Complications of the reform of the hydrocarbons law. An urgent reading

Complications of the reform of the hydrocarbons law. An urgent reading

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By Alberto Acosta

Today, more than ever, we must act calmly to avoid haste leading to mistakes that can be very costly for the country. These elements do not appear in the bill of reforms to the law, reason for these reflections

It is undeniable that the country requires profound and urgent changes in the current legal framework in the hydrocarbon field. The current legal situation is unsustainable and the urgency to change it is indisputable. This conclusion is nourished by the analysis of the Ecuadorian oil reality and its perspectives.

To begin with, leaving the bottom line for the following lines, the urgency raised cannot be synonymous with an irresponsible outrage. Today, more than ever, we must act calmly to avoid haste leading to mistakes that can be very costly for the country. Therefore, given the importance of the proposed issue and the challenge that its resolution implies, it would be of national convenience that the assembly members return the reform project to treat it more calmly.

If in the National Assembly, for whatever reason, said return does not prosper, it would be a gesture of political maturity if the government of President Rafael Correa itself withdraws its project to prevent it from entering into force by the simple ministry of law; that would be very serious for many reasons, but above all because it would be demonstrating a joyful and irresponsible handling of a matter of such importance.

What is required now is a serious commitment on the part of the National Assembly, the government and the whole of society to debate this issue with due responsibility. The subject interests us all. It is not just a matter for specialists, still less exclusively for representatives of particular oil interests.

Regarding the substantive issues, there are several points that we can address to collectively face the end of the current oil model.

1. The new constitutional framework, approved by the majority of the Ecuadorian people on September 28, 2008, requires substantial changes to the current hydrocarbon legal framework.

In the Montecristi Constitution, the role of the State in the exploitation of non-renewable natural resources was redefined, especially in articles 313 to 318, where strategic sectors, services and public companies are addressed. There the foundations were laid to close the disgraceful neoliberal past, when it was intended to weaken the State in order to privatize it and subordinate it to transnational interests. The goal of the new constitutional framework requires strengthening the State and its companies, establishing those exceptions that are necessary to have the complementary support of foreign or national private investment.

The Montecristi Constitution establishes a rich interpretative regime that forces a radical change in the prevailing developmental and extractivist model, while committing the creation of legislation in accordance with the mandate of a life in harmony with Nature, with Pacha Mama. This fundamental element, which identifies our Constitution, must be crystallized in the implementation of the Rights of Nature and the effective recognition of Human Rights, including the Rights of Indigenous Peoples. In this sense, real consultation processes are required when deciding on new areas, more environmental responsibility at the time of operation and repair actions at the time of abandonment.

In the project presented by the executive to the National Assembly, this is not fully complied with. On the contrary, they limit themselves to retaking by retreading the old contract modalities, the exception becomes a general rule, there is an uncomfortable silence regarding environmental justice and ecological justice, the door is opened to the delivery of oil fields in operation and even to the oil infrastructure. The routes of a fundamental policy change are not marked, nor is the necessary renovating and revolutionary legal framework established.

2. Another fundamental point is related to the changing reality of the Ecuadorian oil industry. Ecuador's oil reserves have reached the top of the bell, that is, we have exploited half or perhaps more of the existing reserves in the country. There will be fewer and fewer reserves available. The remaining proved reserves at present must reach just over 4.5 billion barrels. With the current exploitation rate of 470 thousand barrels per day, we have an oil horizon of about 26 years. If we consider that the Yasuní-ITT Initiative implies leaving some 900 million barrels of crude in the subsoil, the oil extraction horizon is much shorter; this Initiative would leave the horizon in about 21 years.

The current horizon of reserves in the hands of foreign companies is much shorter. With an average extraction rate of 87 million barrels per year, this horizon would not reach 5 years.

One fact that must be absolutely clear is that in approximately 15 years, if not sooner, Ecuador could cease to be a hydrocarbon exporting country, since the growth in demand for oil derivatives grows steadily; Thus, to mention the last two years, this demand grew by 8.1% in 2008 and by 11.7% in 2009. That said, the timely construction of a post-oil, even post-extractivist economy is a imperative need.

Also, let's not forget one of the biggest aberrations in the country: Ecuador extracts oil, Ecuador exports oil, but Ecuador imports oil derivatives because it does not have enough refining capacity. And those expensive petroleum derivatives, such as diesel, are burned to generate electricity in polluting thermal plants. We do not take advantage of alternative and renewable energies. Like hydro, solar, wind, geothermal, remember that we literally sleep on active volcanoes. That is a great task, transforming the energy matrix by reducing dependence on oil and its derivatives.

