Changing history? Hernan Lara confronts the most important mission of his career; building a massive oil pipeline that could help jump-start Ecuador's economy - Strategies

MOST CHIEF EXECUtives are accountable to shareholders and employees, but you could say Hernan Lara is accountable to a nation of almost 13 million people. Ecuador's hope of digging out from under two decades of economic stagnation is pinned in part on OCP Limited's chairman and CEO, and the construction of the company's new US$1.1 billion oil pipeline.

The huge foreign investment should stimulate the economy with thousands of jobs and increased exports. The pipeline will also enable the OCP partners to ramp up exploration and production, hampered for years by a lack of capacity in the old and inefficient pipeline that currently transports oil from remote drilling fields to tankers docked on the coast.

OCP Limited is itself a consortium, formed in 1999 by five large oil companies, following years of unsuccessful wrangling with the government and each other. Its members include Canada's Alberta Energy Co.; Italy's Eni-Agip; USA's Kerr-McGee and Occidental Petroleum (OXY); and Spain's Repsol-YPE The international group's first task was to find an executive capable of breaking the deadlock in negotiations with the Ecuadorian government. The search led to Colombia, where Lara was running Ocensa, a private company that built and operated the largest pipeline in the country. A few months after arriving in Quito as OCP's CEO, Lara sat down in November with Ecuador's business-minded president, Gustavo Noboa, and left the bargaining table with a signed deal. Soon after, Argentina's Perez-Companc joined the consortium.

According to the Ecuadorian Central Bank, the new 314-mile pipeline will double the country's export capacity, generating some US$62 billion in exports during the next 25 years -- a figure almost four times Ecuador's international debt and five times its current GDP. "The pipeline project is without a doubt the lifesaver of our sinking economy" says Quito's Chamber of Commerce President Fernando Navarro.

The importance of the project is not lost on Lara, an MBA from Texas A&M University who also studied at Boston's MIT. "This is a landmark in the history of the oil industry in Ecuador," he says.

Lara is used to making history Before running Ocensa, he was the chairman of Oleoducto de Colombia, the firm which constructed the first private pipeline in that country He knows what it takes to win the approval of a president, and he also knows how it feels to work under the constant scrutiny of the private and public sectors--including leftist congressmen and environmental activists. "This project is a new concept for Ecuador, a country where the government traditionally doesn't take risks or make significant long-term investments," says the 55-year-old Lara.

Despite the obvious benefits to the economy, the negotiations to build the pipeline have dragged on since it was first proposed in 1994, delayed by politics and debate over whether it should be state- or privately-owned. Complicating negotiations, Ecuador has had five presidents since 1999.

When President Noboa came to power, he authorized two groups to bid for the project--the Tulsa, Ok.-based Williams Cos. and the OCP consortium. Weeks later, the Williams Cos. had a change of heart and pulled out of the negotiations, claiming Ecuador's capacity for oil production didn't justify the investment.

The deal grants the company rights to build the country's first private pipeline. Ecuador's existing pipeline, the state-owned Sote, can transport only 390,000 barrels a day, while the country's oil production capacity exceeds 520,000 barrels a day The result is that many wells operate below potential. This affects mainly foreign oil companies--which take a back seat to PetroEcuador when it comes to moving oil through the Sote. Despite demand, the 31-year-old Sote operates at a daily loss of about US$1.6 million, largely due to inefficiencies and favorable pricing for PetroEcuador.

When built, the OCP pipeline will have a capacity of 450,000 barrels a day According to Lara, 390,000 barrels per day will be used by consortium members and the remaining capacity must be sold to "other users," including PetroEcuador, which gets a discounted rate.

The consortium will begin construction in June, and expects to complete the project by December 2002. The line will start in the rainforest town of Lago Agrio, 120 miles northeast of Quito, and end at Balao port on the Pacific Ocean. According to the consortium, at least 5,000 people will be hired for the construction of the line and of a special port terminal in Balao. After completion, some 400 employees will remain on the payroll to operate the pipeline. "Another 55,000 jobs will be created indirectly, and the project will bring money to poor rural areas where the pipeline will be built," says Navarro. Most importantly he adds, "this huge investment will get the attention of other potential investors."

The government calculates that oil production will increase to at least 700,000 barrels a day because of the new pipeline capacity. Secretary of Energy Pablo Teran says that during the construction phase alone, the pipeline will have a net positive effect of almost US$608 million on Ecuador's balance of payments, and that over the 20-year life of the contract the pipeline is expected to produce around US$5.6 billion in taxes and other benefits.

Another justification for the new pipeline is Ecuador's varied petroleum products, which, up to now have shared the same pipeline. The consortium estimates that 90 percent of the oil fields in the rainforest are filled with heavy oil. "We needed a separate pipeline because we were mixing qualities of crude oil in the Sote and both the companies and the country were losing money" Lara says.

The big question for Lara and OCP is when they will earn back the staggering US$1.1 billion investment. The Williams Cos. was frightened away by the risk. "We hope to recover [the money] before we turn the pipeline over to the country in 20 years," says Lara, who declined to give specifics about the deal with the government.

Lara rules out future projects in oil exploration or drilling for OCP, a compromise made in its deal with the government. Those projects will be left to the OCP members individually and to PetroEcuador. "This association has a single, very clear target, which is the pipeline," he says. "Anything other than that is none of our business."

COPYRIGHT 2001 Americas Publishing Group
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