Oil, Gas and the Transition to Renewables 2024 Comparisons

The Republic of Ecuador Constitution establishes non-renewable natural resources (including oil and gas) are part of the inalienable, unseizable and imprescriptible assets of the state. Therefore, oil exploration and exploitation activities must be carried out by the state through its public companies or by mixed economy companies. These activities could be granted to private entities through contracts accepted by Ecuadorian law, but only by exception.

When E&P activities are carried out by private entities, these companies operate as contractors of the state and are entitled to receive petroleum as their share in production-sharing agreements or as payment in service agreements.

The following governmental agencies primarily regulate hydrocarbon activity.

• The Ministry of Energy and Mines (the “Ministry”) is in charge of establishing the public policies regarding oil and gas, mining, electricity and renewables, as well as granting licences and oilfields to public and private companies. It also grants and manages contracts.
• The Agency for Hydrocarbon Regulation and Control (ARCH) regulates all upstream, midstream and downstream hydrocarbon operations.
• The Ministry of Environment, Water and Ecological Transition grants and oversees authorisations for all hydrocarbons activities to comply with environmental laws and regulations.

Ecuador has one state-owned company (NOC) for the hydrocarbons industry, Empresa Pública de Hidrocarburos del Ecuador, EP PETROECUADOR, which is in charge of exploration and production of oil and gas, transporting, refining, storing and commercialising both nationally and internationally all hydrocarbons (upstream, midstream and downstream operations). Currently, EP PETROECUADOR is the main oil producer and performs exploring and producing activities in respect of hydrocarbons in dozens of fields.

EP PETROECUADOR was merged in 2020 with Empresa Pública de Exploración y Explotación de Hidrocarburos PETROAMAZONAS EP, which exclusively handled upstream operations.

The Constitution grants the state exclusive ownership of energy resources, minerals, hydrocarbons, biodiversity and forest resources. All hydrocarbons belong to the state and for that matter EP PETROECUADOR has preferential rights for upstream, midstream and downstream operations.

The oil and gas activities legal framework is complemented with the Hydrocarbons Law, Environmental Organic Code, Regulations on the Hydrocarbons Law, the Hydrocarbons Operations Regulations, the Hydrocarbons Operations Environmental Regulation and EP PETROECUADOR specific resolutions, among others.

Companies or joint ventures must have an executed contract to explore and develop hydrocarbons, according to the Ecuadorian law.

A general contract has a four-year term for exploration that can be extended up to six years and a 20-year term for production, that can also be extended if reserves have been added or there are new investments with a five-year plan.

The Hydrocarbons Law provides the following form of contracts for traditional upstream and E&P activities.

• Association between the Ministry (concession and areas) and private or public entity or joint venture (investments) with a participation in production.
• Production sharing, which is a delegation of the Ministry for exploration and exploitation activities to a private or public entity or joint venture. Payment will be a percentage of participation in effective production. The contractor stake will be valued according to the reference price, adjusted by (i) quality of the crude oil; (ii) volume of hydrocarbons produced, and (iii) sale price limits.
• Service contracts for exploration and exploitation, where a private or public entity or joint venture, in exchange for a tariff per barrel of oil produced and delivered, will provide the Ministry, through its own economic resources, services of hydrocarbon exploration and/or exploitation in areas designated for that purpose, investing capital and using the necessary equipment, machinery and technology for the fulfilment of the contracted services.
• Contracts for the provision of specific integrated services to NOC are considerably different from association, participation and any E&P service contracts. In this kind of contract, contractors execute specific activities or services for an NOC block or field, providing technology, investments and necessary equipment or machinery for maintaining and/or increasing production. The contractor usually receives a cash payment in the form of a per barrel tariff.

Licences generally must be issued by formal bidding procedures. Public tender processes are held under the terms and conditions set by the Ministry. Usually, once a bidder is qualified, they must submit a technical and economic bid to back up their investment proposal. This proposal will be qualified by the Hydrocarbons Tenders Committee which may recommend the Ministry to award a contract. Once the bidder has been awarded the contract, they must open a local branch or subsidiary to execute the contract in Ecuador.

Exceptionally, licences could be directly awarded, with no bidding process, to an international NOC.

