Identifier
Created
Classification
Origin
04QUITO2327
2004-08-24 21:01:00
CONFIDENTIAL
Embassy Quito
Cable title:  

THE PROCURADOR STRIKES BACK AT OCCIDENTAL PETROLEUM

Tags:  ETRD EPET ECON EC 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 03 QUITO 002327 

SIPDIS

DEPT PLEASE PASS TO USTR BENNETT HARMAN

E.O. 12958: DECL: 08/24/2014
TAGS: ETRD EPET ECON EC
SUBJECT: THE PROCURADOR STRIKES BACK AT OCCIDENTAL PETROLEUM

REF: 8/23/04 MEMMOTT-HARMAN TELCONS

Classified By: Ambassador Kristie A. Kenney, Reason 1.5 (b) and (d)

C O N F I D E N T I A L SECTION 01 OF 03 QUITO 002327

SIPDIS

DEPT PLEASE PASS TO USTR BENNETT HARMAN

E.O. 12958: DECL: 08/24/2014
TAGS: ETRD EPET ECON EC
SUBJECT: THE PROCURADOR STRIKES BACK AT OCCIDENTAL PETROLEUM

REF: 8/23/04 MEMMOTT-HARMAN TELCONS

Classified By: Ambassador Kristie A. Kenney, Reason 1.5 (b) and (d)


1. (U) See paragraph 11 for an action request.


2. (C) Summary. Ecuador's Procurador (Solicitor General)
may be seeking to terminate Occidental Petroleum's (Oxy)
Block 15 participation contract for alleged violations of the
hydrocarbon law. If the allegations are upheld, Oxy's Block
15 contract could be terminated and the assets would revert
to state-owned Petroecuador. The Procurador initiated his
investigation of Oxy shortly after Oxy won a $75 million
international arbitration award against the GOE. The
Ambassador conveyed the USG's extreme displeasure at this
action to the Ministers of Trade, Economy, Foreign Affairs
and Government, as well as to President Gutierrez. Though
there may be technical grounds to justify the Procurador's
action, it smacks of retaliation. While criticizing the GOE
for the abuse of its legal system and explaining that it
could result in serious trade implications, the Ambassador
also encouraged the GOE to discuss with Oxy an amicable
resolution to all its pending issues with the GOE. End
Summary.

Retaliation or Coincidence?
--------------


3. (U) The Procurador (Solicitor General) admitted to the
press that he started the investigation of Occidental
Petroleum (Oxy) shortly after the July international
arbitration decision against the GOE, awarding $75 million to
Oxy (through 12/31/03) in value-added-tax (VAT) drawbacks.
Yet, he claims this latest action has nothing to do with that
decision. He is also investigating Canadian oil company
EnCana, which has its own VAT drawback case before
international arbitrators. Last week, under apparent
pressure from the GOE, the GOE-appointed arbitrator resigned
in the EnCana arbitration. He also was the GOE-selected
arbitrator in the Oxy international arbitration and joined
the other two arbitrators in the unanimous decision against
the GOE.


4. (U) The Procurador seeks to nullify Oxy's contract with
the GOE on the basis that Oxy failed to comply with
Ecuadorian law by transferring 40% of its block 15 assets to

Canadian oil company EnCana without Ministry of Energy
authorization and 33 other alleged violations of the law.
Under Ecuador's hydrocarbon law, if Oxy transferred its
contractual rights to EnCana without Ministry of Energy
authorization or is a repeat violator of the law, the
contract can be terminated (caducidad) and the area under
contract would be immediately returned to the state, with all
equipment, facilities, etc. transferred to state-owned
Petroecuador, without cost. Upon the Minister of Energy's
declaration of caducidad, the oil company will have between
30 and 60 days to resolve any alleged violations.

Oxy's Position
--------------


5. (C) Econoffs met August 23 with Oxy's Ecuadorian
President and GM Jerry Ellis, who said that while Oxy "could
have done things better" with respect to the transfer, Oxy
did materially comply with the law. Ellis said Oxy notified
then Energy Minister Pablo Teran in October 2000 about the
proposed transfer of 40% of Oxy's economic interest in block
15 to a subsidiary of EnCana. In January 2001, after an
exchange of letters and information between Oxy and the
Ministry of Energy (MOE),Teran sent a letter to Oxy that
said, according to Ellis, that Oxy should seek the MOE's
approval at the time of the transfer of legal title to
EnCana. Ellis said that EnCana fulfilled its preconditions
for the transfer this year and Oxy sent a letter to the MOE
and Petroecuador on July 15 seeking authorization of the
transfer. Ellis claims that Oxy has not assigned any rights
and obligations under the Block 15 participation agreement to
EnCana. He left Quito on August 24 for Oxy's corporate
headquarters in Los Angeles to discuss the matter.


