China's Huge Oil Deal ... With Ecuador

Reuters gives us the scoop on Ecuador's oil deal with China ...

Shunned by most lenders since a $3.2 billion debt default in 2008, Ecuador now relies heavily on Chinese funds, which are expected to cover 61 percent of the government's $6.2 billion in financing needs this year. In return, China can claim as much as 90 percent of Ecuador's oil shipments in coming years, a rare feat in today's diversified oil market.

So how much oil is that?  Well, the same story reveals that Chinese-controlled firms are already getting 83% of Ecuador's oil exports, which run around 360,000 barrels per day. That's from total production of 504,000 barrels per day.

And another Reuters story tells us that Ecuador's oil output should rise 9% to 550,000 barrels per day by the end of the year. That's a 9% gain. Maybe Ecuador's own domestic oil use will expand to use that ... or maybe the new production (90% of it anyway) will go straight on the boat to China. 

The US is currently the #1 export market for Ecuador's oil.

Here's the thing: Ecuador has a much bigger oil prize just waiting to be tapped.

That's because Ecuador discovered an estimated 900 million barrels of oil reserves in 2007. It was hidden beneath Yasuni National Park, a world biological preserve home to several indigenous groups.

President Rafael Correa worked with the United Nations to create a trust fund that would pay Ecuador not to drill. In return Ecuador would preserve  a rainforest with more species per hectare than in all of North America. Also, keeping the oil in the ground is a sure-fire way to avoid putting carbon in the air, and the rainforest itself plays an important role in capturing and storing carbon.The UN estimated that the trust fund would stop 400 million tons of carbon from entering the atmosphere by not burning the oil and another 800 million tons by stopping the removal of carbon-consuming plant life.

The cost would be $3.6 billion. Everybody wins, right?

Wrong. Flinty-fisted global donors put up only $13 million in cash (and $167 million in pledges). So, President Correa railed against foreign donors for their apathy, canceled the trust fund project and went ahead with the oil drilling in the rainforest. 

Anticipating the decision, oil companies built roads and drilling infrastructure adjacent to the park. 

Now, all that oil (or 90% of it) is going into China's hands.

Ecuador probably is making the best of its bad choices. Ecuador has $18.19 billion in foreign debt, up 20% in a year, and equal to 20% of Ecuador's $90 billion gross domestic product. It also has $12.52 billion in public debt, up 25% in a year. 

Part of the problem is the awful terms that Ecuador gets on loans after defaulting on its foreign debt in 2008. Correa, a U.S.-trained economist, declared a large chunk of Ecuador's foreign debt "illegitimate" and "odious."

Reuters adds: 

China's cash advances to Ecuador cover only a slice of the near $13 billion a year Ecuador can earn from oil sales. But since 2009 PetroEcuador has agreed to sell Chinese firms several hundred million barrels of oil, valued far higher than the loans themselves, according to a Reuters analysis of seven different contracts. With those supplies locked up, other buyers now get few chances to purchase crude from PetroEcuador in competitive tenders.

Interestingly, China may or may not send the Ecuadoran oil to China.Instead, Chinese oil firms can sell the oil to would-be Ecuadorean trading partners and capture an enormous discount. 

Down the road, who knows what China will do. But this is certainly an interesting twist in the global oil markets.