Correa's Play for Greater Influence in the Oil Sector

Correa is an economist by training who has frequently expressed his disillusion with market reforms in Latin America and believes economic power should reside within the state. He has been trying since 2007 to change foreign oil contracts from production-sharing agreements, under which the foreign producers can have partial ownership of the fields they operate, to servicing contracts, under which the producers would have to pay a production fee and then get reimbursed for the cost of their investment. In the latter scenario, the state ends up getting more revenue for itself and the producer ends up making less money overall since it can only make profits from remuneration fees - the amount per barrel that the government is willing to pay companies for producing its oil. In other words, the foreign companies incur the risk of investing resources into a project with none of the potential rewards associated with high oil prices. If the foreign oil companies do not agree to the government's terms, Correa has threatened to push for new legislation that would allow the state to expropriate the oil fields.

Many of these companies have reason to take Correa's expropriation threats seriously. After the state took over U.S. oil company Occidental Petroleum's assets in 2006, claiming the firm's contract had expired, Correa further raised investor fears in late 2007 when he imposed a 99 percent windfall revenue tax on foreign energy firms to help make up for the state's commercial bond debt obligations. That move led to a number of arbitration suits at the World Bank's International Center for Settlement of Investment Disputes. Ecuador has also expropriated two blocks belonging to Anglo-French oil firm Perenco over tax disputes.

Now operating under the state's growing shadow, foreign oil companies that have stuck it out in Ecuador thus far are measuring the costs and benefits of their future investments. The companies that do stay will likely do so for either geopolitical purposes or basic economic need, but will not be inclined to further Ecuador's long-term oil growth.
http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2010/04/22/ecuador-correa-s-play-for-greater-influence-in-the-oil-sector.aspx