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Report No. 5865-EC Ecuador: Issuesand Options in the Energy Sector Public Disclosure Authorized December 1985 Public Disclosure Authorized Public Disclosure Authorized A . :§ U 0': . .r r- . - . - . - . - , . ~;;sr >s - Public Disclosure Authorized W,,e', ;''- 'iksE?eir;y- id'dlM't%Ufib4 JOINT UNDP/WORLDBANK ENERGY SECTOR ASSESSMENT PROGRAM REPORTS ALRFADY ISSUED Coiirtrv DaLte Number Ind t7 nees Ia Nov emb er 1981 3543-INI) 8-Il rirt his December 1Q81 3910w-MAS V enya- Max' 19982 3800-KE Sri l.arika. 'ia; t11W 37q?-Cii .ii ' t .;ilime I:' It 36I725-I Il:i rl. New ni lin June. 19 82 3852-pI; Innetlv.';] QLJ} I:wil.^ 3f77-H A P.w Ind l i Iht'l 1 9S" 1i79-1RW 1;I A:t;,S i-s-!A!. ! Uc" 30 Bane izi;. s ! : eit h'e r 91-.! g 8 7t;3-iso - a Utn::na.,rv !W*)' :,I fl-z. IA '. - -19 i :r'.ex 't~~~~~~~~~~~~~~~-;irchll 18si i.1i 77-'I'!; , r I 1'). 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This report has a restricted distribution. Its contents may not be disclosed without authorization from the Government, the UNDP or the World Bank. The main energy issues in Ecuador concern petroleumexplora- tion, developmentof existingoil fields,the role of the State Petroleum Corporation(CEPE), inadequate energy pricing,and the power subsector's financialdifficulties. Petroleum exploration is the key investment priority in Ecuador t energy sector. The country is so dependent on oil that what- ever happens to the voLume of oil production or to oil prices, over- shadows developmentsin the rest of the economy. Nevertheless,past explorationefforts in Ecuador have been insufficient,resulting in a steadydecline in petroleumreserves of almost30Z between1973 and 1984. In accordancewith the country's requirementsand good pros- pects for futureoil discoveries,the overallstrategy for the petroleum s-bsectorshould aim to increasecurrent petroleum production as long as productionis backed by a strong explorationprogram. No other invest- ment in Ecuadorhas a higher expectedrate of return,a quickerpay-off, and a more dramaticimpact on exports. The role of CEPE should be redefined and the governmentshould take actions to implement its decision. CEPE is not able to functionas an efficient oil company mainly because of limited exploration involve- ment, and insufficient autonomy permitted by the petroleumlegislation. Petroleum pricingpolicy involvesheavy subsidieswith retail prices roughly 50Z of economic cost, and power tariffs exceedinglylow when comparedto marginalcost. The power subsectorhas been facing serious financialdiffi- cultiesfor a number of years. These only becameapparent at the turn of the decade after the sector had startedan ambitiousinvestment program to be financedmostly by oil revenues. ACONYNS BEOE Banco Ecuatoriano do DesarolIo (Development Bank of Ecuador) EF i3BancoNaclonal de Feoento (National Development Bank) CAF Corporacion Andine,de Fomento (Andean Development Fund) CEDEGE Comision de Estudios para el (Guayas Basin Development Desarrollo de Rio Guayas Comission) CEPE Corporacion Estata Petrolerai (Ecuadorian Petroleum State Ecuatorl3na Corporationi WONAOE Consejopacibonal de DesarolIa (National Development Office) ONi Direccion Nacional de (Hidrocarbons Nationai Hldrocarburos Directorate) EEC Comunidad Economica Europea European Economic Community EMELEC Empresa Electrica del Ecuador (Ecuadorian Electric Company) FONAFOR Fonda NacTonal Forestal (National Forestry Fund) GDE Goblerno de la Republica del Ecuador (Governmentof Ecuador) [NE InstitutoMacional de Energia O(ationalEnergy Institute) INECEL InstitutoEcuatoriano de (EcuadorianElectrificiation Electrificacion Institute) MAG Ministerio de Agricultura (Ministryof Agriculture) NOF Ministerio de Finanzas (Ministryof Finance) MRNE Ministerio de Recursos (Ministryof Natural and Energy Naturales y Energeticos Resources) OLAIE Organication Latinoamericana (Latin American Energy de Energla Organization) OPEC Organizationof Petroleum Exporting Countries PRONAF Prograra Naciona Forestal (NationalForestry Program) USAID U.S. Agency for InternationalDevelopment ASRESVIATIONS B Billion = 109 km Kilometer bbl Barrel kW Kilowatt bd Barrel per day