6. (C) Ellis said that 15 of the 33 other violations were
for failure to file reports in a timely fashion. These
reports fell through the cracks when the responsible employee
was transferred to Russia. He claimed the other violations,
like drilling without permits, were minor, citing drilling
operations that were authorized to begin on January 1, but
were actually begun on December 31, as an example of the
minor nature of the breach. Other claims include over
drilling. Ellis said that fines have been paid for most of
the violations. In some cases, administrative procedures
have not been completed. Still, the hydrocarbon law does
provide for sanctions, including caducidad, for repeated
violations of the law.

EnCana's in Trouble Too
--------------


7. (SBU) EnCana (nearly 50% U.S. investor owned) has
problems too. It has set up a data room for potential
purchasers interested in its Ecuadorian assets. The
Procurador's accusations regarding the transfer from Oxy
casts doubt on the legality of the transfer of Oxy's Block 15
assets to EnCana and on any sale of EnCana's Ecuadorian
assets. EnCana tells us that it has also been cited for
seven violations of the hydrocarbon law. Press reports
suggest that all or most other oil companies operating in
Ecuador are also under investigation, and some analysts
believe Ecuador is seeking to use these investigations to
re-negotiate its contracts with all the private oil companies.

Embassy Action
--------------


8. (SBU) The Ambassador raised the Oxy issue with Trade
Minister Baki on August 23. She explained to Baki that the
GOE's apparent retaliation against Oxy for the VAT decision
could have serious implications for Ecuador's free trade
negotiations and ATPDEA benefits (ref telcons). The
Ambassador conveyed the same message to Minster of Economy
Mauricio Yepez later that afternoon and again on August 24 to
Minister of Government Baca. She also raised the issue
during her visit with the Minister of Foreign Affairs
Patricio Zuquilanda. The Ambassador spoke with President
Gutierrez on August 24, expressing the USG's concern about
the Procurador's actions and irresponsible statements to the
press. Ambassador suggested Gutierrez form a commission to
resolve the matter, noting that Oxy would be willing to sit
down and talk (as Oxy had previously relayed to the Embassy).


9. (C) The ministers had also agreed to raise the issue with
President Gutierrez and all concurred that it reflected
poorly on Ecuador and its investment climate. Baki called it
an outrage. Baca said he had tried to dissuade the
Procurador from taking the action, telling him it was
unacceptable. Even if there were grounds to investigate,
Baca said, the Procurador was wrong to go to the press before
giving Oxy a chance to respond. Yepez suggested forming a
commission to sit down with Oxy to resolve the Procurador's
allegations and the VAT drawback case, which the Procurador
has appealed to the court in London. Yepez opined that a
commission would limit the influence of the Procurador, tone
down the rhetoric and provide an opportunity for resolution
on all pending matters between Oxy and the GOE. The Foreign
Minister noted to the Ambassador that his press comments
focused on finding solutions in a calm environment.

Comment
--------------


10. (C) Clearly, the Procurador is retaliating against Oxy
as a result of the VAT arbitration decision. This course of
action flies directly in the face of what Ecuador is trying
to accomplish -- reach a free trade agreement and attract
foreign investors, particularly in the oil and energy
sectors. That said, the Procurador might well have technical
grounds to pursue actions against Oxy and, possibly, other
private oil companies. Still, the most egregious allegation
against Oxy is the failure to get prior authorization before
the transfer of some assets to EnCana, an accusation that Oxy
vehemently denies. The GOE has not, and cannot credibly
claim that the proposed transfer from Oxy to EnCana would
adversely affect Ecuador's interests. Both are reputable,
responsible companies and both are among the biggest
taxpayers in Ecuador.

Action Request
--------------


11. (C) A strong signal must be sent to the GOE, that
government retaliation against U.S. companies that win
arbitration cases is unacceptable. We urge Washington
interlocutors to engage the GOE to express our extreme
displeasure at the abuse of the legal system against U.S.
companies (including in the cases of BellSouth, Duke Energy
and, potentially, ChevronTexaco) and to reiterate that
continuing abuses will have serious bilateral implications.
At the same time, we urge Washington to encourage Oxy and the
GOE to discuss the pending matters, perhaps along the lines
suggested by Minister of Economy Yepez. Post has already
begun the process and will continue to vigorously press for a
speedy resolution of the current problems and more
responsible behavior by the Procurador and other GOE
officials in the future.
KENNEY