PetroChina provides $2 billion oil pre-payment facility to PetroEcuador

PetroChina provides $2 billion oil pre-payment facility to PetroEcuador According to a $2 billion oil pre-payment facility agreement (also known as a presale agreement) signed on August 3, 2013 between PetroChina Company Limited and EP PetroEcuador, PetroChina agreed to purchase 190,080,000 barrels over four years at a rate of approximately 130,191 barrels per day (bpd).

The price for each shipment of crude oil was to be determined by the prevailing market price. The loan’s maturity was 4-years (from August 3, 2013 to August 3, 2017) and its annual interest rate was 7.25%.

PetroChina Company Limited was contractually obligated to disburse a first tranche of $1.2 billion to EP PetroEcuador, no later than August 12, 2013 (i.e. within 10 business days after the signing of the oil pre-payment facility).

The proceeds from the oil pre-payment facility were to be used by the Government of Ecuador to ‘finance the development of certain social projects.’ Fausto Herrera, the Minister of Finance of Ecuador, issued a letter of comfort in support of the oil pre-payment facility agreement, which stated that ‘the undersigned, on behalf of the Ministry of Finance of the Republic of Ecuador, in his capacity as the governmental authority with competent powers, hereby declares that the prepayment funds under the [Sales and Purchase Contract of Crude Oil dated August 3, 2013] will be received by the Republic of Ecuador, that the Ministry of Finance is comfortable with the contents of the Contract and that the Ministry of Finance will encourage the performance by EP PetroEcuador and will collaborate with [PetroChina Company Limited] in connection therewith.

It is expressly agreed that nothing contained herein will constitute or be interpreted as a guarantee by the Ministry of Finance of the performance by EP PetroEcuador or its obligations under the Contract.’ Then, in July 2017, the Office of the Comptroller General headed by Dr.

Pablo Celi announced pursuant to Acuerdo 024-CG-2017 its intention to conduct a ‘Special Audit’, as authorized by Ecuadorian law to examine acts of public entities.

The Special Audit examined the sources and uses of various financings, and whether those financings were completed in accordance with the relevant applicable laws, regulations and policies.

The Office of the Comptroller General in the CGR Audit Report conclude concluded that certain rules that defined the Government of Ecuador’s methodology to calculate public debt were replaced with laws and regulations that allowed for discretion in the application and use of certain concepts related to public debt and, specifically, that the amounts of advance payments pursuant to certain commercial agreements providing for the advance payment of a portion of the purchase price of future oil deliveries should have been categorized as public debt and included in the calculation of the public debt to GDP ratio.

The CGR Audit Report also set forth some conclusions and recommendations regarding certain interinstitutional agreements between the Ministry of Economy and Finance and Petroecuador, and found deficiencies in the filing of debt documentation.

On April 9, 2018, during the presentation of the CGR Audit Report to the public, the Office of the Comptroller General announced that the Special Audit resulted in indications of: (i) administrative liability of certain public officials, which may lead to the dismissal of those officials; (ii) civil liability of certain current or former public officials, which may lead to fines if those officials acted in breach of their duties; and (iii) criminal liability of certain former or current public officials.

Civil and administrative indications of liability are reviewed by the Office of the Comptroller General.

If the Office of the Comptroller General finds that such former or current officials acted in breach of their duties, it will issue a resolution determining civil and/or administrative liability. A final resolution from the Office of the Comptroller General may be appealed to the district administrative courts.

In April 2018, the Office of the Comptroller General delivered to the Office of the Prosecutor General a report regarding the indications of criminal liability of certain former or current public officials.

Based on that report, the Office of the Prosecutor General initiated a preliminary criminal investigation against former President Correa, three former Ministers of Finance and another seven former or current public officials of the Ministry of Economy and Finance.