Therefore the reforms must account for this reality. A legal framework from earlier times is no longer required when oil exploration and exploitation were forced irresponsibly. It is not simply a matter of developing clear rules to ensure confidence and stability for private companies, with an eye toward increasing rates of oil extraction. We need a different strategy. If beforehand the oil exploited responsibly was not taken advantage of, today it would be unforgivable to continue with the same wasteful logic of oil reserves and the income generated by hydrocarbon exports, as well as a predator of Nature and the same communities where these activities are developed.

From all of the above, it follows that an enormous and sustained effort must be made to maximize the positive effects that can be obtained from oil extraction, without losing sight of the fact that oil is running out and that development (even less Good Living or Sumak Kawsay) is not made simply based on the extraction of natural resources. We must generate wealth, we cannot live on the income of natural resources but on the effort of human beings.

At this point, the proposals in the oil field of the Government Plan presented by the Country Movement 2007-2011, drawn up in 2006, during the electoral campaign to bring Rafael Correa to the Presidency of the Republic, take on renewed vigor:

“The task (…) is not simply to expand oil production, but to optimize its extraction without causing more environmental and social damage (…) Our government will not be a partner of transnational companies against the Ecuadorian people, as has happened one and again in the oil business. It is necessary to try to obtain the greatest possible benefit for the country in each barrel extracted, refined, transported and commercialized, before maximizing the volume of extraction, but it must be done with respect for nature and the communities. (…) "

3. In the context of the foregoing reflection, it is inconvenient to have extended or extended the terms of current contracts with foreign companies, simply having as reference parameters the previously existing ones.

There are several contracts with private companies, which expire between 2010 and 2014. This forces the government to act with redoubled caution. Furthermore, the National Assembly should know the terms of the recent negotiations, which incorporated a one-year transitional contract until the final renegotiations are concluded. It is not wise to terminate or modify contracts without first evaluating the impacts, as this would exclusively benefit private companies to the detriment of the national heritage and the quality of life of local populations.

At this point, then, emerges the urgency to carry out operational, legal, economic, social and environmental audits of all current contracts, especially those about to be finalized. Without such audits, no renegotiation could take place. On account of attracting investment, the possible abuses committed in various areas by companies that are still in the country cannot be erased. Let us remember that it was inconvenient for national interests to have allowed the hasty termination of the contract with Perenco, whose contract ended in 10 months, without first having carried out said audit. Even the case of Campo Palo Azul, which meant an illegal benefit for Petrobras, should be the subject of analysis in the National Assembly, without this affecting the ongoing judicial process at all.

Additionally, the company expects a comprehensive audit of all oil contracts for at least the last 20 years; that is to say, all the contracts signed after the departure of Texaco. The government of President Rafael Correa, which had the capacity to promote a comprehensive audit of public credit and even serious violations of human rights, must now show that it can do something similar in this area. A commission created for this purpose, with representatives of various forces in society, not contaminated with the oil negotiations, should take on this historic task. The country requires a "truth commission" on oil policies and their consequences.

3. Companies that wish to participate in the new hydrocarbon phase do not simply have to comply with the previous regulations. Even a simple improvement of these standards is not enough. Another type of contract is required that delivers the maximum benefit possible to the country.

The benefit to be obtained will not be measured only by the amount of potential income to be obtained, but by the availability of crude for Ecuador to satisfy its internal demand for derivatives, expanding its refining capacity and promoting efficient use of oil and its derivatives. This is one of the main requirements to transform the current energy matrix, building another energy matrix based on renewable and sustainable sources of energy, as well as efficient consumption.

At this point, the law must provide for the changes that will be essential. For example, the rehabilitation and repowering of the Esmeraldas State Refinery must be speeded up. In addition, the appropriate legal conditions must be created so that the construction of the Pacific Refinery meets the national demands in this energy transition process, without putting Nature or the lives of local communities at risk.

4. An imperative follows from the above. In order to finalize current contracts or sign new ones, it is necessary to consider what the repair of the intervened areas implies. In no way can the operators not assume the costs of this repair, as established in the Montecristi Constitution in many of its articles. The new hydrocarbons law must therefore prioritize the processes of abandonment, comprehensive reparation and punishment of those responsible for the damage to the State. These elements do not appear in the bill of reforms to the law, reason for these reflections.

This implies the existence of environmental monitoring, surveillance and control systems, as well as conditions for the responsible abandonment of the intervened areas. Likewise, consultation and dialogue procedures with the communities and workers are essential, under the principle of unrestricted respect for their rights. Respect for indigenous peoples, who have collective rights over their territories and the recognition of inclusion in a Plurinational State is also fundamental.

