Agency for the Regulation and Control of Energy and Non-Renewable Natural Resources (Ecuador)

Agencia de Regulación y Control de Energía y Recursos Naturales No Renovables

Country

Location

Regulated area

Ecuador

Quito

Energy & natural resources

Useful pages on the regulator website

Homepage: www.controlrecursosyenergia.gob.ec

Key individuals

  • Ing. René Ortiz: Minister of Energy and Non-Renewable Natural Resources, Chairman of the Board of the Regulation and Control of Energy and Non-Renewable Natural Resources Agency
  • Ing. Santiago Aguilar: Executive Director of the Agency for the Regulation and Control of Energy and Non-Renewable Natural Resources
  • Ing. José Franco: Technical Coordinator of Hydrocarbon Regulation and Control

Regulatory oversight

The Agency for the Regulation and Control of Hydrocarbons (Agencia de Regulación y Control Hidrocarburífero), now the Agency for the Regulation and Control of Energy and Non-Renewable Natural Resources (Agencia de Regulación y Control de Energía y Recursos Naturales No Renovables (ARCERNNR)), was created through an Amendment of the Hydrocarbons Law in July 2010 as a public law institution, with administrative, technical and economic autonomy. Its responsibilities are to regulate, control and supervise the technical and operational activities during the different phases of the hydrocarbon industry carried out by public or private companies, whether national or foreign, consortium or natural person, that carry out hydrocarbon activities in Ecuador, in order to protect the interests of the state, guaranteeing the adequate use of hydrocarbon resources and the efficiency of public and private investment.

The legal representative of the ARCERNNR is the Executive Director, who is appointed by the board of directors.

The key attributions of the ARCERNNR within the hydrocarbons field include the following:

  • to regulate, control and supervise the operations of exploration, exploitation, industrialisation, refining, transportation and commercialisation of hydrocarbons;
  • to exercise adequate supervision and control for the correct use of hydrocarbon resources;
  • to control the technical aspects of hydrocarbon activities;
  • to guarantee the proper functioning of the hydrocarbon market and its derivatives, as well as their good quality;
  • to control the correct application of the Hydrocarbons Law, its regulations and other applicable regulations;
  • to apply fines and sanctions established in the Hydrocarbons Law for contractual breaches and infractions of the Hydrocarbons Law and its regulations;
  • to resolve appeals and other administrative resources filed by users regarding resolutions issued by the ARCERNNR;
  • to set and collect fees corresponding to its administration and control services; and
  • to prepare reasoned reports to request from the sectoral ministry the termination of hydrocarbon exploration and exploitation contracts, if applicable, or the revocation of authorisations or licences issued by the sectoral ministry.

The performance of financial audits as well as compliance obligations is relevant because it is the result of the control exercised over hydrocarbon operations. By conducting these audits, the budget executions and assets are controlled to establish the objectivity and reasonableness of investments, income, costs and expenses, the use of assets and the level of compliance with laws, regulations, contracts, plans, programmes and annual budgets.

Audit processes are particularly focused on aspects such as:

  • compliance with legal and contractual obligations assumed by companies;
  • the use and destination of depreciable assets, equipment and facilities, property, plant and equipment that will allow the availability of the necessary information for the processes of reversion to the state of such assets at the end of the contracts, for any reason, as determined by the Hydrocarbons Law;
  • technical and economic reports on challenges submitted by a contractor to the executive director of the ARCERNNR and to the sectoral minister regarding reports and resolutions issued by officials of the Agency; and
  • approval of resolutions for the authorisation of the encumbrance, alienation or withdrawal of the assets acquired by the control subjects.

