Subsidiary of Canadian New Stratus Energy Notifies Ecuador of Dispute

By Diego Luis Alonso Massa, 30 November 2022

On 25 November 2022, Petrolia Ecuador S. A (Petrolia) – subsidiary of Canadian New Stratus Energy Inc (NSE) – announced that it had sent Ecuador’s Ministry of Energy and Mines (MEM) a notice of dispute and had initiated a period of direct negotiations under the Amendment Agreements to the Service Provision Contracts for the Exploration and Exploitation of Oil in blocks 16 and 67 in Eastern Ecuador.

According to Petrolia, the disagreement stems from a series of contractual breaches by the Ecuadorian State, including an alleged failure to pay sums due through the application of the correction factor contained in the amendment agreements, as well as claims that the interruption of the process of renegotiation of the amendment agreements’ term and change of modality of was abrupt and arbitrary.

According to Petrolia, these breaches violate its legitimate rights and guarantees – in addition to breaching legal certainty – and will cause serious damage to the company and its shareholders.

As a consequence, Petrolia has requested the extension of the contracts to continue the operation of blocks 16 and 67. Failing that, it has threatened to institute legal proceedings against Ecuador before international arbitration tribunals to protect its legitimate rights and guarantees.

The dispute between the parties arose when Repsol Ecuador S.A. (Repsol) – the original holder of the Service Provision Contracts for the Exploration and Exploitation of Oil in blocks 16 and 67 – decided to sell its rights over said blocks to the Canadian company New Stratus Energy (NSE), for almost USD 5 million, in October 2020.

These contracts expire in December 2022. So, if no agreement is reached for their extension, Repsol will have to ensure the closure of the wells and the environmental restoration of the area, including possible indemnities.

On 15 October 2021, Repsol and NSE requested the MEM to authorise, through the respective ministerial agreement, the transfer to NSE of all the shares that Repsol Exploración S.A. (98.36 %) and Repsol Petróleo S.A. (1.64 %) held in Repsol.

Initially, the Ministry rejected the request because it considered that the technical and economic conditions of NSE could not ensure the continuity of operations in the fields.

In this regard, the fact that the Canadian company had accumulated a deficit of some USD 14 million raised doubts about its capacity to undertake the investments required to decommission the wells and recover the environmental state prior to the operations, as well as compensate workers, fulfil tax obligations and cover other possible expenses.

Although, the Minister of Energy and Mines of the new government, Juan Carlos Bermeo, authorised through an official document the sale in Spain of Repsol’s shares to New Stratus Energy on 8 November 2021, he made clear that this did not mean a change of operator, and that it would not represent any type of labour instability for those who were working in the blocks.

Meanwhile, the Ministry never authorised the transfer of the shares, as requested by Repsol and NSE and pursuant to the provisions of Decree No. 1363 of 2001.

However, a few days before the end of the term of the contracts, Ecuadorian President Guillermo Lasso expressed his firm support for not extending the term of the current contracts, nor negotiating new ones. The result, in accordance with Article 29 of the Hydrocarbons Law, would mean that the assets and reserves would revert to the Ecuadorian State.

Thus, by an official letter dated 11 November 2022, Vice Minister of Hydrocarbons, Rubén Espín, informed Ramiro Oswaldo Páez Rivera, Petrolia's attorney-in-fact, that the exploration and exploitation contract will expire on 31 December 2022.

However, when officials from the MEM tried to enter the fields to assess the state of the assets, equipment and facilities and their operability, Petrolia’s representatives denied them access. With this, the fact that Petrolia had become the real operator of the blocks became evident.

Since then, the MEM has on several occasions requested the company to allow the persons delegated by the Ministry to enter the facilities, in order to continue with the reversion of the blocks in accordance with the provisions of the contract. 

Government officials argued that, according to Article 5 of the Regulations for the Transfer of Hydrocarbon Contracts, issued by Decree No. 1363 of 2001, the authorisation for the sale of the shares had to be granted through the pertinent “ministerial authorisation,” under penalty of nullity.

For this reason, government officials held that the actions of former Minister Juan Carlos Bermeo, who announced the approval of the transfer of Repsol shares to New Stratus (Petrolia), lacked legal effect since, to change the operator, the approval and issuance of ministerial authorisation was required.

In view of this, the Ministry granted Petrolia a period of ten days to present “the updated documentation that demonstrates the technical and operational capacity, as well as the economic solvency of New Stratus Energy Inc.”

Further, government officials warned that, in the absence of the corresponding ministerial authorisation, the share transfer process would be incomplete meaning that the continued operation of the blocks could have serious consequences for Petrolia.

Petrolia’s advisor, Héctor Paz y Miño, argues, however, that the approval and the subsequent ministerial authorisation would not be necessary since, on the one hand, there was no transfer of rights but a sale of shares, and, on the other hand, the sale was carried out abroad, in Spain.

Likewise, Ramiro Páez, Petrolia’s attorney-in-fact, has pointed out that the reversion process “is suspended by operation of law.” Perez bases his statement on the fact that the Ministry of Energy has not yet responded to the negotiation request for the extension of the term and the migration of the modality of the contracts.

According to Paz y Miño, the company has the right to have a negotiating commission formed, in accordance with the provisions of Article 88 of the Hydrocarbons Law Regulations, approved by Decree No. 342 of 2022. So far, this has not happened.

Meanwhile, Minister of Energy and Mines, Fernando Santos, pointed out in response that the contracts in question specify that the extensions should have been negotiated two years prior to their termination (that is, in January 2021). Petrolia, however, only requested the renegotiation and the formation of a commission in the last few months.