China in Ecuador: An ominous double edged sword for the Amazon

The Amazon Pink Dolphin’s Voice-27/03/2013

Ecuador auctions off Amazon to Chinese oil firms

Indigenous groups claim they have not consented to oil projects, as politicians visit Beijing to publicise bidding process

Ecuadorean Amazon

Indigenous groups in Ecuador say the planned oil projects would devastate the environment and threaten their traditional way of life. Photograph: Alamy


Ecuador plans to auction off more than three million hectares of pristine Amazonian rainforest to Chinese oil companies, angering indigenous groups and underlining the global environmental toll of China‘s insatiable thirst for energy.

On Monday morning a group of Ecuadorean politicians pitched bidding contracts to representatives of Chinese oil companies at a Hilton hotel in central Beijing, on the fourth leg of a roadshow to publicise the bidding process. Previous meetings in Ecuador’s capital, Quito, and in Houston and Paris were each confronted with protests by indigenous groups.

Attending the roadshow were black-suited representatives from oil companies including China Petrochemical and China National Offshore Oil. “Ecuador is willing to establish a relationship of mutual benefit – a win-win relationship,” said Ecuador’s ambassador to China in opening remarks.

According to the California-based NGO Amazon Watch, seven indigenous groups who inhabit the land claim that they have not consented to oil projects, which would devastate the area’s environment and threaten their traditional way of life.

Ecuador map

“We demand that public and private oil companies across the world not participate in the bidding process that systematically violates the rights of seven indigenous nationalities by imposing oil projects in their ancestral territories,” a group of Ecuadorean organised indigenous associations wrote in an open letter last autumn.

In an interview, Ecuador’s secretary of hydrocarbons, Andrés Donoso Fabara, accused indigenous leaders of misrepresenting their communities to achieve political goals. “These guys with a political agenda, they are not thinking about development or about fighting against poverty,” he said.

Fabara said the government had decided not to open certain blocks of land to bidding because it lacked support from local communities. “We are entitled by law, if we wanted, to go in by force and do some activities even if they are against them,” he said. “But that’s not our policy.”

Amazon Watch said the deal would violate China’s own new investment guidelines, issued jointly by the ministries of commerce and environmental protection last month. The third clause of the guidelines says Chinese enterprises should “promote harmonious development of local economy, environment and community” while operating abroad.

Fabara said he was not aware of the guidelines. “We’re looking for global investors, not just investors from China,” he said. “But of course Chinese companies are really aggressive. In a bidding process, they might present the winning bids.”

Critics say national debt may be a large part of the Ecuadorean government’s calculations. Ecuador owed China more than £4.6bn ($7bn) as of last summer, more than a tenth of its GDP. China began loaning billions of dollars to Ecuador in 2009 in exchange for oil shipments. More recently China helped fund two of its biggest hydroelectric infrastructure projects. Ecuador may soon build a $12.5bn oil refinery with Chinese financing.

“My understanding is that this is more of a debt issue – it’s because the Ecuadoreans are so dependent on the Chinese to finance their development that they’re willing to compromise in other areas such as social and environmental regulations,” said Adam Zuckerman, environmental and human rights campaigner at Amazon Watch. “The message that they’re trying to send to international investors is not in line with reality.”

Last July the inter-American court on human rights ruled to prohibit oil developments in the Sarayaku, a tropical rainforest territory in southern Ecuador that is accessible only by plane and canoe, in order to preserve its rich cultural heritage and biodiversity. The court also mandated that governments obtain “free, prior and informed consent” from native groups before approving oil activities on their indigenous land.

A TV news report broadcast by the US Spanish-language network Telemundo showed members of Ecuadorean native groups – some wearing traditional facepaint and headdresses – waving protest banners and scuffling with security guards outside the Ecuadorean government’s roadshow stop in Houston.

“What the government’s been saying as they have been offering up our territory is not true; they have not consulted us, and we’re here to tell the big investors that they don’t have our permission to exploit our land,” Narcisa Mashienta, a women’s leader of Ecuador’s Shuar people, said in the report.

