Last week, President Guillermo Lasso said that intermediaries who benefited from the commercial and financial contracts that Ecuador and China signed “are fully identified.”

According to Lasso, these Ecuadorian and foreign intermediaries who participated in a corruption plot have used China and abused Ecuador. And to give a clue as to who he is referring to, the president said that it is “chains of corruption, chains.” He said that he mentions the word, because in this way the intermediaries who benefited from the government of former President Correa can be identified.

Clearly one of the people Lasso was talking about is Enrique Cadena Marín, who has been linked to a series of intermediary companies such as CorePetroleum, Naparina, Castor and Taurus Petroleum. In several reports—based on the Panama papers and information from the US Financial Intelligence Unit—he has been linked to unusual transactions related to Ecuadorian crude brokerage.

President Lasso has said he will make the debt contracts with China, tied to oil deliveries or in which oil was put as collateral public. However, there are confidentiality clauses that prevent part of those agreements from being published.

According to President Lasso, the current renegotiation of the debt with China has to do with two fundamental issues, which are already being discussed at a technical level with the economic ministers of Ecuador and China. The first is extension of terms and review of rates of debt contracts.

Second, and more importantly, is the decoupling of crude oil from financing contracts.

Lasso explained that Ecuador currently has 120 million barrels of crude pending delivery to China. If these barrels are not removed as the guarantee of the financial debt, the price of those contracts means a loss to the country of between $3 to $4 per barrel.

The president said that the Chinese government’s response to decoupling the oil from the debt has been positive. “A good political gesture,” said Lasso, who added that it still must go through a renegotiation process and that takes time.

In a direct afront to prior administrations, Lasso said that all negotiations with China will be public. The president criticized the confidential management that was given, in previous governments, to debt contracts tied to the sale of oil.

Lasso said that he will deliver “all documentation called confidential, to the State Attorney General. He said the Prosecutor’s Office will also be given the information to evaluate the possibility of initiating legal actions both in the country and abroad, or to participate in trials that have already been.

The president indicated that all these actions will be so that Ecuador “can manage its oil sovereignly without being conditioned by contracts that have been harmful.” He added that there would be no problem selling oil to China, so long as it does not end up in the hands of intermediaries.

The president explained that this was one of the two points that were addressed on his trip to China. He explained that Ecuador’s debt with the Asian nation it is approximately $4.6 billion, of which $2.5 billion are credits to the Chinese Eximbank and the Bank of China. There is also a $2.1 billion with the China Development Bank (CDB). This is the debt that is secured with oil.

Lasso also stated that the country pays freight (ship fees) to send the oil to China, but that it actually ends up being transported and sold to nearby countries, such as Peru.

“However, they charged us the freight from here to China, that is detrimental to the country,” said Lasso.

Another of the points addressed during his visit to China was the Free Trade Agreement (FTA). President Lasso said that the agreement is expected to be ready for China’s meeting with Latin American countries to be held in October in Guayaquil.

Prior debt/oil contracts

Between 2009 and 2016, Ecuador accessed $18.17 billion in financing conditional on the sale of Ecuadorian oil to Chinese state-owned companies, such as PetroChina and Unipec, and to Thailand’s PTT.

As part of these obligations, the public company Petroecuador signed 13 contracts for the sale of oil with the three Asian firms.

The volume of committed oil amounted to 1.278 billion barrels.

Thailand and China gave Ecuador the $18.17 billion in financing in two parts. The first was through advances for eight oil pre-sales worth $9.2 billion, the terms of which are public.

The second figure includes seven loans from Chinese banks for $8.97 billion, in which oil was a kind of “collateral.”

But of these seven contracts, only two are public. The others are confidential and were all signed in the administration of President Rafael Correa.

The eight presales

Petroecuador and the three Asian firms participated in all eight oil pre-sales.

The legal contract required the advance disbursement of part of the money for the oil sale contract, which Petroecuador transferred to the Ministry of Finance under liquidity agreements.

Then, those advances were deducted from the value that China or Thailand had to pay Ecuador for the oil sold.

