Brazil scares Ecuador into playing nice with Petrobras

There is something I love about South American interstate politics.

In 2008, problems at the San Francisco hydroelectric dam led the Ecuadorean government to cancel its $243 million contract with Odebrecht, a Brazilian construction company. President Rafael Correa of Ecuador sent troops to seize the San Francisco dam along with an irrigation project, a hydropower plant, a highway, and an airport Odebrecht was building. Odebrecht officials fled to the Brazilian embassy for protection.

In a very 19th-century move, Brazil recalled its ambassador in response. Foreign Minister Celso Amorim said, “There are no plans for the ambassador’s return to Quito.”  The Brazilians then threatened to cancel all development loans and credits. The Ecuadorian government backed down, and Brazil’s ambassador returned in January 2009.

It was an unpleasant experience for the Ecuadoreans.

Around the same time as it (not unreasonably) cracked down on Odebrecht, Ecuador decided to get tough with Petrobras. Again, this was not unreasonable. Ecuador had a remarkably easy fiscal regime. When the country mooted the changes in 2008, Repsol-YFP, Perenco and Andes Petroleum all quickly agreed, but Petrobras was, according to the U.S. embassy, somewhat unenthused. 

In late 2010, the Ecuadoreans finally passed a new oil law, transforming Petrobras’s production-sharing agreements into a service contract offering a flat per barrel fee. The changes would reduce Petrobras’s revenue (at 2008 prices) by $25.0 million per year. Petrobras demanded $344 million in compensation. In 2012, Ecuador paid $217 million.

So Ecuador won! Right? Nope.

First, Petrobras wrote in its annual report that the contract shift would reduce the recovery value of its assets by $174 million. $174 million < $217 million.

Second, the talks between Ecuador and Petrobras failed on November 19, 2010. On that day, Petrobras shares traded at a price-earnings ratio of 8.036. Petrobras earned $25 million from its Ecuadorean assets. $25m × 8.036 ≈ $201m < $217m.

If you click the above link about the price-earnings ratio, you will see that it was stable for most of 2010. What it tells you is that if Petrobras considered its Ecuadorean income streams to be at least as safe as its other income streams (which come mostly from Brazil) then Ecuador overcompensated Petrobras. If you believe that Petrobras considered its Ecuadorean assets to be more risky (and seriously, it did) then Ecuador way overcompensated Petrobras.

It’s good to be the king! Welcome to hegemony, my Brazilian friends. As long as none of the states in your backyard go collapse, or go Communist, it’s a pretty good deal. Your tourists will find it less pleasant when they travel, but believe you me, being from the big boss country more than makes up for it. So enjoy it, mis amigos brasileiros. May it last until we all unite in war against the owners of the robots.

Comments

[Randy McDonald]

This is a new sort of thing, then?

[Noel Maurer]

For Brazil! It was standard operating procedure for the United States between the 1930s and the 1980s.