PROCURADOR'S INVOLVEMENT IN OXY AND OTHER MATTERS

C O N F I D E N T I A L SECTION 01 OF 03 QUITO 002578

SIPDIS

SECSTATE PASS USTR

E.O. 12958: DECL: 11/10/2010
TAGS: EPET ECON PGOV EC
SUBJECT: PROCURADOR'S INVOLVEMENT IN OXY AND OTHER MATTERS

REF: QUITO 2236

Classified By: EconCouns Larry L. Memmott, Reasons 1.4 (b&d)


1. (C) Summary: At Occidental Petroleum's (Oxy) and the GOE's
request, EconOffs met with Ecuador Solicitor General
(Procurador General) Jose Maria Borja November 7, to lay the
groundwork for Borja's buy-in to the ongoing discussions
between Oxy and members of the GOE. Recently, Oxy has had
its most serious discussions to date with members of the GOE
regarding a resolution to its commercial disputes with the
GOE. The involvement of the Procurador, who actually created
the problem, is not welcome by anyone, but is unavoidable.
The fact that the GOE thinks it's time to bring Borja into
the talks could be construed as progress. However, Borja
cannot be trusted and his involvement will complicate
matters. In the end, pressure from a variety of sources will
be needed to get Borja to do the right thing, as his
interpretation of the law depends upon how he is feeling at
any particular moment. End Summary.

Bring in Jose Maria and Hold On to Your Wallets
-------------- --


2. (C) Oxy has held secret discussions over the last two
months with the President of PetroEcuador Luis Roman and
President Palacio's advisor and now Ambassador to the United
Nations Diego Cordovez. In a refreshing change for Oxy,
Roman actually knows the oil sector very well. While the GOE
has still not responded with its own counteroffer to Oxy's
various offers, the two sides have developed a good working
relationship and some progress had been made toward a
resolution. At Palacio's express instruction, knowledge of
the discussions was kept strictly to Oxy, Palacio, Roman,
Cordovez, and us. When Minister of Energy Ivan Rodriguez
threatened to resign (reftel) he too was informed of the
discussions, but had not participated in them.


3. (C) Oxy called Econoff November 4 to request that Embassy
officials approach Procurador General (similar to the U.S.
Solicitor General) Jose Maria Borja. Roman had called Oxy
and said the GOE needed to get Borja on board in the
negotiations and wanted the Embassy to approach Borja first
to lay the groundwork for Roman and Rodriguez to meet with
him.


4. (C) Econoffs met with Borja on November 7 to deliver the
message. Borja first regaled Econoffs with his efforts to
insert himself into any area where there was a vacuum in the
government. For instance, he claimed that he was "taking
over" the two state phone companies. The following day, the
newspapers reported changes in the directors of both
Pacifictel and Andinatel. Borja said he also intended to
insert himself into the electric sector and we heard through
other sources that he had tried to negotiate a gas deal with
Venezuela.


5. (C) Borja then offered a "resolution" to the multi-billion
dollar Chevron lawsuit (reftel) pending in Ecuador (with
other legal processes in the United States). His resolution
- Chevron need only place $500 million into a trust fund for
environmental remediation and the GOE would put up the same
amount. As to Chevron's remediation agreement that releases
the company from further liability, Borja responded that it
was agreed to by corrupt former Ecuadorian officials and
therefore was not binding. He did not explain why the GOE
has not prosecuted these allegedly corrupt officials. Econ
Counselor responded that Chevron believed it had a strong
case and that it would ultimately prevail in court.


6. (C) Taking advantage of Borja's hubris, Econ Counselor
asked the Procurador about the sale of Canadian oil company
EnCana's Ecuadorian assets to a Chinese consortium. That
sale is contingent on resolution of the Oxy caducity issue.
A smiling Borja told Econoffs that the Chinese had been in to
see him on the matter. He said that he told the Chinese that
they had just bought themselves a lottery ticket!


7. (C) Apparently delighted that he was now being asked by us
to become involved in the Oxy discussions, Borja was quick to
offer his views to Econoffs. First, the state/company share
of revenues would have to be changed. Incorrectly stating
the Oxy received 72% of the oil revenues to the GOE's 38%
share, Borja said the split should be 60/40, in favor of Oxy
and should be backdated to 2000, when the Block 15
transaction between Oxy and EnCana began. (Note: when
royalty, tax and other payments are taken into account, the
state share is already over 60%.) Second, Oxy would have to
accept the declaration of caducity (contract nullification,
which under Ecuadorian law would mean that Oxy's assets in
Ecuador would devolve to state-oil-company PetroEcuador,
without compensation to Oxy). However, Borja said that we
should not worry because immediately after the declaration of
caducity, the GOE could announce the new contract the GOE
negotiated with Oxy to resolve Oxy's violation of the law.
Econ Counselor pointed out that if caducity was declared it
seemed that under Ecuadorian law a bid solicitation process
might be needed, as Oxy's assets would have devolved to
PetroEcuador as a result of the caducity declaration. Borja
dismissed that as unnecessary.


