Petrobras in Ecuador (A)

On October 18, 2007, Ecuadorian President Rafael Correa announced his intention to convert Petrobras’ existing participation agreements to exploit oil reserves in Ecuador’s Blocks 18 and 31 into maintenance contracts under which Petrobras would pay a production fee and reimburse investment costs, but get them all back. Oil would belong to the government. Correa also announced a drastic increase in corporate taxes and changes to other contracts in which Petrobras participates. All foreign oil companies operating in Ecuador would be similarly affected, and any company that refuses to “renegotiate” their contracts would face a 100 percent income tax. How should Petrobras react to Ecuador’s gross negligence in its treaties? Should Petrobras take the Ecuadorian government to arbitration? Or would it be better to seek a negotiated solution similar to the one reached in Bolivia a year earlier? How should Petrobras reconcile its fiduciary duties and the best interests of its shareholders with the interests of the Brazilian government? How should you communicate with your various constituencies?

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