Energy: Trouble In The Pipeline

Recent unrest in Equador may complicate EnCana Corp's efforts to divest its operations there.

A real estate agent prefers that unruly neighbours not squabble on their front lawn while one is showing prospective buyers a house. Likewise, recent unrest in Ecuador may complicate EnCana Corp.'s (TSX: ECA) efforts to divest its operations there.

Oil shipments from the Latin American nation came to a grinding halt in August, after a group of social organizations, local politicians and trade unions from the country's two oil-producing provinces went on strike. The groups called for more jobs, local infrastructure and petrodollars paid into local coffers. They set up roadblocks, occupied airports and oil camps and–according to one report–dynamited one of EnCana's pipelines, spilling 700 barrels of crude. Dissidents, oil producers and the government eventually reached an agreement that ended the protests.

EnCana owns stakes in five producing blocks and a 36.3% interest in the Oleoducto de Crudos Pesados, the newer of the country's two major oil pipelines. The OCP's operating company reports it was largely unaffected. However, EnCana spokesperson Almas Kassam says some of her company's facilities were occupied. “We declared force majeure on all of our Ecuadorian production,” she says. At press time, most production had been restored.

EnCana has been trying to off-load those assets for some time. Last year, it retained Harrison Lovegrove & Co., a London-based oil-and-gas corporate finance advisory firm, to co-ordinate the sale. It was part of its plan to focus on becoming a leading North American natural gas firm. It's tough to say how Ecuador's inherent instability influenced that decision, but EnCana had witnessed numerous presidents come and go. Aon Corp., an insurance and risk management firm, rates Ecuador a “high risk” country. EnCana has experienced daunting community-relations problems, and has long been embroiled in a tax dispute with the government.

“It's too soon to say how these protests will impact the sale process,” Kassam says. “However, we believe we have high-quality assets. We've been speaking to several interested parties, and they are all aware of the operating conditions.”

Martin Molyneaux, managing director of institutional research at FirstEnergy Capital Corp. in Calgary, says the protests add “an extra level” of political risk to the assets. He observes that while protests in Quito are common, major disruptions in the oil-producing provinces are not. However, he doesn't see protests thwarting a serious purchaser. “If I'm a buyer, I don't think the protests make me think differently,” he says. Assuming progress on the tax dispute, Molyneaux thinks the assets could sell this year.

The need of bidders to acquire oil may trump risk. Molyneaux says Chinese and Indian firms have visited Ecuador, and state-owned firms from both countries have already submitted bids. The two emerging economies have been scouring the globe for resources, and their appetite for risk may be greater than most. Most recently, China and India squared off over Calgary-based PetroKazakhstan Inc. For EnCana, such eagerness can only be encouraging.