kWh Kilowatt hour rTU British thermal unit L Liquefied Petroleum Gas CFD Cubic feet per day m Cubic meter GN Gigawatt MM Million GQh Sigawatt hour MT Metric Ton ha hectare MW Megawatt kcal Kilocalorie MWh Megawatt hour kgoa Kilograms of oil equivalent toe Tons of oil equivalent ktoe Kilo tons of oil equivalent TPD Ton per day CURRWC DQUIVE (1984) Official exchange rate applied to selected imports: US$1 = 65 sucres Average effective exchange rate: 1 US$ = 96.95 sucres which has been used throughout the report. EKENCY CONVERSION FACTORS Petroleum Crude Oil 139 toe = 1,000 bbl LPG 114 toe = 1,100 bbl Gasoline 122 toe = 1,000 bbl Kerosene & Jet Fuel 133 toe = 1,000 bbl Diesel 139 toe = 1,000 bbl Fuel Oil 153 toe = 1,000 bbl Biomass Fuelwood 300 toe = 1,000 ton Charcoal 650 toe = 1,000 ton Bagasse 209 toe = 1,000 ton Electricity 86 toe/GWh This report is based on the findings of an energy assessment mission which visited Ecuador in January 1985. The full-time members were Bernard Zinman (Mission Leader); Gabriel Sanchez-Sierra (Deputy Mission Leader); Ignacio Rodriguez (Mineral Economist); Fernando Lecaros (Power Economist); William Simmons (Petroleum Engineer); Jean Pierre Angelier (Energy Planner); John Shillingford (Refinery Specialist); and Sergio Trindade (Energy Conservation Specialist). The following consultants participated on a part time basis: Peter Symborski (Gas Specialist) and Robert Chronowski (Forestry Specialist). All concerned with preparing the report, especially the principal authors, Gabriel Sanchez-Sierra and Ignacio Rodriguez, would like to express their gratitude to (the late) Bernard Zinman for his wise guidance and wholehearted support. TABLEOF COMTEETS SUMMARYAND RECOMMENDATIONS .................. ........... i IsENERGY IN THE ECONOMY..*.s.. 1 I* NRYI H CNM..................................... 1 Country Backgroundo ............. 1 Economic Situation ..................................... 1 EnergyResources3....................................* 3 Energy Balance, 1984.................................... 3 Energy Demand Projections ..... ............. 4 II. ENERGY DEMAND MANAG EN ENT. ..... .. ...... ...... 7 Energy Pricing.......................................... 7 Petroleum Products.... ....... ........... 7 Reconmendations.............. 9 Electricity Tariffs....... .....0669 11 Recommendations ..0.0..O,,.,........................-. 0 ....... .. 13 Energy Conservation and Substitution.................... 0 13 The Structure of Energy Demand........................ 13 The HouseholdSector .......................... ........ 13 The Industrial Sector ..........o......................... 14 The Transport Sector .... ......... .... ......... 0........ 16 Recommendations ..... ............- .. .... ..... ......... 20 III. PETROLEUM .................... ,o . .. ee.o 21 Background .o.......................0.0......... .......... 6.09...... 21 Petroleum Exploration and Development Activities........ 22 Current Reserves ............ o......................... 22 PetroleumExploration ....... .................. ...... 23 Petroleum Production and Secondary Recovery........ .... 24 Heavy Crudes ..... ..... ........... ................ 26 Petroleum Supply .. ....................... o....- ........ .............26 Refining Facilities .... o.............................................27 Supply/Demand Imbalance ...... ....... 27 Storage .e.....es.......................................oo.. ......27 InstitutionaL Issues* ........ o..........................- ............ 28 Petroleum Legislation and the Role of CEPE............ 28 CEPE's Finances .. ..................... .... ...... o ..... 30 CEPE's Investment Program....... ............... ....... 3.1 Exploration and Oil Field Development................. 32 33 Transportation and Storage. ... .................. 35 Recommendations................ o...................... 36 IV. NATURAL GAS ................. .................................. 38 Background*...*..*................... .......................... 38 Gas Development in the Gulf of Guayaquil...... .......... 39 Oriente - Efficient Use and Recovery of Gas............ 43 Recommendations .........................................46