2nd UPDATE: Ecuador, Petrobras Agree To Transfer Block 31 To State

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(Updates with Petrobras'comment, adds detail)



By Mercedes Alvaro


Of DOW JONES NEWSWIRES



QUITO -(Dow Jones)- The Ecuadorian government and Brazilian state-run oil
company Petroleo Brasileiro SA (PBR) agreed to finish the contract for block 31,
which will be transferred to the state, President Rafael Correa said Saturday.


"Other good news for Ecuadorians. ... After hard negotiations with Petrobras
and although it has $200 million in investment, we (the government) got the
company (to) transfer the block 31 to Ecuador. It is in Petroecuador's
hands," Correa said during his weekly radio address, but didn't give
further details.


Block 31 has 200,000 hectares, some within the Yasuni National Park, which
Unesco has declared a world biosphere reserve.


Petrobras hasn't started production in block 31. Government sources said
Petrobras, as the Brazilian oil company is known, agreed to transfer block 31
because changes in windfall profit tax rates have made its businesses
unprofitable.


The previous administration of President Alfredo Palacio mandated that when
oil prices rose above those in operating contracts, the government's share of
the excess would be 50%. Correa's administration raised that to 99% last
October.


The company said in a press release it has agreed to terminate its contract
for the oil field but plans to continue investing in the country.


Mining and Oil Minister Galo Chiriboga told Dow Jones Newswires on Saturday
that the block could be operated by Petroamazonas SA, a unit of Petroecuador
that operates the former Occidental Petroleum Co. (OXY) blocks.


In 2006, Ecuador canceled a contract with Occidental Petroleum after accusing
the U.S. company of wrongdoings, among them the unauthorized transfer of a 40%
stake in its operations in Ecuador to Canadian oil firm Encana Corp. (ECA).


Occidental Petroleum is seeking international arbitration over that decision.


"The government and Petrobras had reached a friendly agreement, without costs
for the state," Chiriboga said. "The block will come to the state in around 30
or 45 days after some audits are completed."


Government sources said that as part of the deal, the state will buy the
Petrobras' capacity to transport crude oil through the private, heavy crude
Oleoducto de Crudos Pesados, or OCP, pipeline.


Petrobras has 11.42% of shares in the OCP. OCP's shareholders, all of whom
transport oil along the OCP, operate under take-or-pay contracts, where they
must make payments regardless of how much oil is transported.


"We are talking about (a) tariff to use OCP if we need it," Chiriboga said.


The sources said the tariff could be around $1.436 per barrel transported.


In August 2004, under Palacio, Ecuador gave Petrobras a license to operate the
block. However, Environment Minister Ana Alban suspended the license in July
2005 and barred the company to enter Yasuni Park, asking Petrobras for a new
development plan and a new environmental management plan for the block.


Petrobras presented the new plans in May 2006. The Environment and Mining and
Oil ministries approved the new plans in December 2006. The company paid about $
800,000 for the new environmental license and other fees. That was in addition
to $700,000 the company paid in 2004.


Petrobras planned to start producing 30,000 barrels of oil a day from the
Apaika and Nenke fields in block 31 in 2009. It has invested around $257 million
in the block.


Since Ecuador approved the first environmental license for Petrobras to
operate in block 31 in 2004, ecological and scientific groups have lobbied
against oil exploration in the park, which is considered to contain one of the
most biodiverse areas in the world.


Unions and leftist movements also held occasional protests to impede oil
exploration in block 31. Chiriboga said Petrobras will continue to negotiate
changes for its contract in block 18.


Although Chiriboga said a month ago that Petrobras agreed to immediately
change its current participation contract, but now it's negotiating changes to
it.


"The negotiations for block 18 are advancing. I think we can reach an
agreement soon to introduce some changes to the participation contract to
improve the benefits for the state and in one year we change the contract for
one of services," he said.


Under the current participation contracts, the state receives a percentage of
profits from oil production. Under the new service provider contracts, companies
would be paid a production fee and reimbursed for investment costs, although all
of the recovered crude oil will belong to the state.


The new service contracts will also prohibit foreign companies from seeking
international arbitration awards, requiring them to rely instead on Ecuadorean
courts to settle any disputes.


Petrobras currently produces about 32,000 barrels of oil a day from block 18,
but it has to hand over 51% of that to Ecuador.



-By Mercedes Alvaro, Dow Jones Newswires; 5939-9728-653; mercedes.alvaro@
dowjones.com