Under the Constitution, the Hydrocarbon Law and the contract terms, the government stake must not be lower than the contractor party. In a service contract, the government part consists of the oil export price minus the per barrel tariff paid to the company, plus all applicable taxes. The government always participates in at least 25% of the gross income of the oil exports of the contract plus all oil transportation and commercialisation fees.

In addition, a company stake consists of the per barrel tariff paid by the government, minus the expenses (investments, operating costs, taxes, etc). The company’s portion may be reduced when oil prices are lower than required to compensate the per barrel tariff.

Under a production-sharing contract, the government income comes from the oil exports of its share, plus taxes and contributions paid by a company or joint venture. In this case, the participation of the contracting company consists of income from the oil exports of its share, minus expenses (investments, operating costs, taxes, etc) which must be paid in accordance with the law and the contract.

Main taxes are income tax, value-added tax and 15% profit-sharing.

Tax law provides a ring-fence provision under which each contract shall keep its accounting independent from other contracts entered by the same party. Therefore, each contract is considered as an independent unit for tax purposes. Consequently, profits under one contract may not be offset with the losses under another contract or other activities of the company.

A contractor pays 15% profit-sharing of which 3% corresponds to direct and indirect employees of the company and the remaining 12% to the government activities with the communities within the area of influence of the exploration and production established in the contract. Additionally, the company must pay a 25% income tax.

Other applicable taxes also include the 15% value-added tax that the company pays on all goods and services required for its operations. Such tax is not refundable under production-sharing contracts. Under service contracts, the amount established (15% value-added tax plus the stated tariff in the contract) is invoiced once a month.

The income of a service contract comes from fees paid to the company or joint venture. On the other hand, in a production-sharing contract, income is based on the sales price and the referenced oil price.

Tax returns are filed annually, and the fiscal year runs from January 1st to December 31st of each year. The statute of limitations before the tax authority to review timely filed tax returns runs out after three years.

Moreover, the company or joint venture can deduct its investments in accordance with the rules for amortising investments for each contract, as well as all operating and transportation costs of each fiscal year and all taxes and contributions paid each year in accordance with the law and the contract.

National oil company EP PETROECUADOR holds preferential rights to explore and produce oil and gas in the entire Ecuadorian territory. NOC’s oil production range is 75–80% of total activity in Ecuador.

An international community NOC, directly or by means of a joint venture, may not need to participate in a bidding process to get a direct award of an E&P contract.

The Hydrocarbons Law provides that public or private companies, contractors and associates must contract a minimum of Ecuadorian personnel. According to this, 95% of the working personnel, 90% of administrative personnel (95% within two years of operations having started) and 75% of technical personnel must be Ecuadorian (unless there is no professional offer in this specific job market). Foreign personnel must promote technology and knowledge transfer to local employees.

Likewise, if the activities are carried out in the Ecuadorian Amazon or Eastern circumscription, the norms of preferential employment have been established by virtue of which no less than 80% of the assigned personnel to such area shall be permanent residents of the region. From this assigned percentage, 60% must belong to the influence zone under a gender, youth and aboriginal criteria; 20% residents from the main activities province; and 20% permanent residents from the circumscription.

Goods and services procurement in the circumscription must be acquired directly or indirectly in the area by establishing awarding benefits by appointing with local, municipal, provincial or regional priority.

Pursuant to the local framework for developing and production stages, exploration commitments and/or activities must be executed within the first four years, extendable for an additional two years. Therefore, production is carried out in the subsequent 20 years in the case of oil exploration and production contracts.

Nonetheless, the Hydrocarbons Operations Regulations allow early exploitation, in terms of which the contractor may execute development and production activities within the exploration period, with prior authorisation from the Ministry.

Once a discovery has been made, it must be reported to the Ministry. A request must be submitted to the Ministry, which must contain the investing company or joint venture field development plan. Once the field development plan has been approved, the production stage will start. The authority has the capacity to regulate fields and well production rates.

The licensee or contractor acts as an operator and, therefore, must take on all investments, exploration and production risks as well as environmental liability pursuant to its environmental obligations. Additionally, a contractor shall comply with all employment laws in regard to maximum number of foreign employees. Other key terms include termination provisions in the event of the contractor breaching the law or the contract.