Although Ecuador had access to immediate liquidity, it had to pay China interest rates of between 6% and 7.25% per year.

Of the $9.2 billion disbursed by China and Petrothailand for pre-sales advances, Ecuador still owes $2.03 billion, which it will finish paying in 2022.

The seven debt contracts

In addition to oil pre-sales, Ecuador accessed financing through seven debt loans with China, all tied to the sale of oil or with crude oil as collateral.

President Lasso announced that going forward all negotiations with China will be public and he questioned the opacity that surrounded these agreements during the governments of Rafael Correa and Lenín Moreno.

Carlos de la Torre, former Minister of Finance, says that these contracts have confidentiality clauses, so they can only be published once the term of the agreements has expired.

Therefore, only two of seven contracts tied to the sale of oil have been published on the website of the Ministry of Finance.

The rest remain confidential as their terms have not expired, says De la Torre.

Any violation of the confidentiality clauses that Ecuador previously agreed to, could bring the country penalties, added De la Torre.

Unlike pre-sales, four actors were involved in credit contracts tied to the sale of oil.

The two Chinese loans that are public, were signed in 2010 and 2011 by:

• China Development Bank (CDB).
• Petrochina.
• William Vásconez, then Undersecretary of Public Credit of the Ministry of Finance.
• Nilsel Arias, then Petroecuador International Trade Manager.

According to Mauricio Pozo, former Minister of Finance, the only way to make the rest of the credits tied to the sale of oil transparent, is for China to agree to modify the confidentiality clause.

This could be part of the debt renegotiation announced in February 2022 by the governments of Ecuador and China, adds Pozo.

According to the Government, Ecuador’s current debt with China exceeds $5.0 billion, of which $2.077 billion are oil-backed instruments.

Prior contract renegotiation

Ecuador sent its proposals for a renegotiation of the debt with China to Beijing on February 11, 2022. The Government says that there are problems that issue that will impede the discussion.

“The problem is that in the [original] oil negotiation, other people participated there, and allowed conditions harmful to Ecuador,” said President Lasso, promising that those responsible will be investigated.

Carlos Tejada, who was manager of Petroecuador in the government of Lenín Moreno, says that the original contracts, signed in previous administrations, were in fact signed with terms harmful to the country.

To improve those conditions, Tejada says that in September 2017, he renegotiated the pre-sale contract with Petrotailandia or PTT, which was still in force.

According to Tejada, the renegotiation was possible because one of the elements used to calculate the sales formula for Ecuadorian oil was no longer published on the international market, which made it impossible to invoice the oil. It was the price of petroleum coke at 70 parts per million sulfur or ppm, which served as a price reference for Ecuadorian crude.

The renegotiation with PTT opened the door for the next manager of Petroecuador, Pablo Flores, to modify another five oil sales contracts, also signed in previous administrations.

Although the discussion of the formula was the main point discussed, Ecuador achieved a total of three adjustments:

1.Shipment rescheduling

Ecuador managed to make the deliveries of oil volumes committed to PTT, Petrochina and Unipec more flexible. This allowed rescheduling shipments and making ‘spot’ or open sales, through a bid process, to obtain better prices.

The four renegotiated contracts with Petrochina and Unipec allowed the release of 50 million barrels for spot sales, according to former Petroecuador manager Pablo Flores.

2.Freight Cost Adjustment

Another change that was introduced during the renegotiation involved freight. In the original contracts, it was established that the transport would be done with Panamax ships, a condition that forced losses for the country, since they are smaller ships whose transport costs are higher.

This happened even though in reality, according to Tejada, 78% of the volume of oil was transported in Aframax vessels, which have greater cargo capacity and lower freight rates.

Both Tejada and Flores negotiated that the rates for Aframax-type vessels be used.

3.A higher prize

In the renegotiation with Petrothailand, it was agreed to raise the premium from $0.26 per barrel of oil to $0.90 per barrel.

And the premium with Unipec and Petrochina rose from an average of $0.50 per barrel of oil to $0.90 per barrel.

According to Flores, this adjustment alone gave a benefit of $200 million to Ecuador.