OXY BRINGS IN THE BIG GUNS - EMBASSY KEEPS FIRING

C O N F I D E N T I A L SECTION 01 OF 02 QUITO 002418

SIPDIS

DEPT PASS TO USTR BENNETT HARMAN

E.O. 12958: DECL: 09/02/2014
TAGS: EPET ETRD ECON EC
SUBJECT: OXY BRINGS IN THE BIG GUNS - EMBASSY KEEPS FIRING
AWAY

REF: A. QUITO 2327

B. QUITO 2380

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


1. (U) Summary. Occidental Petroleum (Oxy) brought a team
of lawyers and executives to Ecuador to discuss the GOE's
claims that Oxy failed to comply with the hydrocarbon law in
the transfer of 40% share of its Block 15 interest to
Canadian oil company EnCana. Oxy is confident that it is on
solid legal ground in the matter, but remains willing to
discuss this and other issues (i.e., its $75 million VAT
award) with the GOE. Oxy prefers to keep the matter as low
profile as possible, for the time being. GOE officials
expressed confidence that they were right that Oxy failed to
get GOE authorization for the transfer, but that is likely
due more to their lack of understanding of the issue than the
strength of their legal argument. The Ambassador met with
the Oxy representatives explaining the efforts that she and
the Embassy team have made on Oxy's behalf and offered Oxy
advice on how to proceed with the GOE. Oxy representatives
were meeting with the Procurador, Minister of Government and
perhaps other GOE officials in the coming days. This is yet
another instance in which one person can do great harm to a
US company and Ecuador's best interests. End Summary.

Oxy Reps Come to Town - With Strong Legal Arguments
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2. (C) President and General Manager of Occidental Petroleum
(Oxy) Exploration and Production Company John Morgan is in
Quito to discuss the GOE allegations of an unauthorized
transfer of 40% of Oxy's share of the Block 15 oil field to
Canadian oil company EnCana (reftels). He and his team of
seven lawyers and executives met with the Ambassador on
September 1. Oxy officials cited Ecuadorian law, regulations
and constitutional provisions and the transfer contract
language supporting its position that it was operating within
Ecuadorian law in the transfer to EnCana. The Ambassador
explained that in contacts with the GOE it appeared that
Procurador Jose Maria Borja was becoming quite nervous about
the case. She added that it is unclear whether Borja was
acting on his own or at the behest of someone else, but the
former seemed more likely. Borja's efforts may be an attempt
to soften the blow of the expected Queen's Court ruling in
Oxy's favor on the GOE appeal of the $75 million
international arbitration award against the GOE. All in the
meeting agreed that Borja was a loose cannon and not to be
trusted. The Ambassador explained that she had spoken with
President Gutierrez about the case and the day before has
also raised it with Minister of Economy and Finance Mauricio
Yepez. According to GOE sources, Gutierrez instructed the
Minister of Energy in a subsequent meeting with his cabinet
that under no circumstances should Oxy's Block 15 contract be
declared void (caducidad).


3. (SBU) In conversations with the Ambassador and econoffs,
several GOE officials said they were certain that Oxy had
made the transfer without authorization and they expected Oxy
to acknowledge its alleged transgression and compensate the
GOE. GOE officials base their arguments heavily on U.S. SEC
filings by Oxy and other public documents that imply that the
sale to EnCana was completed some time ago. Incredibly, none
of our GOE interlocutors seemed aware of a GOE regulation
controlling the transfer between Oxy and EnCana that stated
the procedures for the transfer and the amount of
compensation to be paid to the GOE. They were also
apparently unaware of the transfer contract provisions
(though the GOE has copies of the contract) stating the
transfer would not be complete until authorization was
provided by the GOE. Nonetheless, none of the officials we
have spoken to have said they wanted the contract terminated.



4. (C) Morgan said Oxy wanted to keep a low profile in the
case. Confident of Oxy's legal position, he wanted to avoid
the sensationalism of the Ecuadorian press to give the GOE an
opportunity to "save face" in a quiet manner. He said Oxy is
willing to discuss with the GOE how it has complied with the
hydrocarbon law and would be willing to discuss how they
could work out the payment of the $75 million arbitration
award. On the advice of the Ambassador, Oxy sent two lawyers
to talk with Borja, instead of sending higher-ranking Oxy
officials to the meeting. Oxy officials plan to meet with
Minister of Government Raul Baca on September 2 and will seek
meetings with Minister of Trade Ivonne Baki and Minister of
Economy Yepez when they are in the USA (separately) next
week. The Ambassador said she would be raising the Oxy case
with President Gutierrez again, upon his return from the
Panamanian presidential inauguration. Oxy and Embassy
officials will continue to quietly press the case with GOE
officials and keep one another informed of developments in
the matter.

Comment
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5. (C) This latest commercial dispute highlights a
continuing problem in Ecuador. The dearth of any
institutional or transparent processes leaves room for
individuals (e.g., Procurador Borja) or GOE entities (GOE
regulators) to act with whim and caprice without fear of
being held accountable, under the banner of national
sovereignty so long as they can argue it is good for Ecuador.
These officials only fear pursuit by the Contraloria
(Inspector General equivalent) and the Civil Corruption
Commission, both subject to considerable political influence,
or the vengeance of some future government administration.
A free trade agreement can help build the institutions
Ecuador desperately needs, but political will and a
fundamental change of attitude will be crucial to the real
improvements in the rule of law and respect for contracts
Ecuador desperately needs. We are driving those points home
to the GOE and explaining that such capricious behavior has
its costs, in lack of investment and trade benefits.
KENNEY