OXY: THE CALM BEFORE THE STORM - OR PROGRESS?

C O N F I D E N T I A L SECTION 01 OF 02 QUITO 002509

SIPDIS

STATE PASS TO USTR BENNETT HARMAN

E.O. 12958: DECL: 09/15/2014
TAGS: EPET ETRD ECON EC
SUBJECT: OXY: THE CALM BEFORE THE STORM - OR PROGRESS?

REF: A. QUITO 2462


B. QUITO 2418: QUITO 2380

C. QUITO 2327

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


1. (C) Summary. Occidental Petroleum's (Oxy) meetings in the
US and USG efforts have provided a temporary calm in the
contract nullification process. Oxy has still not been
officially notified of its alleged violations of the
hydrocarbon law, thus the statutory time period for it to
respond has not commenced. Privately, the Procurador
(Solicitor General equivalent) has said he would support a
negotiated settlement with Oxy, but said he could not say so
publicly. GOE sources think an offer for a negotiated
settlement could be tabled in the next 2-3 weeks. Oxy is
pleased with the calm, but is also waiting for the possible
storm ahead. Canadian oil company EnCana's international
arbitration is back on track. Likely unrelated, but worth
consideration, EnCana's pipeline was recently
vandalized/sabotaged causing an oil spill and environmental
damage. End Summary.

Washington Meetings Successful
--------------


2. (C) Economy and Finance Minister Mauricio Yepez told
Ambassador on September 14 that his meetings with Oxy in New
York were productive and opened the door to a negotiated
settlement. He also mentioned that A/S Tony Wayne had raised
the Oxy matter during their meeting. When Yepez returned to
Quito on September 13, he spoke with President Gutierrez,
Minister of Government Raul Baca and the Procurador about
Oxy. All agreed that a negotiated settlement was the route
to take and that none of them wanted to nullify Oxy's
contract. Though, Yepez told the Ambassador that the
Procurador said he could not say so publicly. Yepez said he
did not discuss the Oxy matter with Minister of Energy and
Mines Eduardo Lopez, because Lopez was too scared to take
action. Still, Yepez thought the parties could put an offer
on the table within the next 2-3 weeks.


3. (C) Minister of Trade Ivonne Baki also told Ambassador
September 13 that she had received a strong message from USTR
that Oxy and other commercial disputes had to be quickly
resolved or Ecuador would face serious trade consequences.
Baki said she too explained this to Gutierrez.

Public Debate Less Polemical - For Now
--------------


4. (C) Procurador Borja announced September 14 in the press
that he would continue to review all oil company contracts
for compliance with Ecuadorian law. Next on the list is
Canadian oil company EnCana. However, Borja's statements
were not inflammatory. Ecuadorian Ambassador to the USA Raul
Gangotena's comments on a local radio show were conciliatory
towards Oxy and stressed the need to work out a long term
relationship with the company. However, Minister of Energy
Lopez is scheduled to appear before the Ecuadorian Congress
on September 17 and it is unclear whether he will wilt under
Congressional pressure and adopt a more nationalistic
attitude.

Oxy: Is It Progress or the Calm Before the Storm?
-------------- --------------


5. (C) Oxy President and GM of Ecuador Jerry Ellis told
econoff September 14 that Oxy thought its meeting with Yepez
in New York had been productive. He also said that he was
pleased that things were relatively calm in the press in
recent days. He added that Oxy continues to be willing to
negotiate a settlement, but it is unclear with whom they
would negotiate. He agreed that Energy Minister Lopez was
too afraid to take any action and that it was far from
certain that the Procurador could be trusted, even though
Borja eventually would probably have to approve any
settlement agreement. He was waiting to see what Lopez would
say before Congress and moderately encouraged by the fact
that Oxy has yet to be officially notified of its alleged
hydrocarbon law violations and the statutory time for Oxy's
response had not yet begun.

EnCana Waiting in the Wings
--------------


6. (C) EnCana's GM John Keplinger told econoff on September
14 that the GOE had appointed its replacement arbitrator for
EnCana's international arbitration case on the value added
tax (VAT) refunds. Keplinger said that the final hearing in
that VAT arbitration would be held on November 18 and they
expected a decision in the first quarter of 2005. EnCana had
closely followed Oxy's international arbitration case on the
same topic. He noted that the Minister of Energy has refused
to sign anything involving EnCana (the purchaser of Oxy's 40%
share of Block 15, see reftels) or Oxy.


7. (C) Keplinger also told econoff that someone had either
vandalized or sabotaged one of its pipelines. He said the
person had to know something about what they were doing
because they dug 1.5 meters to get to the underground
pipeline and then used a power drill to penetrate the pipe.
However, the vandals/saboteurs were not that expert, as oil
flows through that pipeline at 700 psi; thus, the person
drilling the hole received quite a jolt when the pipe was
penetrated. He theorized that the shock scared the person/s
off. EnCana security personnel do not believe this was an
act by any of the Colombian insurgents, but continue their
investigation.


8. (C) Unfortunately, because of the small size of the hole,
the oil leak was not discovered for some time, until a local
farmer notified EnCana. Some 11 hectares could be affected
by the spillage of approximately 200 barrels of oil. Local
colonos (settlers from other parts of Ecuador) living in the
area tried to extract a $25,000 payment from EnCana for
access to repair the pipeline and clean up the environment.
As a result, EnCana was forced to go to environmental
authorities to get access to the land. Keplinger hoped that
the incident was not a reaction to the recent developments in
the oil sector involving Oxy and EnCana.

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


9. (C) Oxy is right to be wary of reaching a negotiated
settlement with the GOE. Still, the right people in the GOE
are involved, Ministers Yepez, Baca and Baki and President
Gutierrez. However, the weak links are the two people that
need to be most involved, Minister of Energy Lopez and
Procurador Borja. It is a good sign that the statutory time
for Oxy to respond has not commenced and that both parties
have agreed on that is imperative to reach a settlement and
keep Oxy in Ecuador. Our task now is to encourage the GOE to
get a responsible person with the authority to act to sit
down with Oxy sooner, rather than later. As long as problems
like Oxy's VAT and contractual problems remain, Ecuador
cannot hope to attract the foreign investment in the oil
sector it desperately needs. As the case involving EnCana
also points out, there are plenty more problems in the oil
sector waiting for the GOE in the very near future.
Responsible development of Ecuador's oil sector is crucial to
its economic and political stability, both of which are in
the USG's best interests.
KENNEY