Likewise, it would be necessary to analyze how total or partial, permanent or temporary restrictions are processed when intervening in environmentally, socially or culturally vulnerable areas, with a long-term vision. We must abandon the worn out and mistaken premise that if non-renewable natural resources are not exploited, the sacrifices are paid by impoverished people.

In this context we must place the Yasuní-ITT Initiative. This Initiative opens the door, if there is coherence, to the construction of a post-oil and post-extractivist economy. However, this Initiative cannot serve as a pretext for the government of President Rafael Correa to boast and say that it has already done a lot for Nature and the lives of uncontacted peoples, while simultaneously expanding the oil frontier in the rest from the Amazon or encourages large-scale open-pit metal mining.

Then, the reforms to the hydrocarbons law should also incorporate this type of reflections. One could even analyze how the law strengthens the Yasuní-ITT Initiative, which opens up a space still little explored in the legal field.

6. In the purely contractual sphere, the official proposal must be studied calmly. Migrating from participation contracts to service provision contracts requires a great deal of thought. Remember that the reverse transition was made not many years ago. In each of these changes, given the particular conditions of the deposits, reserves, extraction rate, investments and amortization, there may be and in fact there have been great damages for the State.

An extremely worrying issue arises in the reform project in question. The door would be opened to hand over exploited oil fields to foreign companies. By creating contracts for the exploration and / or exploitation of oil (article 16 of the reform project) the door would be left open for “a betrayal of the homeland and economic stupidity”, as Rafael Correa denounced before being president of the Republic , when during the government of Colonel Lucio Gutiérrez it was intended to deliver the mature fields -Shushufindi, Lago Agrio, Sacha, Auca- to foreign companies; unfortunately, President Correa would soon after allow the delivery of the Sacha field to the Venezuelan state company.

There are many elements that should be considered when debating a new hydrocarbons law that wants to change the contractual regulations. That cannot be done seriously in a peremptory 30-day period. The different types of contract, identifying the benefits for the State, should try to minimize the potential damages from the rich accumulated experience. To achieve this, a careful study would have to be carried out and not at all run over.

At the end of my term as Minister of Energy and Mines, in June 2007, I gave President Rafael Correa a proposal that could have served at least as a reference to study a change in contracts, as proposed from the beginning of his government administration. . In this proposal, it was proposed to particularly consider the existing reserves, the price and quality of crude oil, as well as the duration of the contracts. This proposal was prepared by a group of technicians from the Ministry of Energy and Mines, as well as officials from Petroecuador, led by engineer Julio Cárdenas. There are also other important studies that we should read with intelligence and humility, thinking exclusively of the public interest.

7. As ordered by the Constitution in its article 423, "integration, especially with the countries of Latin America and the Caribbean, will be a strategic objective of the State" and as such must "promote economic, equitable, supportive and complementary integration." This constitutional mandate, which also incorporates the energy issue, has to be reflected in a new legal framework to encourage such integration in this field, not only in the oil sector.

Therefore, it is necessary to establish a clear referential axis that allows crystallizing this type of relationship with state oil companies in the region. Beyond the simplistic or ill-intentioned reading of those who claim to see only problems in rapprochement with neighboring countries, this task involves building a solid model of strategic alliances with state-owned companies in those countries. This should even be extended to other state-owned companies from other regions.

However, recognizing as necessary this energy integration and the joint work between state companies to confront the power of the transnationals and their tinterillos, a scheme that makes hiring possible by hand does not seem the most appropriate: in article 19 of the reform project, the possibility for new contracts, as well as those for works, goods and services, to be “directly awarded” to the aforementioned state or even mixed companies.

Integration requires solid foundations. This is achieved with clear rules, which could develop suitable public bidding schemes for these types of companies.

8. Another fundamental point to be considered is relative to the crude oil and derivatives marketing schemes, as well as the construction, maintenance and administration of the oil infrastructure. The foundational element in this field lies in the construction of energy sovereignty, as provided in the Constitution in its article 334.

The executive's reform project opens up some inconvenient possibilities, to the extent that the sale of crude oil to companies that carry out exploration and exploitation tasks could be generalized. Let us not forget that the objective of the law, especially in this new hydrocarbon phase, must be to supply the domestic market. Oil, in short, must serve as the basis for building the new energy matrix, not simply to ensure tax revenue.

9. Otherwise, the bill is unconstitutional in addressing several matters simultaneously: hydrocarbon and taxation, at least. This violates article 136 of the Constitution, which is clear in this regard: "if the project does not meet these requirements, it will not be processed." This is another compelling reason to return the law to the executive.