How Ecuador sold itself to China

When a country is a serial defaulter, two things happen: it regularly writes down the value of its own debts, and it can’t borrow money anywhere else. The result looks something like this:


The implication of this chart is that Ecuador is finally, perforce, living within its means — something you have to do, if you have no ability to borrow.

Except there’s something the chart doesn’t show: China.

Ecuador’s government on Monday signed a loan for $2 billion with the China Development Bank Corp., Ecuador’s Finance Ministry said, as China deepens its financial ties with the South American nation…

Currently, China’s loans to Ecuador exceed $6 billion, including $1.7 billion to finance 85% of Coca-Codo Sinclair, a hydropower plant to be built by China’s Sinohydro Corp. in Ecuador, which will supply about 75% of the country’s energy needs.

In a country the size of Ecuador, these numbers are huge. The latest newsletter from Ecuador’s Analytica Investments puts them in perspective:

Since the 2008-9 default, which chopped the government’s foreign debt to $7.01 billion, debt has surged 54% to $10.78 billion with the latest deal…

Newspaper El Universo reported that the loan from China’s Development Bank is tied to another 72,000 barrels per day of oil deliveries, citing a memo from the negotiations. That would make Ecuador owe 75% of its oil exports to China, the paper cited opposition legislator Vicente Taiano as saying…

Ecuadorian bankers report that Ecuador wants a $10 billion credit line from China. If that were to happen, Ecuador would owe the Asian giant an extraordinary 24% of GDP.

With the latest deal, Ecuador owes China some $8 billion, or 19% of GDP. That’s more than its total external debt, as measured in the kind of charts which people generally look at when they want to know debt-to-GDP ratios.

This is something which happens when sovereigns default: they risk losing their sovereignty. Ecuador now resembles a wholly-owned subsidiary of China, much like many solvency-challenged yet resource-rich countries in sub-Saharan Africa. And a glance at Greece is enough to see how that country has essentially ceded much sovereignty to the EU.

Not all defaulting countries run into this issue: Argentina still does whatever it wants to do, and is beholden to nobody. But the oldest and loudest complaint about the IMF is that it forces governments to do its bidding in return for providing emergency financial assistance. And compared to the likes of China, the IMF is positively mild in terms of self-serving policy prescriptions. It’s a key reason why governments are well advised to address fiscal problems sooner rather than later. Because if they dally too long, they risk losing their very independence.


Ecuadorians Fear Their Country Is Being Taken Over By China



The steady rise in Ecuador’s debt to China (currently over US$7bn), and recent revelations of the terms on which it has been granted, has sparked concerns over an erosion of Ecuador’s sovereignty.


The Ecuadorean state started to receive loans from China in exchange for oil shipments in July 2009. The first deal was for US$1bn in exchange for 69.1m barrels of crude. The interest rate on the loan was 7.25% over two years. In August 2010, 36,000 barrels of oil per day were committed in exchange for US$1bn at a 6% interest rate over four years. In February 2011, the first “advance sale” for 69.1m barrels was renewed at a 7.09% interest rate over two years, and in June 2011 a US$2bn credit was agreed in exchange for 130m barrels over six years.

Additionally, two of the largest hydroelectric infrastructure projects (Coca-Codo-Sinclair and Sopladora) are being financed with loans from China. Although these are not being financed though oil exports, Ecuador is obliged to use Chinese contractors to build the projects. The loans for the two projects total US$2.25bn.

Critics initially focused on the high interest rates attached to the loans and the obligations to use Chinese contractors. Concern has also grown over the concentration of debt to a single creditor and a lack of transparency regarding the specifics of the deal (the contracts are not made public). However, the recent emergence of a letter signed by both Petroecuador and Petrochina in 2009 has further fuelled criticism.

The letter appears to suggest that Petrochina has the authority to seize oil from Ecuador’s other international clients if the country fails to repay any part of the loans. Petroecuador has since claimed this is in line with the constitution and is not a guarantee over Ecuadorean assets. However, it does set a precedent of ceding some rights to Ecuador’s strategic assets to an external power.

