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10/8/08

The Ecuador oil dance continues

Correa: Surprisingly good at the yo-yo

In the last couple of years, President Studmuffin Correa has managed to tame nearly all the main foreign influences in Ecuador. From the ongoing threats of kicking out "illegal" debt paper to the actual kicking out of the US military at the Manta air base to taking none other than Carlos Slim to the brink before getting a better cellular phone deal for the state to the ongoing fear and nervousness he creates in the nascent mining sector.

All except for one. To say Ecuador depends on oil is a bit like saying there's a small problem with the world banking system. With ongoing revenues from oil Ecuador as a country would shut down in about a week, and the foreign oil players there sure do know that. Every time Studmuffin comes on as the tough guy and tries to play hardball with the oil companies, he gets the same reply:

Studmuffin:"We're going to raise the windfall tax to 99%"
Oil Companies: "Screw you."
Studmuffin: "Ok let's negotiate on the point."
Oil Companies: "Screw you."
Studmuffin: "If you don't like it, you can leave."
Oil Companies: "Screw you."
Studmuffin: "I'm not joking guys. Honest."
Oil Companies: "Screw you."
Studmuffin: "We must renegotiate contracts right now. There's no more time."
Oil Companies: "Screw you."
Studmuffin: "We'll slap fines on environmental damage starting now."
Oil Companies: "Screw you."
Studmuffin: "If you don't up investment and production, we're kicking you out."
Oil Companies: "Screw you."

That last one is the latest episode. Last weekend Correa came on all strong, surely feeling bolstered by the excellent win in the referendum on the 28th. He told oil companies that they must invest and get production up or risk being kicked out. Today, President Lula (supposedly from allied Brazil, but bizniz iz bizniz dudes) plays messenger boy to big Ecuador player Petrobras, saying that they might pull out of Ecuador.

The plain fact is that Ecuador can't kick the oil boys around like the other sectors. If it tried to take over or was handed the production from the private company fields, state coffers just could stretch far enough at the moment to cover the necessary capex, opex and investment needed to maintain the fields. And then there's the brain drain factor, as Ecuador just doesn't have enough beautiful oil minds to cover all bases. In short, the oil boyz leave and Ecuador goes down the toilet, go straight down toilet, do not pass go, do not collect even a couple of hundred dollars.

So eventually Correa has to climb down a bit. My best guess is that the two sides will come to some kind of longer term deal before the end of the year, but it's going to have to suit both sides. On the oil side, they'll demand and get continued excellent gross profits. On the Correa side he'll demand and get a deal that wins a bit more for Ecuador while bringing long-term stability and is a face-saver, as ongoing ego enlargement is vital in LatAm politics.

How the miners must wish they had the same muscle.....................