Case | HBS Case Collection | April 2009 (Revised August 2009)

Petrobras in Ecuador (A)

by Aldo Musacchio, Lena G. Goldberg and Ricardo Reisen de Pinho

Abstract

On October 18, 2007, Ecuador's President Rafael Correa announced his intention to migrate Petrobras' existing participation contracts to exploit oil reserves in Ecuador's Blocks 18 and 31 to servicing agreements under which Petrobras would be paid a production fee and reimbursed for investment costs but all recovered oil would belong to the government. Correa also announced a dramatic increase in corporate taxes and changes to other contracts to which Petrobras was a party. All foreign oil companies operating In Ecuador would be similarly affected and any company refusing to "renegotiate" its contracts would face a 100% tax on profits. How should Petrobras respond to Ecuador's riding roughshod over its contracts? Should Petrobras take the Ecuadorian government to arbitration? Or would it be better to pursue a negotiated solution similar to that reached in Bolivia a year earlier? How should Petrobras balance its fiduciary duties to and the best Interests of its shareholders with the interests of the Brazilian government? How should it communicate with its various constituencies?

Keywords: Metals and Minerals; Globalized Firms and Management; Corporate Governance; Government Administration; Taxation; Contracts; Negotiation Process; Negotiation Tactics; Public Ownership; Business and Government Relations; Business and Shareholder Relations; Brazil; Ecuador;

Citation:

Musacchio, Aldo, Lena G. Goldberg, and Ricardo Reisen de Pinho. "Petrobras in Ecuador (A)." Harvard Business School Case 309-107, April 2009. (Revised August 2009.)