UNIPEC provides $2.4 billion oil pre-payment facility to PetroEcuador

According to a $2.4 billion oil pre-payment facility agreement (also known as a presale agreement) signed on May 15, 2014 between UNIPEC Asia Co., Ltd. and EP PetroEcuador, UNIPEC Asia Co., Ltd. agreed to purchase 120,960,000 barrels over six months (from June 2014 to March 31, 2018). The price for each shipment of crude oil was to be determined by the prevailing market price. The loan’s maturity was 3.833 years and its annual interest rate was 6.97%. The borrower was responsible for making monthly repayments between June 2014 and March 2018. Total scheduled interest payments over the lifetime of the loan amounted to $88,667,142.21. UNIPEC Asia Co., Ltd. was contractually obligated to disburse a first tranche of $400 million to EP PetroEcuador no later than June 15, 2014 (i.e. approximately one month after the signing of the oil pre-payment facility). Loan disbursements were to be made directly to the National Treasury Account. 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 May 15, 2014] 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 [UNIPEC Asia Co., Ltd.] 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.

Additional details

1. The 2014 prepayment facility agreement (Contrato-No-#2014090 or Contract ID#2014090) between UNIPEC Asia Co., Ltd. and PetroEcuador can be accessed in its entirety via https://www.dropbox.com/s/zf2nqrbcmc5desp/Contrato2014090.pdf?dl=0. 2. A pre-export finance (PXF) facility is an arrangement in which a commodity producer gets up-front cash from a customer in return for a promise to repay the customer with that commodity (possibly at a discount) in the future. PXF funds may be advanced by a lender or syndicate of lenders to a commodity producer to assist the company in meeting either its working capital needs (for example, to cover the purchase of raw materials and costs associated with processing, storage and transport) or its capital investment needs (for example, investment in plant and machinery and other elements of infrastructure). PXF facilities are usually secured by (1) an assignment of rights by the producer under an ‘offtake contract’ (i.e., a sale and purchase contract between the producer and a buyer of that producer of goods or commodities), and (2) a collection account charge over a bank account into which proceeds due to the producer from the buyer of the goods or commodities under the offtake contract are credited. There are two key documents in prepayment finance transactions: a contract providing for the advance payment by the offtaker to the producer for the purchase of goods/commodities (the 'Prepayment Contract'), and a loan agreement between a lender and the offtaker (the 'Offtaker Loan Agreement') under which the advance payment is financed.

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