributed to rising political tensions and social unrest. To complicate matters further, the decision to leave OPEC has also started to alienate Ecuador from some of the world’s other major fossil fuel producers. For a relatively small country that relies heavily on oil revenue to fuel its federal budget, Ecuador’s political leaders have been debating how best to increase economic development while also safeguarding cultural and environmental resources. The government’s plan to expand the oil industry, as highlighted by the decision to leave OPEC, will have lasting socioeconomic and environmental implications for the country. While the revenues from increased oil production may help resolve some of the issues related to foreign debt and annual budget deficits, the consequences related to the destruction of indigenous communities and a drop in ecological biodiversity may ultimately hinder future economic growth because of a loss in tourist-related activity. Since Ecuador also relies on tourists visiting its historic centers and pristine Amazonian landscapes, it will be imperative to find a balance between oil production and environmental conservation.

Sources

EIA. (2017). “Country Analysis Brief: Ecuador.” U.S. Energy Information Administration.

Goldman, J. (2017). “Ecuador has begun drilling for oil in the world’s richest rainforest.” Vox.

Lessmann, J., et al. (2016). “Large expansion of oil industry in the Ecuadorian Amazon: biodiversity vulnerability and conservation alternatives.” Ecology and Evolution.

Maclay, L., and Remington, P. (2016). “Algeria, Ecuador, and OPEC.” Social Sciences Research Method Center.

OPEC. (2019). “Ecuador facts and figures.” Organization of the Petroleum Exporting Countries.

Valencia, A. (2019). “Ecuador to quit OPEC in 2020 in search of bigger export revenue.” Reuters.