Reporting and disclosure obligations

The main obligations of companies that carry out technical and operational activities during the different phases of the hydrocarbon industry and are subject to the control of the ARCERNNR are to:

  • obtain all the approvals, authorisations and permits required for operations during the different phases of the hydrocarbon activities in its charge, in accordance with the provisions of the Hydrocarbons Law and the applicable regulations;
  • deliver information about the activities carried out within the terms established in the Hydrocarbons Law, its regulations and contracts signed with the state or public companies;
  • pay the corresponding fees for the rights and services provided by the ARCERNNR in accordance with current regulations;
  • provide the facilities and industrial safety required by the officials of the ARCERNNR for the proper execution of their control and inspection activities on the site where the hydrocarbon operations are being carried out, in accordance with the provisions established in the law and contractual regulations;
  • guarantee that the measurement equipment at the control and custody transfer centres for hydrocarbon derivatives are duly calibrated, verified and have the respective certificates in accordance with current regulations;
  • provide training to the officials of the ARCERNNR, the sectoral ministry, or any other state entity that has competence to control any aspect of hydrocarbon activities in accordance with the provisions of the contracts and the law, to implement new technologies and methods of operation;
  • contract the insurance policies specified in the law and in the contracts, which must be issued by insurance companies legally established in the country and qualified by the Superintendency of Companies, Securities and Insurance;
  • comply with current regulations regarding comprehensive quality, safety, occupational health and environmental management systems, energy efficiency, social responsibility and operational control measures, as well as international standards and norms for the hydrocarbon industry;
  • report daily and monthly the data regarding the measurement of the production of each field and each of its wells, as well as any other information required by the ARCERNNR, detailing the individual results of each well with respect to the amount of oil, water and gas;
  • present by 30 April of each year the financial statements of the immediately preceding fiscal year, duly audited by independent companies, and an income tax declaration; and
  • provide monthly, in physical and digital form, a report of the work carried out and its budget execution according to the programme of activities and budgets approved by the Ministry of Energy and Non-Renewable Natural Resources.

Monetary sanctions and recent behaviour

As stated previously, the ARCERNNR, in accordance with the Hydrocarbons Law, has the power to control and carry out audits and  special examinations of technical and operational activities during the different phases of the hydrocarbon industry developed by companies that have entered into contracts with the Ecuadorian state or with public companies.

This control is carried out constantly, that is, it can be carried out at any time without prior notice to the subject of control during the entire time that a contract with the state is in force and the activities subject to its control are developed.

If as a result of its control activity the ARCERNNR determines a breach of the contracts signed by the Ecuadorian state for the exploration or exploitation of hydrocarbons, or a violation of the Law or of the regulations that do not produce expiration effects, prior to imposing any sanction, the director of the ARCERNNR will order that a process be started with opening an administrative file, and the control subject will be notified, granting him or her a term of 10 days to present the evidence of discharge. At the end of this term, if the subject of control has not remedied the breach or has dismissed the declaration of breach formulated by the authority, the executive director of the ARCERNNR will issue, within 10 days of expiry of the term granted to the subject of control, the appropriate resolution will be determined.

Once the procedure indicated in the previous paragraph has been completed, a first instance of such a breach will be sanctioned with a fine of up to 500 units of basic income (a unit is currently set at $400 per month), the second instance with a fine of between 500 and 1,000 units of basic income, and the third instance with a fine of between 1,000 and 2,000 units of basic income.

In respect of petroleum derivatives, including liquefied gas and biofuels, if as a result of the control activity it is determined that there has been a degradation in their quality, price or volume, the penalty on the first occasion will be a fine of between 25 and 50 units of basic income; for a second infringement, a fine of between 50 and 100 units of basic income and the suspension of operations of the establishment for 15 days; and for a third infringement, a fine of between 100 and 200 units of basic income and the definitive closure of the establishment. When those responsible for these irregularities are the fuel marketers, the fine will be 10 times the aforementioned amounts.

In the event that the ARCERNNR verifies that security seals that it has set in fuel dispensers for public use have been deliberately or maliciously broken, or the mechanical or electronic systems have been altered in any way to reduce the amount sold, to the detriment of the consumer, the first infringement will be sanctioned with a fine of up to 25 units of basic income, the second with a fine of between 25 and 50 units of basic income, and the third time with a fine of between 50 and 75 units of basic income.

These sanctions are imposed by the executive director of the ARCERNNR using objective evaluation criteria, such as the seriousness of the infraction, negligence, level of damage produced, scope of remediation, volume of sales, damage to the state, or others that are considered pertinent and in proportion with the infringement, in accordance with what is established in the regulations.

