Ecuador is fast becoming for EnCana what Sudan was for Talisman Energy — a foreign millstone around the neck of a Canadian-based independent.
Interventionist government policies, attacks from environmentalists and human rights activists, threats of sabotage and kidnapping — those and more are taking the shine off what would otherwise be a resounding success for EnCana.
In the five years since a C$1 billion takeover of Pacalta Resources by Alberta Energy Co. (one of EnCana’s two founding companies), EnCana has seen its net production from the Tarapoa concession near the border with Colombia climb to 78,000 barrels per day (close to 10 percent of its combined output) from net reserves of 162 million barrels and it now holds a 36.3 percent stake in a 450,000 bpd pipeline to the Pacific coast.
But EnCana’s Latin American venture is quickly becoming a pain on the scale of Talisman’s four-year buffeting in Sudan, where its 25 percent stake in that country’s largest oil project netted 60,000 bpd.
Talisman eventually pulled out
What should have been a jackpot turned into a liability as Talisman faced accusations of fueling the Sudan regime’s endless civil war.
Haunted and harried by human rights activists, church leaders and politicians, Talisman mounted a vigorous defense, spending millions of dollars to build roads, hospitals and water systems for some of Sudan’s most impoverished citizens and arguing there was no proof that the Sudanese government was buying arms with its oil revenues.
That case started to wear thin in 2001 when the U.S. Securities and Exchange Commission and U.S. legislators took steps to ensure U.S. investors were fully aware of the risks of investing in U.S.-listed companies operating in countries such as Sudan, Iraq and Libya that were under U.S. sanctions.
For Talisman that put its prized New York Stock Exchange listing in jeopardy and resulted in a drag on the company’s stock value.
That chapter was seemingly closed 18 months ago, when the Sudan holding was sold to India’s ONGC Videsh for about C$1.13 billion.
But Talisman remains a target of protestors, who showed up at the May annual meeting in Calgary to demand compensation for Sudanese displaced by oil development.
They also pressed for an apology from Chief Executive Officer Jim Buckee, who told the meeting that Sudan is no better off since Talisman’s departure.
Heaping some more coals on the fire, plaintiffs have filed a lawsuit in the District Court in New York demanding that Talisman hand over all revenue from its Sudan operations to compensate those allegedly removed by force to make way for the oil development.
A court judge in August denied Talisman’s motion to dismiss the suit for lack of jurisdiction, increasing the likelihood that the case will go to trial — a prospect that a Talisman spokesman described as “outrageous” given his company’s “well-documented history of corporate behavior that is completely contrary to these allegations.”
Growing opposition in Equador
While Talisman tries to shake off its past, EnCana finds itself entangled in growing opposition to oil development in Ecuador, with activists challenging the environmental impact of oil development in the Amazon Basin and alleging violations of human rights in the oil regions.
Representatives of non-governmental organizations surfaced at EnCana’s annual meeting in April with a barrage of complaints, accusing the company among other things of inadequately compensating communities and working with the military to silence opposition.
EnCana Chief Executive Officer Gwyn Morgan, in rejecting parallels with Sudan, told reporters later that “there is no civil war going on in Ecuador. There’s no weapons being bought by oil money. Ecuador doesn’t have enough money to basically carry on from day to day.”
He said EnCana has spent C$250 million cleaning up environmental messes and improving conditions in Ecuador as part of its efforts to “make the country and the people better off.”
Troubles for 20 oil companies in Ecuador
Since then, troubles have started to accumulate in Ecuador for the 20 oil companies operating there as the government has scrapped agreements, hiked royalty and tax rates and threatened to nullify an oil and gas contract with Occidental Petroleum.
EnCana has been dragged into that dispute because Occidental failed to ask the government for permission in 2000 before the Canadian company took a 40 percent, non-operating stake in a parcel referred to as Block 15.
Investment dealers believe the threat to revoke the contract stems from a recent ruling by an international tribunal that Ecuador wrongfully withheld US$75 million in taxes.
EnCana has an arbitration hearing scheduled for November arguing that the government owes it about US$100 million in tax refunds.
Adding to EnCana’s woes, the crude oil pipeline built by a consortium of foreign companies is operating far below its 450,000 bpd capacity, because private investors are giving Ecuador a pass and no big new discoveries have been made.
All this has given rise over the past few weeks to a series of speculative stories originating with Reuters news agency that EnCana is seeking buyers for its Ecuador operations, hiring the London investment bank Harrison Lovegrove & Co. that advised Petro-Canada on its C$3.2 billion acquisition of Germany’s Veba Oil and Gas in 2002.
Sources have said that EnCana has approached state-owned PetroChina, which is reported to be carefully weighing the assets.
EnCana refuses to get drawn into the rumor mill, but there is a rising chorus urging the company to learn from Talisman’s mistakes and get out of Ecuador. With a chance to pocket US$1.5 billion-$1.8 billion, the cure now is seen as better than any drawn-out pain.