For an assignment with prior approval from the Ministry, the law requires an evaluation of the assignee to be performed. Such approval needs to be issued through a ministerial decree.

The assignor shall pay a premium for the transfer. The amount is equivalent to one per thousand (0.1%) of the net profit obtained in the preceding year, for each one percentage (1%) of participation transferred, according to the income tax returns. This premium shall in no case be less than USD5,000) for each one percentage of participation. Actual payment may be split between assignor and assignee.

Furthermore, the assignee shall pay to the Ministry a premium for the improvement of the economic conditions of the contract, in the amount  of USD5,000 for each one percentage of participation.

Contracting rights may be transferred upon payment of the respective premiums and if such operation was approved by the Ministry. If a company or joint venture does not proceed accordingly, such action may provoke a unilateral termination of the contract (caducidad). Likewise, non-compliance with the procedure may trigger a unilateral termination of the contract.

Competent authorities have the capacity to regulate E&P operations as well as production rates. Ecuador is no longer a member of OPEC; therefore, it is not subject to its production rates. There are no quotas or similar restriction.       

Most oil production is transported to the “Balao” Terminal on the Pacific Coast. The SOTE pipeline is owned by EP PETROECUADOR and transports ORIENTE crude oil of an average of 24 degrees API. On the other hand, the OCP pipeline is owned by a private consortium of companies that transports NAPO crude oil of an average of 18 degrees API.

A private company may build and operate a pipeline until the maturity date set in each contract when, subsequently, the pipeline will be relinquished to the state. Currently, OCP is the only primary pipeline owned by a private entity. Its contract is in its final stages.

Private companies may construct and operate refineries, upon formal authorisation. Nevertheless, currently, all existing refineries are owned by EP PETROECUADOR.

Most gas stations are privately held by distribution companies. Others are held by private individual owners that are required to be affiliated with a distribution company.

EP PETROECUADOR currently has the majority of commercialisation and distribution markets and all the commercialisation and distribution is done through products sold by it. However, private companies may access such phases upon obtaining authorisation from ARCH and the Ministry, which will evaluate its financial and technical capacities.

Private companies are authorised to distribute and sell gas, diesel and LPG to final consumers, upon approval by the Ministry. Private companies receive certain subsidised products from EP PETROECUADOR or its subsidiaries and are allowed to have a margin that is set by the government each year. Currently, subsidies set on prices of certain fuels have been reduced or lifted. Accordingly, profit margins for distributors are no longer in force for certain fuels.

A licence from the Ministry or ARCH, depending on the case, is required to execute distribution or commercialisation activities. Licences do not result from bidding processes and may be renewed every five years. For obtaining a state licence, the following factors, among others, may be observed: technical capacity, economic means, locations and plans.

All oil products excluding lubricants are produced, refined or imported by EP PETROECUADOR. Therefore, for private companies to carry out related activities, a licence from the Ministry is required, or they must enter into a contract with EP PETROECUADOR that establishes the terms of the activities.

For 2025, the following taxes apply to downstream operations; 15% value-added tax, 15% profit-sharing and 25% income tax.

The company in charge of refining and importing hydrocarbon products is EP PETROECUADOR. Furthermore, pursuant to the law, distribution of such products shall be made exclusively by EP PETROECUADOR, acting by itself or through the contractual forms established in the law. Therefore, EP PETROECUADOR has preferential rights for distribution. However, private companies do most of the distribution, given that EP PETROECUADOR owns few gas stations.

There are no specific local content requirements for downstream operations established in the Hydrocarbons Law. However, if downstream operations are carried out in the Ecuadorian Amazon circumscription, the norms of preferential employment have been established by virtue of which no less than 80% of the assigned personnel to such area shall be residents of the circumscription.

Generally, all activities are controlled by ARCH, which may impose fines and has competence to suspend any establishment and even terminate a licence or contract. Furthermore, an environmental licence is required for downstream operations, and companies shall abide with environmental regulations.

Pursuant to the Constitution and the law, the hydrocarbons industry is considered a strategic sector throughout its phases. Accordingly, the Ministry may declare eminent domain on land, buildings, facilities and other assets. For this purpose, all expenses and payments must be borne by the private investor. This capacity may not apply for gas stations.