To determine and impose the appropriate pecuniary penalties, it should be considered an aggravating circumstance if the person who commits an offence is the owner or manager responsible for a service station. If this is the case, the amount of the fine will be double. However, owners and managers will not be held responsible for the malicious acts of third parties.

Once the control subjects have been issued with a Resolution by the Director of the ARCERNNR, by means of which it determines and imposes a pecuniary sanction, they can appeal to the Minister of Energy and Non-Renewable Natural Resources.

One of the requirements that subjects of control must meet to file an appeal or any other administrative recourse regarding a Resolution of the ARCERNNR is to attach the document that confirms payment of the fine imposed, otherwise it will be denied. If the appeal is resolved favourably, the amount of the fine paid must be returned to the appellant or subject of control. This requirement should be made subject to reform because it is unfair and inappropriate that, to exercise the right of appeal, the appellant must first pay the fine that is being challenged.

In practice, a very low percentage of these appeals have a favourable outcome. They are generally confirmed by the higher authority because, at the administrative stage, it is considered that the Resolutions issued by officials of the ARCERNNR meet the necessary legal requirements. The reason why the subjects of control file these appeals is that, according to the law, prior to requesting the annulment of a Resolution, the administrative stage must be completed.

Non-monetary sanctioning powers and behaviour

The Hydrocarbons Law establishes that, without prejudice to the aforementioned monetary penalties, there are certain breaches by contractors that, because of their importance and severity, result in the termination of hydrocarbon exploration and exploitation contracts, which must be declared by the Minister of Energy and Non-Renewable Natural Resources.

If the authority has justly declared the termination of a contract, this implies the immediate return to the state of the contracted areas and the delivery of all equipment, machinery and other elements of exploration or production, industrial or transportation facilities, without any cost to the state, without prejudice to the execution of the insurance and guarantees rendered in favour of the state, in accordance with the provisions of the Hydrocarbons Law and the contract.

Prior to declaring the termination of a contract, the sectoral ministry will notify the contractor of the contractual breach or the legal violation that it has committed, granting it a period of no less than 30 and no more than 60 days, counted from the date of the notification, in which to comply with unmet obligations or to refute the allegation. If in this time the contractor has not disproved the claims of non-compliance, a proof period will be opened. After this time, the termination of the contract will be declared.

From experience, termination of a contract is an extreme measure that has been used in few cases, and then typically because the contractors have not fulfilled their commitment to make investments, and that they have not obtained authorisation from the sectoral ministry prior to entering into private agreements or contracts to transfer contractual rights.

Companies whose contracts have expired have resorted to international arbitration as a conflict resolution mechanism provided for in the contracts, arguing that the declarations have not been duly substantiated. In most cases, the arbitration tribunals have ruled in favour of the contractors, which has meant that the Ecuadorian state has had to pay significant amounts of money. This has been the case of the Occidental Exploration Petroleum Company, Petrobras and Perenco.

It is important to note the effects of the termination of a contract that can be declared by the Ministry of Energy and Non-Renewable Natural Resources. The causes established in article 74 of the Hydrocarbons Law are as follows:

