The financing that Ecuador seeks to obtain with the ICBC Bank of China of up to $1.4 billion, through a financial operation (credit) tied to a commercial operation (sale of crude oil), would have a total cost of between 9.43%, 9.70% and 9.83%, depending on the amount of the credit and the volume of crude oil committed. This, according to a “comprehensive analysis” carried out by the Public Credit Undersecretary of the Ministry of Finance.
This analysis includes the financial costs, but also the possible losses to which the state-owned company would be exposed, when entering into a commercial contract under off-market conditions. Two sensitive issues are recognized in this comprehensive analysis of the Ministry.
The first: there would be other alternatives for Petroecuador “that would eventually allow obtaining a greater profit from the sale of crude oil,” and by closing a commercial contract under the conditions proposed by the Chinese companies, “approximately $2.43 less income would be generated per barrel of crude than the best alternative considered.”
The second: that although in the purely financial analysis, the cost of operations does not exceed 6.05%, counting on the commercial analysis (losses for the oil company) the cost rises to 9.43%, 9.70 % and 9.83% mentioned above.
The data is included in the communication sent on October 26th by the Vice Minister of Finance, Juan Hidalgo. to the manager of Petroecuador, Ricardo Merino, through the Official Letter MEF SFP 2020 0136 M. In it, other possible scenarios are explained both in the event that the contract with China was accepted and, in the event, that a market alternative was chosen.
In the communication Hidalgo asked the oil company to accept the conditions proposed by China and make the credit viable. “I allow myself to reiterate the importance of this operation for the benefit of the country, which will allow obtaining the necessary resources to cover the financing needs of 2020. Once the commercial contract is in place in the required terms, this portfolio of the State will proceed to execute the credit operation approved by Resolution Act 021-2020 of August 31, 2020, by the Debt and Financing Committee,” says the communication.
A financing cost of this type (more than 9%) is high when compared with the costs incurred by multilaterals (2.9% from the IMF, for example), but lower than the costs that a placement would entail of credit through the international market (15.92%).
Thus, the analysis of Economy and Finance was made considering three scenarios: one if the amount of credit to which Ecuador would have access is $1.4 billion with a sale tied to 55 million barrels, another for $1.1 billion with a sale of 47.7 million barrels; and one for $700 million with a sale of 33 million barrels.
The total cost without the commercial operation with China, with financing at the market price with ICBC itself, including the sale of crude oil at the market price with other companies, would be 12.49%, 12.16% and 12%, respectively. But if the operation is carried out with China, the cost drops to 9.43%, 9.70% and 9.83% for each of the cases.
The funny thing is that if only the financial analysis is taken into account, the costs are much lower: 6.05%, 6.04% and 6.03% for the same scenarios in their order. What increases the integral cost is the loss in commercial operation.
In the comprehensive analysis (financial and commercial analysis), the Under secretariat of Credit highlights that “the reason why Ecuador, through the Ministry of Economy, approves of an operation that is considerably below the performance required by the market, is because it is happening concurrently and independently with a crude oil sale contract with a Chinese company.”
It was also clarified that the financial operation was being done by the Ministry and not by Petroecuador (as had happened in 2016). Thus, the current debt would be prepaid, and the provisions of the Comptroller’s Office would be complied with so that the 2014 Interinstitutional Cooperation Agreement is eliminated133.
This week the Ministry of Energy established alternatives to Petroecuador so that it stops holding spot sales (sales at market price) of crude, in order to have enough volume for the sale of crude to China. This would be one more concession in order to obtain the required financing, which will serve to close this year’s fiscal deficit.
Spot sales would be suspended for two years
The suspension of spot sales for 2021 and 2022 (and readopting it in 2023), are the ways that the Vice Minister of Hydrocarbons, María Eliza Soledispa, has proposed to Petroecuador to have a greater volume of crude for export. This was laid out in the middle of the negotiations for the closing of a commercial operation for the sale of crude oil with Chinese companies, and which is tied to financing from banks in that country.
In the credit negotiations with China, the amounts of crude oil being discussed are 55 million, 47.7 million, and 33 million barrels.
However, it has been said that some 70 million barrels of crude would be required to carry out the attached commercial operation, a volume that Ecuador cannot currently provide.
The request to suspend spot sales by the Vice Ministry is unusual, as in July of 2017, it adopted spot sales as a valid way of mandatory legal compliance (and transparency), and to establish the market price of Ecuadorian crude.
Between 2017 and 2020, at least 14 spot sales were made. In accordance with legal regulations, it is mandatory to allocate at least 10% of the exportable volume to spot sales, but if the Vice Ministry’s orders are accepted, it would lead to non-compliance. Data from the Ministry of Energy revealed that between 2017 and 2019, 25.8 million barrels were sold via spot sales for a total amount of $1.61 billion.
[Rafael Correa’s government had suspended these sales—because it had compromised all exportable crude and up to 90% or more was destined for Chinese companies. After a renegotiation with Unipec, Petrochina and Petrotailandia, the current administration managed to release certain volumes of crude.]
The proposal to void spot sales was made to the current manager of Petroecuador, Ricardo Merino, through the official letter 2020 06 11 Of the Vice Ministry of Non-Renewable Natural Resources, on October 25th. The document addressed the issue of Hydrocarbon Estimates and Exportable Balance 2021 -2024.
The letter indicates that the Ministry of Economy had requested information on the exportable balance estimates for the period 2020 and 2024 on a monthly, quarterly, annually, by company and by field.
In turn, the Vice Ministry requested the information from both public and private companies that participate in the production of crude. In addition, the annex ‘Budget 2020-2024 new scenario’ shows the budget requirements for these years to achieve the estimated production profiles. Only in 2021, the budget required by Petroamazonas is $3.44 billion, to reach an average production profile of 412,079 barrels.
Loan from ICBC tied to IMF requirements
On the subject, a senior source from the Ministry of Energy indicated that this credit operation is “in harmony with the commitments with the International Monetary Fund (IMF).”
Apparently, the IMF agreed to give its recently approved loans to Ecuador, as long as it “manages to cover other obligations,”, in other words, obtaining the loan from China. In this sense, the source said, “If there are not these [Chinese] credits, all the external financing of Ecuador can collapse.”
He clarified that these loans are not contracted lightly, but that they are absolutely necessary. Without these Chinese monies, the country would essentially be paralyzed. China is willing to provide the credit, as long as it is guaranteed with an oil supply contract. He also said that the price that Petroecuador is demanding, is the best because it is making three Chinese companies compete to award the best one.
In addition to the possible suspension of spot sales, the Vice Ministry indicated that by 2022 the company should consider reducing percentages of volumes (up to -5%) as permitted by the contracts. Additionally, this week, it was learned from Petroecuador sources that during a meeting, management has been asked to evaluate the possibility of lowering refining at the La Libertad Refinery, in order to release crude oil and meet the commitments.
Henry Llanes, longtime Assemblyman and oil expert, said that with this measure, 100% of the exportable supply to China will be re-committed. And the renegotiations that were made with the past with former minister Carlos Pérez, who managed to free up some 50 million barrels for spot sale, would be practically non-existent.