The law states that in an event of shortage in transportation capacity, the oil produced by the NOC has preference over the oil produced by private entities. Accordingly, remaining transportation capacity shall be distributed among private producers, subject to the production capacity of each company.

A system of secondary pipelines (RODA) is owned by EP PETROECUADOR, but each operating company oversees constructing its own facilities when a production-sharing contract is concluded. The point of delivery is typically at the connection to a secondary pipeline, for service contracts. On the other hand, the operator must pay transport fees to the different secondary or main pipelines it desires to use to get its oil to the Pacific Coast, for production-sharing contracts. Under each contract, companies may also construct and use a secondary pipeline with a prior authorisation from ARCH.

Unless force majeure events occur, there is enough transportation capacity to transport oil to terminals, through SOTE and OCP. Transportation tariffs for OCP are set by the contracting parties, while those for SOTE are set by EP PETROECUADOR applying regulations that assess quality and distance.

Ecuador has oil transportation agreements with Colombia, where operators may transport Colombian hydrocarbons through secondary pipelines for getting to the main Ecuadorian pipelines service to the Pacific Coast. For the same purposes, another cross-border transport operation has taken place since 2024 by using river vessels from Peruvian oilfields to transport production in the Amazon region.

Some pipelines may be constructed under the provisions established in each contract and used by private companies. However, such pipelines may serve a public purpose; consequently, third parties may request to access that infrastructure in similar terms applicable to the owners.

Considering there are still some subsidies in force for certain fuels, restrictions have been reduced or even eliminated in recent years. While other fuels remain highly subsidised, EP PETROECUADOR remains the main importer and producer of hydrocarbons distillates sold to private distributors and commercialising companies for a pre-established price (for certain fuels) and with pre-determined price profit margins for sales to the public (for certain fuels). Consequently, there are no pre-established profit margins for distributors for certain fuels.

The Cargo Reserve Act states that all crude and distillates imports and exports must be through FLOPEC, Ecuadorian Public Fleet. This demands all sellers and buyers to get receive this entity’s services or grant the first right of refusal when no vessel services are available for the necessary routes and dates.

In general, the Hydrocarbons Law and its Regulations set the legal frame for export of crude oil, natural gas and petroleum products and the Hydrocarbons Operations Regulations establish that the Ministry shall determine the quotas for export of hydrocarbons to public and private companies. Calculations are based on the estimates of releases (levantes) of the applicable legal framework and contractual provisions. Furthermore, the Ministry shall be responsible for the distribution of the exported volumes.

For other LNG considerations please see 7.2 Liquefied Natural Gas (LNG) and for cross-border pipelines please see 3.10 Laws and Regulations Governing Transportation.

The Ministry is entitled to approve any transfer of interest in downstream licences or an indirect transfer of ownership. Subsequently, payment of premiums is required by law. In respect of taxes for transfers of interest in downstream licences, capital gains tax on the sale of shares is applicable.

Foreign investment may be protected through investment agreements, which seek to obtain stability. According to an investment agreement, investments generated in the country have tax incentives such as reduction on income tax percentage, deductions for the calculation of income tax, exoneration of remittance tax and exoneration of advance payment for income tax for all new investments. Such benefits are available if the investor executes an Investment Protection Agreement (IPA).

Foreign investors will have tax stability in income tax and other national direct taxes, exclusively with respect to the rates and exemptions of each tax in force on the IPA signing date.

Non-discriminatory treatment is offered in the administration, operation, expansion and transfer of investments, which shall not be subject to arbitrary or discriminatory measures. Investments and foreign investors will be granted full protection and assurance, in such way that they will have the same protection that Ecuadorians receive within the national territory. As per the law, property of the investors will be protected and all forms of confiscation are prohibited, either in respect of national or foreign investments.       

Where dispute resolution methods for oil contracts are concerned, international arbitration may be agreed by the contracting parties, subject to approval from the State General Attorney Office. With regard to international arbitration for an investment agreement, this will only be applied if it exceeds USD10 million, and will be held under the rules of UNCITRAL, PCA, ICC or CIAC.

