OXY: GOE TAKES A SERIOUS WRONG TURN

C O N F I D E N T I A L SECTION 01 OF 03 QUITO 002462

SIPDIS

STATE PASS TO USTR BENNETT HARMAN

E.O. 12958: DECL: 09/10/2014
TAGS: EPET ETRD ECON EC
SUBJECT: OXY: GOE TAKES A SERIOUS WRONG TURN

REF: A. QUITO 2418


B. QUITO 2380

C. QUITO 2327

Classified By: Ambassador Kristie A. Kenney Reason 1.4 (b),(d)


1. (U) See action request in paragraph 12.


2. (C) Summary. The GOE is proceeding with the contract
nullification process (caducidad) against Occidental
Petroleum (Oxy),potentially triggering the nationalization
of Oxy's assets in Ecuador. Presidential Legal Advisor
Carlos Larrea acknowledged that the GOE action would amount
to an expropriation, expressly prohibited by the Ecuadorian
Constitution. Still, he said President Gutierrez was too
weak to negotiate a resolution with Oxy. The GOE has grossly
underestimated the strong negative reaction from the USG and
the foreign investor community should the GOE follow through
with the nullification. We have spoken with Oxy's GM and are
educating GOE officials about the severity of its
miscalculation. These efforts appear to bearing fruit as
Gutierrez has apparently ordered Economy and Finance Minister
Yepez to meet with Oxy on September 10 to explain that the
Larrea position is not the GOE's official position. We urge
State, USTR and Commerce officials to send a similar message
to Ecuador's Ambassador to the United States and other GOE
officials. End Summary.


GOE to Pursue Contract Nullification/Nationalization
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4. (C) In a September 8 meeting with econoffs, Presidential
Legal Advisor Carlos Larrea said the GOE would go forward
with the nullification of Oxy's Block 15 contract (reftels),
essentially nationalizing Oxy's Block 15 assets. Econ
Counselor explained to Larrea the serious nature of such
action, comparing it to the expropriations of the 1970s. He
told Larrea that it could cost Ecuador its ATPDEA trade
benefits and a free trade agreement with the United States.
Larrea said he was aware of those risks. He felt Oxy would
be able to overturn the expropriation in local courts as the
Ecuadorian Constitution prohibited expropriations, but said
President Gutierrez was too weak politically to resolve the
case through negotiation. He suggested that after the
administrative nullification, judicial action would be the
only remedy left to Oxy.


5. (U) Later that day, Minister of Energy and Mines (MEM)
Eduardo Lopez announced in a press conference that he would
seek the nullification of the Oxy contract. The actual
nullification and takeover of Oxy's Block 15 assets could
occur within the next 30-70 days.


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


6. (C) Ambassador met with Oxy Ecuador President and GM Jerry
Ellis on September 9, who said that Oxy had not received the
official notification of intent to nullify from the MEM. He
added that if the MEM declared nullification of the contract,
Oxy would not seek relief in any Ecuadorian legal process,
but seek a remedy through the Bilateral Investment Treaty
(BIT) and/or the U.S. courts. Ellis feared what could happen
to Oxy's assets if they were left to Petroecuador to run for
even a short period of time. He was reluctant to
characterize the GOE's action thus far as retaliation, but
said Oxy would consider the takeover of its Block 15 assets
nothing short of expropriation. Still, he said Oxy was
willing to sit down with the GOE to discuss a mutually
beneficial resolution to the matter.


7. (C) He agreed with the Ambassador's recommendation that
she contact President Gutierrez again about the issue. The
Ambassador also explained the she had raised the matter with
the President of Congress that morning and he too admitted
that it appeared that the GOE was trying to nationalize Oxy's
assets. Econoffs also explained the MEM's latest step in the
nullification process to USTR on the morning of September 9
as USTR was preparing for a meeting between Ambassador
Zoellick and Trade Minister Baki. Our efforts appear to be
bearing fruit. Late September 9, Ellis told Econ Counselor
that President Gutierrez had ordered Economy and Finance
Minister Yepez to meet with Oxy in New York on September 10,
and to tell Oxy that the policy espoused by Presidential
Legal Advisor Carlos Larrea was not the GOE policy.
The Oxy Nullification Case as a Political Landmine
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8. (C) The Procurador has put the Gutierrez government in an
extremely difficult position with his actions on the
Occidental case. The press and public have swallowed, hook,
line and sinker, the Procurador's oft-repeated public line
that Oxy has violated the terms of its contract, that the
Minister of Energy is legally bound to nullify the contract,
and that that process should be expedited. The Procurador
stated a week ago to the press that anyone opposing his
involvement in the case was "a traitor to the fatherland" -
clearly an attempt to create a political climate in which the
government would have no choice but to expropriate Oxy's
property. On September 6, he announced that if the Ministry
of Energy and the state oil company did not move
expeditiously he would request that the Controlaria (an
investigatory body analogous to our GAO, but with the
authority to bring charges against government officials for
malfeasance) open investigations. Less than 24 hours later
the Minister of Energy acted.


9. (SBU) The effect of the Procurador's tactics has been wide
and deep. Opinions expressed in the press and on the street
are almost unanimous: "the GOE must nullify the Oxy
contract, anything less would be a breach of rule of law."


10. (C) Our contacts universally believe that the Procurador
is acting with the support of the Guayaquil-based Social
Christian Party (PSC, by its Spanish acronym) in order to
place the Gutierrez government in a position in which it must
choose against a position that the whole country has equated
with basic Ecuadorian national interests or against the
United States. Many believe that this trap has been laid in
order to bring the government down. Presidential Legal
Advisor Larrea told us that top PSC insiders such as Miguel
Orellana and Javier Neira, but maybe not party leader Leon
Febres Cordero, were behind the Procurador's actions.
Consulate General officers in Guayaquil will continue to make
clear to PSC officials our support for constitutional
democracy as well our expectations of a level playing field
for US companies.

Comment and Action Request
--------------


11. (C) A strong message must be sent to the GOE that if it
follows through with the nullification it could amount to
expropriation of an American company's assets. Should an
expropriation occur, Ecuador would risk losing its ATPDEA
trade benefits, a possible free trade agreement with the
United States and the support of the international community,
both investors and multilateral lenders. The Ambassador will
again explain to President Gutierrez the potential serious
consequences of this latest misstep by the GOE and Embassy
officials will continue to raise the matter with their GOE
counterparts.


12. (C) Action Request. We recommend State and Commerce
raise with Ecuador's Ambassador to the United States Raul
Gangotena and other high-ranking GOE officials our serious
concern about the possible expropriation of an American
company's assets. We suggest the following talking points:

-- The action by the Procurador was taken on the heels of
Oxy's international arbitration award, making it appear to be
a case of retaliation.

-- Regardless of whether the GOE or Oxy are right on the
merits of the case, the remedy sought by the GOE is not
proportionate to the alleged offense and could amount to an
expropriation, an unconstitutional act in Ecuador, and an act
penalized under U.S. law.

-- It is in everyone's interest for both sides to sit down
and discuss a reasonable solution to this matter.

-- If Oxy's assets are expropriated, Ecuador risks losing
ATPDEA trade benefits, a free trade agreement with the United
States and the support of the international community, both
private investors and multilateral lenders, not to mention
the certain ruin of its investment climate.
KENNEY