TIDE TURNING IN OXY'S FAVOR BUT A LONG WAY TO GO

C O N F I D E N T I A L SECTION 01 OF 02 QUITO 002613

SIPDIS

DEPT PASS USTR BENNETT HARMAN

E.O. 12958: DECL: 09/28/2014
TAGS: EPET ETRD ECON PREL EC
SUBJECT: TIDE TURNING IN OXY'S FAVOR BUT A LONG WAY TO GO

REF: A. QUITO 2509


B. QUITO 2462

C. QUITO 2418

D. QUITO 2380

E. QUITO 2327

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


1. (C) Summary. The efforts of Occidental Petroleum (Oxy)
and the Mission are gathering momentum in blunting
misperceptions raised by the Procurador's (solicitor general
equivalent) allegations against Oxy. Business chambers,
financial analysts and GOE officials are coming to understand
what Ecuador has to lose if it nationalizes Oxy's Block 15
oil interests, but more work needs to be done. The
Procurador continues to send mixed messages, allegedly
seeking a negotiated solution in private while making
inflammatory statements calling for the review of the
US-Ecuador Bilateral Investment Treaty (BIT) and vigorously
defending the national patrimony in public. With Embassy
assistance, Oxy is seeking an amicable resolution, using two
different tracks. Still, a final resolution will require the
Procurador's buy-in, which is by no means assured. In the
meantime, Oxy filed its answer to the allegations to the
President of state-owned Petroecuador, who assured Emboffs
that he would need time to fully and fairly review the
matter. End summary.

Public and Opinion Leaders - Getting the Message
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2. (C) Over the last several days, a number of media have
carried stories about the risks of "persecuting" Oxy (quoting
business chamber representatives) and expropriating (in
another article by a respected financial analyst) Oxy's
assets. They warned that Ecuador was putting at risk current
trade benefits and a future FTA with the United States.
Minister of Economy and Finance Mauricio Yepez publicly
warned that Ecuador risks losing USG support in its efforts
to obtain financing from multilateral development banks if it
did not act fairly in the Oxy case. The Ambassador continues
to press for the fair treatment of Oxy through her daily
meetings with the GOE, business and opinion leaders, pressing
the same message that Ecuador has much to lose, including in
its efforts to attract new investment to the country.

The Procurador - Getting Nervous?
--------------


3. (C) We have also received several reports that Procurador
General Jose Maria Borja wants to discuss the case to explain
his views, including his desire to reach an agreement with
Oxy. He has reached out privately, through intermediaries,
to Oxy and the Ambassador. Still, his public comments belie
his private overtures. Last week he publicly called on
Congress to review the US-Ecuador Bilateral Investment Treaty
(BIT). (Note: The earliest Ecuador could file notice of
terminating the BIT is 2007; a legal fact that escaped Borja,
the GOE's lead attorney.) On September 27, he again claimed
to be defending the national sovereignty of Ecuador in his
prosecution of cases against Oxy and Canadian oil company
EnCana. He is also publicly defending himself against
comments from the business chambers. One of the attorneys in
Borja's office told econoff that Borja's statements, like his
call to review the BIT, had been misunderstood and that he
would like the chance to explain himself in a private meeting
with the Ambassador. The Ambassador has made clear there
will be no meeting with Borja until he changes his public
posture in line with what his intermediaries claim to be his
real intentions.



4. (C) Minister of Economy Yepez and Minister of Government
Baca have told the Ambassador that Borja is a reasonable
person who will approve a settlement reached by Oxy and the
Minister of Energy, who is the person charged with finally
deciding the fate of the accusations against Oxy (see
reftels). However, past experiences in the Duke Energy and
BellSouth cases indicate that Borja may not be true to his
word. Still, Borja now appears to be on the defensive. This
is likely due in part to Oxy's voluminous response to
Petroecuador on the allegations and other efforts to get the
full story out in the public. Yepez told the Ambassador on
September 28 that Borja wanted to find a solution and did not
want Oxy to leave Ecuador. Yepez and Baca have also been
speaking with Borja, whom they now believe is coming to
understand the gravity of the situation. Borja also met with
Oxy GM Jerry Ellis on September 27, to enlist Oxy in
promoting the formation of a commission to review the matter.
Pursuing Two Tracks
--------------


5. (C) Econoff and Commercial Attach met privately with
state-owned oil company Petroecuador President Luis Camacho
on September 23. Camacho said that once he received Oxy's
response to the allegations, he would take his time to fully
and fairly review the matter. He said he would not bow to
public or private pressure to speed up his review or be
prejudiced against one side or the other. He said he would
like to appoint a respected, independent commission to help
review the matter, stating that he would receive no help from
those within Petroecuador. Camacho believed that, whether or
not there was a commission, his review of the matter would
not be completed before the October 17 local elections in
Ecuador, reducing the possibility that the Oxy case could
become an election issue. In a separate meeting between
Emboffs and Oxy GM Ellis, he too welcomed the commission
approach and hoped to discuss the matter with Camacho.


6. (C) Ellis said that Oxy is also continuing its work with
the Ministry of Economy and Finance (MEF) on a possible
resolution. Oxy is providing the MEF with a variety of data
to allow the GOE to analyze the impact of the transaction
between Oxy and EnCana (the most serious allegation against
Oxy concerns that transaction). Minister of Economy Yepez
told the Ambassador that the MEF hopes to present an offer to
Oxy within the next two weeks.

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


7. (C) Oxy's side of the story on the allegations lodged
against it by the Procurador is finally coming to light in
the press. Our education efforts with GOE interlocutors and
business chamber leaders also appear to be working. The
Procurador's outreach efforts are a good indication that
those efforts are having some impact. Oxy continues to say
it is willing to talk while also forcefully arguing its
strong case. Petroecuador's Camacho and the MEF are sending
positive signals that the case can be resolved without
declaring a contract nullification and expropriation. Oxy is
also sending its public relations representatives from Los
Angeles, with whom Post will work with to keep up the
positive momentum in the press and with local opinion
leaders.


8. (C) It appears that any further official GOE pronouncement
on contract nullification will not be made until after the
October 17 elections, but it cannot be totally ruled out.
The additional time will allow for more discussions between
the parties and a cooling off period. We can also use that
time to reach out to business, GOE and opinion leaders, many
of whom have not yet heard the full story on the matter or do
not fully appreciate what is at risk for Ecuador. In the
end, the Procurador will also have to be brought on board to
finalize any agreement, which is by no means assured. We
will continue to encourage Ministers Yepez and Baca to engage
with Borja to ensure he will back a fair and rational
resolution to the problem that he largely created.
KENNEY