The future of the Ecuadorian economy is in no small degree dependent on the success of the Oleoducto de Crudos Pesados (OCP), the pipeline now being built to carry crude oil from oilfields in Ecuador’s Amazon region across the Andes to the Pacific coast. It’s not hard to see why. During construction, which began last July and is due to be completed by August 2003, the pipeline will generate 7,000 direct jobs. Local chambers of commerce reckon it will produce another 50,000 indirect jobs. The pipeline itself will absorb foreign direct investment of $1.1 billion. It should also open the way to a surge in investment in exploration and production. The energy ministry says three foreign oil companies plan to spend $2.6 billion on E&P in the next three years.

The impact on the economy has already been dramatic. Investments of $755 million during 2002 will play a large part in keeping economic growth near 4% for the year. When it opens, the pipeline will carry 450,000 barrels per day (bpd) of heavy crude oil. That will more than double the 390,000 bpd capacity provided by the existing, 30-year old pipeline. That means a lot of export earnings, and a lot of government revenue: if OCP Ecuador exports 400,000 bpd at a price of $15 per barrel, it will bring in additional earnings of $2.2 billion a year. “We’re counting on it,” says Leopoldo Baez, general manager of the Central Bank. It will also allow producers to ship higher-quality, light crude oil separately from heavy crude, increasing the value of existing exports by an estimated $450 million a year.

“Every economic analysis shows that the pipeline will be fundamental for Ecuador’s economy,” says Hernán Lara, the Colombian president of OCP Ecuador, the consortium that is building and will operate the pipeline.

It’s a project that’s been a long time in gestation. The first pipeline was completed in 1972 to carry light crude from the first Ecuadorian oilfields, which began producing oil in the late 1960s. In 1984, heavy crude was discovered and the old pipeline quickly reached capacity. Since then a new pipeline has been a constant necessity, but changes of government and political instability meant that it wasn’t until 2000 that the project was finally put out to tender. Two bidders came forward, one made up of construction companies and the other, OCP, made up primarily of oil producing companies operating in Ecuador. OCP won the contract in November, and construction began on July 26, 2001.

In its short life the consortium has seen a lot of changes. Not only has Ecuador gone through a military coup and a change of currency, but the oil industry itself has witnessed rapid consolidation. Of the original five members of the consortium – Oryx, Occidental, PacAlta, ARCO and YPF – only one, Occidental, remains in its original form. Oryx was bought by Kerr-McGee; PacAlta by Alberta Energy; ARCO was bought by BP and sold to AGIP; and YPF merged with Repsol to become Repsol YPF. Techint, the Argentine construction company, was brought into the consortium, and Pérez Companc, the Argentine oil group, joined in early 2001 when it was negotiating an exploration contract with the Ecuadorian government.

With the exception of Techint, which is responsible for building the pipeline, all members of the consortium have interests in Ecuador as producers. The consortium itself raised the finance for the project, advised by JP Morgan (see box). The producers in the consortium will guarantee to ship 390,000 bpd through the pipeline, leaving 60,000 bpd available for other companies with interests in the Ecuadorian oil fields. OCP will operate the pipeline for 20 years. After seven years in operation, OCP will begin releasing 10,000 bpd of capacity each year for third party use. At the end of 15 years, all capacity will be open access. When the 20 years are up, control of the pipeline will be transferred to the government of Ecuador.

Controversial Construction
Lara has no doubt that capacity will be used quickly by OCP members and third parties. “For the shareholders, the pipeline means they will be able to realize the full value of the fields under contract,” he says. “They will be able to increase production by 250,000 barrels a day very quickly.”

But not everybody is happy about construction of the pipeline. For most of its 343 miles, the new pipeline runs side by side with the old one. But for a 100 mile section near Quito, the OCP pipeline takes a different route – the so-called northern route – that involves at one stage cutting through two miles of pristine cloud forest. The area is one of the world’s richest habitats for birdlife – more species have been spotted there in a 24-hour period than anywhere else on earth – and draws 50,000 visitors a year. Environmental and other groups protest that the pipeline will cause unnecessary damage to the area, and want to see it rerouted.

Lara insists that the northern route is the best possible option, both from an engineering and an environmental viewpoint.

North Rhine-Westphalia Debates Pipeline
“The northern route is the only route,” he says. “There’s no question that that’s where we’re going. The southern route would have had a much greater impact on the environment.”

Local protestors claimed a victory when construction of the pipeline was halted as it approached the contested area last December; Lara, though, says the halt had always been planned to take account of the year-end holidays and the start of the rainy season.

The controversy has traveled as far as the state parliament of North Rhine-Westphalia in Germany. The state has a 40% stake in WestLB, the bank which is lead arranger on the financing for the consortium. Members of the parliament have questioned whether construction of the pipeline is being carried out in accordance with World Bank guidelines on environmental impact. Compliance with such standards – although the World Bank has no involvement with the OCP – are among the contractual obligations of the project financing.

Manfred Knoll, managing director and head of global structured finance for the Americas at WestLB in New York, insists that the pipeline conforms to both local environmental laws and World Bank guidelines. The consortium has contracted studies from independent groups including Entrix, the Smithsonian Institute and the Netherlands Environment Evaluation Committee Advisory Group and no violations have been reported.

“If any violations of World Bank standards are proven, the credit agreement provides for the financing syndicate to take action including stopping funding of the pipeline and calling for repayment of all funds advanced,” Knoll says. “We feel [the northern route] was prudently selected on the basis of environmental and technical criteria.”

Hernán Lara is equally sanguine. He expects the pipeline to be finished ahead of schedule and to be carrying oil by the middle of 2003.