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 -------------- -------------- ¶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 -------------- ¶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