It's probably a minor point, since Ecuador is the tiniest producer among the OPEC cartel. But it could be a trend that we'd rather not see repeated.
I'm referring to the planned strong-arming of foreign oil companies by the Andean nation, its socialist government, and its President Rafael Correa. Correa and his colleagues have their sights set on dipping their fingers deeper into the profits of the oil and gas companies working in Ecuador, including Spain's Repsol (NYSE: REP), Brazil's Petrobras (NYSE: PBR), and Italy's Eni (NYSE: E).
As the country is reworking contracts, the method of payment will be altered from a production-sharing structure -- the preferred method of operation for the companies -- to flat-fee models. This change is almost certain to leave the companies with less cash jingling in their pockets than the prior approach, with its inherent upside potential.
Correa clearly is attempting to pump up his country's weakening economy. His only difficulty is that Ecuador churns out only about 480,000 barrels a day. That's a skimpy 1% of worldwide demand, and many of the companies involved don't have substantial projects in the country. On that basis, it's easy to see why, if the terms are deemed too onerous, the companies wouldn't lose much by heading for greener pastures.
If you have an inclination toward energy investments -- which you should -- you know all too well that this isn't the first time a South American populist has grabbed the reins away from foreign oil companies. It wasn't that long ago that Hugo Chavez booted some of the world's majors from their operating positions in Venezuela's Orinoco basin. Most of the companies acceded to Hugo's edict, but ExxonMobil (NYSE: XOM) and ConocoPhillips (NYSE: COP) packed up and left the country. However, as soon as he realized his mistake, Chavez ate some crow and invited the companies back in.
This isn't even new ground for Ecuador. Nearly four years ago, the country sent Occidental Petroleum (NYSE: OXY) packing on charges that it had illegally transferred a stake in its fields to another company. Also, a contention that Texaco failed to properly remediate areas that were polluted during production long before the company was bought by Chevron (NYSE: CVX) has led to protracted litigation, with the local plaintiffs seeking up to $27 billion from the company.
As time goes on, and with the search for oil involving progressively less hospitable areas, expect a steady increase in this sort of resource nationalism. The manner in which ExxonMobil handles these events makes gives me confidence in its ability to navigate treacherous situations in the future. Your portfolio could do a lot worse, than to have Exxon as its energy representative.
