Ecuador warns protesters, country seeks oil loan

QUITO, Ecuador - Ecuador's government has warned that troops could open fire to quell protests that have crippled oil output and forced the country to ask Venezuela for a loan of crude oil so it can keep up exports.

The protests in two Amazon provinces pushed US crude oil futures up US$2 above US$65 a barrel in New York on Friday. Ecuador is usually South America's fifth-largest producer of crude oil and, after Venezuela, the second-largest South American supplier of oil to the United States.

State-owned Petroecuador said it was slowly resuming oil production as troops took control of installations in Sucumbios and Orellana provinces.

However, an official said Ecuador would ask Venezuela to lend it crude oil so it can meet export commitments.

Security forces arrested the highest profile protest leader, Guillermo Munoz, who occupies the senior elected post of prefect of Sucumbios, the armed forces said.

Soldiers are authorised to use firearms against protesters who began to invade oil camps, sabotage equipment and block highways on Monday, new Defence Minister Osvaldo Jarrin said just hours after he took over the job.

"If strategic installations are being attacked or there is an attempt to destroy or sabotage them, maximum force will be applied, depending on the situation. They can even open fire in self-defence," Jarrin told a news conference.

President Alfredo Palacio appointed Jarrin, a retired army general, on Friday after he asked his predecessor Solon Espinoza to resign over his handling of the worst crisis since Palacio took office in April.

The government declared a state of emergency in the Amazon provinces on Wednesday.

The protesters are demanding foreign oil companies operating in the region provide financing for infrastructure projects and more job opportunities.

Demonstrators also want the government to renegotiate contracts with Occidental Petroleum Corp, Petrobras and EnCana Corp., to raise state participation.

Troops fired tear gas at protesters who tried to free the mayor of the jungle city of Lago Agrio from a police station on Friday, local radio reported.

Army Gen Gonzalo Mesa told Reuters the situation in Lago Agrio was "manageable."

Troops have retaken control of local airports and were clearing obstacles left on the runways, he said.

Ecuador will seek a US$400 million ($581.47 million) emergency loan from the Latin American Reserve Fund to avoid balance of payments problems resulting from the protests and import US$140 million worth of fuel, Economy Minister Magdalena Barreiro said.

Petroecuador suspended its exports on Thursday, declaring force majeure -- a contractual clause invoked in case of events beyond the company's control. Most of its exports go the United States.

The company resumed output at 27,613 barrels per day on Friday, it said.

But its production will only return to its normal 200,000 bpd in November, Barreiro said.

Ecuadorean Foreign Minister Antonio Parra would ask Venezuelan President Hugo Chavez for an oil loan at a meeting in Cuba on Friday, Barreiro said.

"We need the crude loan for us to be able to export and partly normalize our exports," she said, without saying how much oil Ecuador wanted.

Ecuador will meet its debt liabilities despite the protest, Barreiro said.

Ecuador defaulted on foreign bonds in 1999 but has since grown strongly with low inflation, partly thanks to the introduction of the US dollar as currency in 2000.

The government has accused former President Lucio Gutierrez, who was sacked by Congress in April and is now in Peru, of being behind the demonstrations.

Palacio himself might have helped trigger the protests by inflaming popular expectations with moves including diverting money from a fund previously destined for debt payments to pay for social programmes, according to Alberto Ramos, an economist at Goldman Sachs in New York.

These moves have been harshly criticised by foreign bond holders.

The government is "extremely vulnerable to social activism and other rent-seeking pressures," Ramos said in a research note.

Three Ecuadorean presidents have been toppled amid popular unrest since 1997.

- REUTERS