  • contractor does not pay the royalties, entry premiums, surface rights, participations and other commitments established in the Law or in the contract;
  • contractor fails to comply with any of the obligations determined in article 31of the Hydrocarbons Law (ie, approve exploration and exploitation plans before starting them; hire minimum percentages of Ecuadorian personnel; provide technical training so that, within five years, the administration will be in the hands of Ecuadorian personnel; provide information within the deadlines indicated in the regulations; obtain authorisation from the sectoral ministry prior to assigning rights to the contract; present at the beginning of the year a detailed report of operations for the previous year; prepare environmental impact studies and risk mitigation; etc.);
  • contractor does not deliver the guarantees to which it is obliged within the terms stipulated in the contract;
  • contractor does not start exploration operations according to the contract, or if, once started, it suspends them for more than 60 days without justified cause and approval by the sectoral ministry;
  • contractor suspends the exploitation operations for more than 30 days, without just cause, previously qualified by the sectoral ministry, except in the event of force majeure or fortuitous event that must be notified to the ministry within no more than 10 days;
  • the exploitation activities are not restarted within no more than 30 days once the causes that motivated the suspension have disappeared;
  • contractor does not invest the minimum annual amounts;
  • contractor does not perform the drilling or perform the tasks for the exploration and exploitation periods, as established in the contract;
  • contractor obstructs or hinders the control and supervision that the authorised officials of the state must carry out, or does not provide data and other information on any other matters regarding the oil activity for which it is responsible;
  • contractor makes statements in bad faith or states malicious falsehoods in the declarations or reports on technical data of exploration, exploitation, industrial activities, transportation or commercialisation, or on economic data relating to investments, costs or profits;
  • contractor does not make the investments stipulated in the contract;
  • contractor had used fraud or illegal means in signing the contract;
  • contractor transfers rights or enters into a private contract to transfer its rights without previous authorisation from the ministry;
  • contractor integrates consortiums or associations for exploration or exploitation operations without authorisation from the ministry;
  • there is a recurrence of contractual breaches or breaches of the Law and its regulations; or
  • contractor causes, by action or omission, damage to the environment qualified by the sectoral ministry, and, further, does not remedy them in accordance with the provisions of the competent authority.

Recent and upcoming developments

For the purpose of improving services, and optimising economic and administrative resources, the Ecuadorian government, through Executive Decree No. 399 of 15 May 2018, merged the ministries of Hydrocarbons, Mining and Electricity into one called the Ministry of Energy and Non-Renewable Natural Resources (Ministerio de Energía y Recursos Naturales No Renovables).

Prior to the merger, a regulatory and control agency was ascribed to each of the former ministries to control their activities. As a consequence of this merger, and for the same purpose of optimisation, the President of the Republic, through Executive Decree No. 1036 dated 17 May 2020, merged the three regulatory and control agencies into the ARCERNNR, ascribed to the Ministry of Energy and Non-Renewable Natural Resources. This new Agency operates with three units: Hydrocarbons, Mining and Electricity.

The board of the new ARCERNNR is made up of several ministers and high-level officials: the Minister of Energy and Non-Renewable Natural Resources, who chairs it; the Minister of the Environment as delegate of the President of the Republic; the Minister of Government; the Minister of National Defence; and the Head of the Technical Secretariat of the Decentralised National Planning System.

Although the term for the merger of the agencies was 60 days, in practice, because of economic difficulties in the country and certain labour and administrative issues, the organisation process has not yet been concluded. The powers that the former regulatory and control agencies had under the Hydrocarbons, Mining and the Public Electric Power Service Law, and their Regulations, have been assumed by the ARCERNNR.

Ecuador is resolved to explore new oil fields to increase its production, which currently is 530,000 barrels per day. For this purpose, it is preparing the bases for new international tenders to attract more foreign investment because the country requires fresh capital and advanced technology that it does not have.

Likewise, in the field of refining, the government has just called an international tender for foreign companies with experience in this area to invest in the reparation, operation and administration of the Esmeraldas refinery for some years under the figure of concession so that it can process more than 300,000 barrels per day of oil in various derivative products.

Revised regulations

  • Hydrocarbons Law (Official Registry No. 711, 15 November 1978. Last modified on 21 May 2018)
  • Hydrocarbons Law Regulation (Official Gazette 330, 29 November 2010. Last modified on 24 May 2018)
  • Statute for Processes of the Agency for the Regulation and Control of Hydrocarbons (Official Gazette Special Edition 321, 20 May 2015)
  • Regulation of Hydrocarbon Operations (Official Registry No. 254, 2 February 2018)
  • Regulation of Petroleum Derivatives Trading Activities (Official Gazette Supplement No. 621, 5 November 2015)

Challenges

For the reasons described in the previous section, the ARCERNNR faces the challenge of training its officials so that they can exercise optimal and adequate control of these new hydrocarbon projects and others that derive from them, as is the case with transportation, distribution and commercialisation of petroleum derivatives that the Esmeraldas Refinery will produce.

Notes for foreign investors

Not applicable.

Other regulators it works closely with

Not applicable.

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