It is important to note that international arbitration under Bilateral Investments Treaties (BITs) with other countries may not be accessible, given that Ecuador denounced most of them. Despite such denunciation, the survival clause or “Sunset Provision” applies to investments made before the termination date, extending its protection for an additional period. All other future investments may be outside the scope of treaty protection.

Finally, we must warn that according to the Hydrocarbons Law, following due process, the state has the power to terminate an oil and gas contract unilaterally (caducidad) upon breach of law or contract as a result of the administrative procedure set in the law. The termination decision can be challenged judicially and may be followed by action for damages after termination.

Foreign investment is permitted without constraints. Furthermore, the law does not provide an obligation to have local partners.

There are no official sanctions issued by the Republic of Ecuador. In practice, since 2022, EP PETROECUADOR has announced that awarded foreign companies must refrain from trading hydrocarbons of Russian origin with Ecuador. Some public statements said consequences of international enforceable sanctions were prevented against the country and its officials.

The main environmental regulators are: (i) the Ministry of Environment, Water and Ecological Transition; and (ii) decentralised autonomous governments (provinces and municipalities).

The principal environmental laws comprise:

• Environmental Organic Code and its regulations;
• Unified Text of Secondary Legislation on the Environment;
• Hydrocarbons Operations Environmental Regulation; and
• Decentralised specific regulations.

Environmental legal requirements start with the requirement to obtain an Environmental Licence following a specific procedure set in the law. Authorised environmental consultants shall prepare an Environmental Impact Study (EIS), which is required for the issuance of the Environmental Licence. The EIS presents the characteristics of the environmental conditions prior to the execution of the project, a risk analysis and the description of the specific measures to prevent, mitigate and control the environmental alterations resulting from implementation of the project.

Although the law dictates that a community consultation process is required in order to acquire an Environmental Licence; the state, however, has competence to issue the final decision even if the majority of the community opposes the project. Accordingly, Environmental Licences are issued by the Ministry of Environment, Water and Ecological Transition for each phase of the industry (exploration and production) upon approval of the EIS by the same ministry.

It must be noted that the Constitution prohibits extractive activities in protected areas and in areas declared as intangible, including logging. Exceptionally, hydrocarbons may be exploited at the request of the President of the Republic, and after declaration of national interest by the National Assembly, which, if deemed convenient, may call a referendum.

Furthermore, the Ministry of Environment, Water and Ecological Transition has competence to conduct audits and oversee compliance with the EIS and all applicable laws. As a result, in case of breach, aside from penalties, it may determine that the company has to remediate environmental damages. If the company does not proceed accordingly, the Ministry of the Environment may request the Ministry of Energy and Non-Renewable Resources for the termination (caducidad) of the contract.

Additionally, Ecuador has a strict liability regime for environmental damages. Therefore, the burden of proof demonstrating that no damage has occurred falls on the operating company. Liability for environmental damages may not be assigned to subcontractors, although a knock-for-knock clause is included. There are no caps on liability under local legislation. There may be a cap on liability in certain contracts among private entities or subcontractors; however, in contracts directly signed with the state there are no caps on liability.

It is important to mention that a common provision in main contracts is the requirement to conduct a study on an environmental baseline to determine the status of the assigned area. According to each contract, the company may have to operate in compliance with applicable environmental standards during the term of the project. To terminate a project, the Ministry of Environment, Water and Ecological Transition shall approve a final audit.

Environmental regulation is the most notable area that contains differences between onshore and offshore operations.

The Environmental Regulation for Hydrocarbon Activities states that for offshore management of liquid waste, any offshore platform shall have adequate tanking capacity to receive fluids from drilling and production, in order to remove polluting components prior to their discharge. In offshore operations, the discharge of oil-based drilling mud, which must be treated and disposed of on land, is prohibited. On closed platforms, closed circuits must be installed for the treatment of all liquid waste.

Regarding offshore exploratory and advanced operations, exploratory drilling shall include gravel processing systems, with closed effluent treatment systems, and a system of grey water treatment. Additionally, for offshore production tests, the agent must use systems to recover and treat polluting fluids.

In respect of offshore drilling, in case of temporary or definitive abandonment of an operations area, a well must be permanently abandoned. Also, the agent must take other measures to avoid damage or impediments to fishing, navigation or other activities.