Source: Business insider

Ecuador and China: Entwined

Ecuador’s oil economy leaves the country in tricky position

Ecuador’s state-owned Petroamazonas announced last week that it had opened, ahead of schedule, the Oso B-54 well in the country’s Orellana province. This swath east of Ecuador’s Andes is a jungly basin rich in crude oil reserves known as the Oriente Basin. Most of the country’s crude production comes from oil fields in its eastern provinces.

The Oso B-54 well will add 7,500 barrels of oil equivalent per day (boepd) to Petroamazonas’ production, which totaled 148,600 boepd in April. Production is down from 156,100 boepd in March and the company hopes new wells will steer it back on track for its forecast of 160,000 boepd in 2012.

“This is no achievement of Petroamazonas’,” said Fernando Villavicencio, an outspoken Ecuadorian analyst. He points out that the well was discovered by French-owned Perenco before that company was kicked out of the country by Ecuador’s ministry of non-renewable natural resources in 2009 during contract renegotiations and for “suspending exploratory activities.”

China has made loans to Ecuador that now total more than US$6 billion, which according to some analysts make Ecuador a wholly-owned subsidiary of the China Development Bank

Since then, Ecuador’s president Rafael Correa has moved to nationalize the oil sector and offer international companies flat-fee service contracts per barrel rather than shares of production. This measure has forced many international companies to leave, including Occidental Petroleum, ConocoPhillips, Noble Energy and Burlington Resources.

In an effort to streamline upstream and downstream compatibility, Petroamazonas and Petroecuador—the larger of the two state-owned oil companies—are in the process of merging. Exploration and drilling will be managed by Petroamazonas and transport and commercialization will be handled by Petroecuador. The priority is exploration in the Oriente Basin to exploit more of the country’s 6.5 billion barrels of proven reserves (an estimate from the Energy Information Administration). Petroamazonas plans to invest more than US$400 million in exploration this year.

This wealth of crude oil reserves has made Ecuador strongly dependent on their export. The country exports more than half the crude oil it extracts and analysts say dependence on export revenue is a threat to their economy. In addition, Ecuador’s refining capacity is weak, so it relies on imports of refined petroleum to satisfy domestic demand. Imports in 2011 totaled US$410 million for products like high-octane petroleum and diesel.

Currently, Ecuador produces just over 500,000 boepd, down from a high of 538,000 boepd in 2006. Roughly two-thirds of this production comes from the state-owned oil companies Petroamazonas and Petroecuador, with the rest coming from private companies and the smaller state-owned Operaciones Rio Napo, which is a joint venture between Petroecuador (70%) and Venezuela’s Petroleos de Venezuela (30%).

Venezuela isn’t the only country with a hand in Ecuador’s oil sector. China’s Andes Petroleum, which is owned by the China National Petroleum Corporation, has been operating in Ecuador for years. Andes owns 36.3% of the country’s second largest oil pipeline (the Heavy Crude Oil Pipeline) and produces more than 37,000 boepd. China has made loans to Ecuador that now total more than US$6 billion, which according to some analysts make Ecuador a wholly-owned subsidiary of the China Development Bank. Ecuador is to invest the funds in infrastructure and energy projects with Chinese companies and repay the loans in crude oil shipments to China.

Ecuador is scrambling to attract investors to buy into its new contracts to fund infrastructure and increase exploration. If it can increase oil production under these terms, it can continue to grow the country’s revenue stream for the future, since oil exports are so closely tied to national revenue. Ecuador opened concessions for 21 oil blocks in the southeastern part of the country in April 2012, and is signing on companies like Italian group Eni, Argentina’s YPF, China’s Andes Petroleum and the China National Petroleum Corporation, Chile’s Empresa Nacional del Petroleo (ENAP) and Venezuela’s PdVSA. These companies account for about one quarter of upstream oil production.

