Ecuador Oil & Gas Report Q4 2013 - New Market Research Report

Ecuador's oil production is on track to make some near-term gains as output rises and enhanced oil recovery projects take shape; however, we see more downside risk than upside given the above-ground challenges that have undermined interest in the OPEC member's upstream. Although there is sizable upside from upstream projects currently under appraisal, for now we expect output to peak by 2017 with risk that it could come sooner and a steeper rate given high rates of decline at mature fields. Our current forecast for gas assumes that with the arrival of a rig and planned investment at Block 6, output will grow steadily from a low base but a lower rate than the operator's plans call for. However, we expect gas production to similarly trend lower before the end of the decade.

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The key trends and developments in Ecuador's oil and gas sector are:

* Although there is upside from the potential awarding of new licensing in an ongoing bidding round, we expect reserves of both oil and gas to fall over the course of our forecast period. We see a somewhat similar trend for production over the long term. Oil production will grow over the near term with fields such as Sacha ramping up output but gains will be incremental and we expect output to slip from 2018.
* We see some sizable sources of upside, Ivanhoe's heavy oil field at Block 20 could produce up to 120,000 barrels per day (b/d) and could come online as soon as 2015. However, the quality of the crude raises the cost of development and with no investment decision we have yet to price in the additional volumes.
* Limiting the upside will be the continued decline from existing production sites. Although Ecuador has made plans to employ enhanced oil recovery (EOR) methods at a number of fields, contracts were not awarded for all sites - a further sign of the above-ground risks. Indeed, President Rafael Correa's recent re-election will weigh on the energy sector over the next four years, as he uses oil revenue to finance his heavy social spending political agenda. The damage to the oil sector done by more resource nationalist policies, such as the switch from production sharing to service contracts, reinforces our largely bearish outlook for the oil sector. This view has played out, with the ongoing licensing round extended for a second time as Ecuador attempts to attract much-needed investment.

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