For offshore industrialisation facilities, extracted gas must be dehydrated and the formation water shall be discharged into the environment or injected in accordance with the provisions of environmental regulations.

In an unprecedented judicial decision, the Constitutional Court mandated the National Election Council to run a plebiscite on decommissioning all hydrocarbons activities on Block 43 known as ITT (Ishpingo-Tambococha-Tiputini). Results were in favour of stopping extraction and the current government is facing challenges on fulfilling the people’s decision: “to progressive and orderly withdrawal of all activity related to oil extraction within a period of no more than one year from the notification of the official results”.

Due to lack of specific legislation, during 2024 two Executive Decrees were issued establishing an ad-hoc committee and establishing technical milestones over several years for the decommissioning process.

The judicial ruling mandated that the state may not exercise any actions aimed at re-initiating new contractual relations to continue with the exploitation of block 43.

The Ecuadorian Constitution mandates the state will adopt appropriate and transversal measures for the mitigation of climate change by limiting greenhouse gas emissions, deforestation and atmospheric pollution. In accordance with this, the Environmental Organic Code establishes that the state must create and strengthen the conditions for the implementation of mitigation and adaptation measures to fight climate change.

The Environmental Organic Code establishes that the decentralised autonomous governments (provinces and municipalities) may include climate change criteria in their territorial planning.

The Ministry of Environment, Water and Ecological Transition is entitled to exclusive attributions for granting oil and gas licences to ensure they are conducted in compliance with environmental laws and regulations.

On the other end, decentralised autonomous governments have competence to grant permissions for infrastructure construction required for the development of oil activities (facilities) and other operating permits.

In January 2024, the Organic Law on Energy Competitiveness came into force, which establishes that private companies, at their own risk, may develop projects not foreseen in the Electricity Master Plan, without being subject to a public selection process, as long as the power of the project does not exceed 10 MW.

In the fourth quarter of the year, in the context of the energy crisis that is seriously affecting Ecuador with service cuts for up to 14 continuous hours due to the lack of rainfall that caused shortages in the hydroelectric plants on which the country largely depends, the National Assembly issued a legal reform to allow the private sector to present projects of up to 100 MW in non-conventional renewable energies and renewable energies transition, not contemplated in the Electricity Master Plan.

Court decisions and government plans have set up the deadline for replacing flares with Teas for 2030. The Regulation for the Utilisation of Associated Gas was issued on 5 November 2024 and establishes the rules for using associated gas for generating electricity and/or industrial products and thus reducing flaring associated with outdoor burning of gas. After implementing these actions and when the maximum gas utilisation capacity is reached, flaring shall be authorised in controlled volumes. During 2025, the Ministry must define the contractual pipeline for PPAs and other commercialisation matters and licences.

There are no other material ways in which energy transition is affecting traditional oil and gas development plans in the region.

The Ministry may regulate further features for interests in heavy crude below 15 degrees API, pursuant to the Hydrocarbons Law, although this has not yet been executed in a particular case.

There are recent specific regulations which apply to all local and foreign natural persons or companies, whether public, mixed economy or private, who are interested in engaging in commercialisation, storage, refining, industrialisation and transportation of Natural Gas (NG) – which includes Compressed Natural Gas (CNG) and Liquefied Natural Gas (LNG).

In general, interested companies must demonstrate having owned or received from third parties authorised gas pipelines, terminals or means of transport. Authorisations may be suspended or terminated due to non-compliance with regulations, at the request of the holder, or by decision of the competent authority.

Production-sharing contracts of exclusive service contracts are taking place in the industry. The Ministry expects to award several production-sharing contracts to local and international companies during 2025. The government is constantly analysing the convenience in releasing mature blocks and fields for private companies to enhance global production.

ITT decommissioning is a relevant milestone in the industry due to its legal consequences. In addition, Ecuador is about to have a prior consultation on the Indigenous Communities’ Act for Extractive Activities. It must be enacted by the National Assembly due to a Constitutional Court ruling on this collective right. The court ruled on the need for an Environmental Consultation Law, prior to the enforcement of new legislation and informed consultation regulations are in force, but these cannot be applied within territories of indigenous communities.