In an experiment to draw more revenue, President Rafael Correa has pledged not to drill in the country’s Yasuni National Park in return for financial compensation from the international community (via the United Nations Development Program). The national park, located in the Amazonian northeast of the country, holds more than 850 million barrels of proven reserves and Correa says he’ll hold off drilling in the park for US$3.5 billion (at US$350 million per year for a decade). Since the agreement’s inception in 2010, Ecuador has only managed to raise US$116 million. There is no law that says Ecuador won’t drill anyway; the Ishpingo-Tiputini-Tambococha fields underneath Yasuni are Ecuador’s largest untapped reserves.

Ecuador’s nationalization of the oil sector is driving away international companies with the new flat-fee contracts. Without diverse exploration and extraction, the sector cannot maintain production levels. To invest in this exploration and infrastructure, the country will continue entering into improperly leveraged agreements with stronger countries. China’s interest in Latin America to fuel its own growth is most strongly reflected in its dealings with Ecuador. Ecuador can only become more indebted to China to develop its resources, hard to believe since China already receives 75% of Ecuador’s oil.

Source:Aleszu Bajak

Ecuador is not a colony of China

Maurer Since its big default on its foreign debt (which I should really write about, it was ingenious) Ecuador has made a lot of oil-for-loans deals with China. The FT reported that Ecuador sold oil at $14-$15 per barrel. Felix Salmon wrote a post entitled “How Ecuador sold itself to China.” Neat stuff.

But exaggerated. The Bolivarians in Quito have not sold their sovereignty to China.Here’s the deal. The China Development Bank (CDB) loans money to Ecuador. Petroecuador repays by shipping oil to China. The Chinese pay for the oil at market prices. The money is deposited in the CDB, which withdraws 21% of the revenue to repay the loan. China has made three of these loans, at fairly cheap interest rates: 7.25% for the first , 6% for the second and 6.9% for the third, at a time when Ecuador basically could not borrow and paid 8.45% on its outstanding issues.

OK, so no Chinese empire … but is China freeing Ecuador from dependence on the United States? (We will ignore that whole dollarization thing.) Not really. There are some reports that the country is now exporting all its crude to China and Latin America. The official figures for the first half of 2012, however, tell a different story. By value, 59% of oil exports went to the United States; another 11% went to Chile and 10% to Peru. Only 2% worth (or $137 million) went to China. Ditto, imports of refined products from the U.S. of A. came to 55% of Ecuadorian petroleum imports; an additional 8% came from Panama. Only 5% came from Venezuela and nothing from China. Ecuadorian crude isn’t the best quality, but it’s good enough for Chinese refineries … except they do not seem to really want it.*

(A useful resume of different oil blends is here: scroll to Table 1.)

OK, then. Unless something drastically changes, Ecuador is going to pay Occidental. Maybe not for a while, but it will pay. And China does not have a colony across the Pacific, fun as it is to imagine such a thing.

I should mention that the international courts thing runs both ways. Maybe Ecuador will pay Occidental with assets taken from Chevron …

* UPDATE: I imagine that Petroecuador is swapping its oil for oil from other sources to send to China. PDVSA does this all the time, so it would not be unprecedented, and it would explain why the Central Bank reports almost no crude exports to the PRC despite the loan deals.

Source: The power and the money


Editorial: SELVA-Vida Sin Fronteras

Editorial Committee

David Dunham

Arno Ambrosius

Gustavo López Ospina

Mariana Almeida

Frank Brouwer

Pieter Jan Brouwer

Assistant: Emilia Romero

The Amazon Pink Dolphin’s Voice is associated with the International Environmental Mission, a grass roots citizens movement created by Chilean Senator Juan Pablo Letelier.

SELVA Vida Sin Fronteras acknowledges Kevin Schafer’s important contribution towards protecting the highly endangered Amazon pink fresh water dolphin. Title photographs of our “The Amazon Pink Dolphin’s Voice” were taken by Mr. Schafer. 

~ by FSVSF Admin on 27 March, 2013.

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