Even due to the haste to present the reform project, some contradictions or inaccuracies have crept in. In article 2 of the bill, the two types of contract are maintained: service provision and participation; when article 16 provides for the migration of participation contracts to contracts for the provision of services for exploration and / or exploitation. This even contradicts what is established in the first transitory of the reform project, which gives a period of 120 days to carry out the aforementioned contractual transition.

Another point that deserves a careful discussion is the one that introduces changes in the institutional framework of the oil sector. It is convenient to strengthen the current National Hydrocarbons Directorate. His name change is not momentous. What counts is how the new Agency for Control and Regulation is legally institutionalized, which should not depend on the Ministry of Natural Resources. Article 213 of the Constitution provides for the creation of superintendencies as entities independent of the government for this type of task.

Creating a Hydrocarbons Secretariat to handle oil contracts would not seem like a bad measure, if one wants to have a state agency independent of the Ministry of the branch to take on this task. Unfortunately, in the draft of reforms to the hydrocarbon law, this Secretariat depends on the Ministry of Natural Resources. There is no doubt that it is not convenient to continue maintaining this dependent relationship, which will ultimately generate new controversies in contractual relationships. For the rest, this Secretariat could well be created by executive decree. However, I must state a concern: Is it constitutional to transfer the hydrocarbon management that corresponds to the public company to a Hydrocarbons Secretariat, attached to the Ministry of the branch?

Another worrying point: the reduction from 44.4% of the income tax applied to contracts for the provision of services, to the 25% indicated in article 37 of the Internal Tax Regime Law. Let us not forget that today the AGIP company pays 44% as a tax, from the beginning of its production, the Constitution in its article 408 indicates that the State “will participate in the benefits of the use of these resources in an amount that is not less than those of the company that exploits them ”.

Additionally, this reduction, in addition to being unconstitutional, since the Hydrocarbons Law is an ordinary law, would violate article 133 of the Constitution, which indicates that an ordinary law may not modify or prevail over an organic law such as that of an tax.

As can be seen, there are many points where there would be open discrepancies with the Constitution of Montecristi.

In the event that the executive insists on maintaining the project and the Assembly fails to return it, the reforms would come into effect through the Ministry of Law. However, the possibility would still be open for the Assembly to address the approved reform and "at any time (proceed to) modify or repeal it, subject to the ordinary procedure provided for in the Constitution", as provided in Article 140 of the same magna carta. In this case, society should assume leadership of the discussion and pressure the Assembly to comply with the defense of national interests.

10. Finally, in line with point 2, Ecuador must, in any case, overcome many pending challenges. Even aberrations that are intolerable. Therefore, there is no way to continue with the argument that without oil the Ecuadorian economy will collapse, or even worse that in view of the end of oil we have to open the door to large-scale metal mining and open pit.

There are multiple sources of financing for the General State Budget and for the economy itself. Let's start by correcting the biggest existing dysfunctionalities. I already mentioned the issue of the expensive import of petroleum derivatives. Now, for example, why don't we discuss and find answers to a series of fuel subsidies, many of which are not benefiting the popular sectors, but the better-off sectors of the population? It is not about removing subsidies to the gross, that is to say to the neoliberal. Not in any way. You have to do it creatively, selectively. Subsidies should be kept for the impoverished and marginalized groups, not for the well-off.

Additionally, in Ecuador, and in practically all the countries of the impoverished world, an adequate tax policy is required. Those who earn the most and have the most must contribute more to the financing of the State. Under the government of President Rafael Correa, there is a certain improvement in the fiscal pressure. This is close to 15% in relation to the Gross Domestic Product. But we are still far from what should be an acceptable goal. The average in Latin America is 24%, the average for the developed world is 44%, the average for Europe is 46%. Our goal should be at least 35%.

To solve these challenges we require a lot of will and a broad political consensus, which will not be achieved with laws passed hastily and even less that violates the Constitution.

The challenge is complex, I don't doubt it. A profound transformation is at stake. That is what we proposed four years ago. We did not want to simply form a government better than the previous ones. First because that has no merit and second because our proposal was radical and revolutionary. When we launched the candidacy of Rafael Correa, we were looking for the democratic construction of a democratic society, understanding that there is no revolution without democracy, nor democracy without revolution.

Alberto Acosta placeholder image, July 21, 2010 - Ecuadorian economist. Professor and researcher at FLACSO. Minister of Energy and Mines, January-June 2007. President of the Constituent Assembly and Assemblyman October 2007-July 2008

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