8. (C) Borja's other brilliant idea was to have the President
of Oxy in the United States come to Quito to sit with Borja
and President Palacio and the three of them would negotiate a
resolution, including the terms of the new contract. Borja
backed away from that proposal when Econ Counselor noted the
complexity of such negotiations and the need for technical
discussions prior to presenting any agreement to Palacio.
Still, he said, at some point Palacio, the President of Oxy
and he would need to get together to agree on the final
resolution. Moments later, however, Borja contradicted
himself and said that neither he, nor his office would be
involved in the negotiations, other than to approve their
outcome.


9. (C) The night of November 7, Borja called Econoff at home
to discuss a new procedure for settling the Oxy case. Borja
said that Minister of Energy Rodriguez, PetroEcuador
President Roman and he had met that evening with President
Palacio. Borja announced that a commission had been formed
to resolve the Oxy matter. He would only give one of the
names of the commission members to Econoff, Borja's designate
Pedro Freile. The other commission members would be one
representative each from the Ministry of Energy, PetroEcuador
and SRI (the Ecuadorian Internal Revenue Service). The
commission, according to Borja, is supposed to come up with a
counteroffer by Sunday, November 13 to present to Oxy (whom
he said should also name a commission, but did not explain
why). The two "commissions" would then agree on the final
resolution. Once that resolution was reached, the
commissions would "disappear." Minister of Energy Rodriguez
would then appoint his own well-respected expert, who would
recommend the same solution reached by the "disappeared"
commissions, whom no one would know about. Rodriguez would
next present the proposal of the secret commissions to
President Palacio for approval. According to Borja, the
entire process should only take 45 days.
Borja Playing Fast and Loose with the Truth
--------------


10. (C) In his November 7 meeting with Palacio, Roman and
Rodriguez, Borja told them that the U.S. Embassy agreed that
Oxy would admit fault and thus accept caducity. Roman and
Rodriguez called Oxy to ask if this were true and Rodriguez
contacted the Embassy to question Borja's assertions. Econ
Counselor and Senior Commercial Officer met with Minister
Rodriguez November 8 to assure him that nothing of the sort
was stated by EconOffs in their meeting with Borja the day
before. Oxy gave Roman and Rodriguez the same message.

Oxy's Reaction
--------------


11. (C) Oxy met with Roman and Rodriguez November 8 where the
idea of a commission was discussed. They agreed that they
would move forward on their own with the talks between Oxy,
Roman and Cordovez (and not wait for the commission to come
up with any numbers). The next meeting would be November 11
and Roman provided Oxy with some "general" numbers, the
closest that Oxy has seen to a counteroffer from the GOE. At
their next meeting, the parties would try to reach an agreed
amount that could be presented to the new commission the
following week.


12. (C) The most positive developments to come out of this
week's events is the affirmation by Minister Rodriguez that
he would resign rather than declare caducity against Oxy.
Rodriguez and Roman also believed that they were successful
in convincing Borja that a declaration of caducity was not
possible if the GOE wanted to negotiate a settlement with
Oxy. Roman told Oxy that he believed that Borja was "all
show" and that President Palacio is now convinced that Borja
is a liar because of his untrue allegations of the Embassy's
position regarding Oxy's alleged acceptance of a caducity
declaration.

Herreria: Palacio Wants to Decide for Oxy
--------------


13. (C) In a separate meeting, Presidential advisor Luis
Herreria told Pol Counselor that President Palacio wants to
decide in favor of Oxy on the caducity issue. Herreria said
that the U.S. Embassy should start laying the groundwork with
the press to sway public opinion in favor of a negotiated
solution that would keep Oxy in the country. Pol Counselor
asked Herreria if the GOE would also be working to create
such an environment. Herreria responded with an unconvincing
yes.

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


14. (C) We have kept the Procurador at arms length,
particularly in the last two months when it appeared that
discussions between Oxy and the GOE might finally start to
show signs of progress. It was inevitable that Borja had to
be brought back into the process. The fact that the GOE
asked us to help bring him back in now is some indication
that the GOE feels it is coming closer to being able to reach
a settlement with Oxy. As we expected, Borja will be more of
a hindrance than help. Still, the fact that the major
participants in the process recognize Borja's true nature
will help to limit his influence. Besides, this is the first
time that the Ministry of Energy, PetroEcuador, the
Presidency, the Procurador and Oxy all seem to be working at
the same time toward a common goal, a negotiated settlement
with Oxy.


15. (C) However, with Borja's dishonesty and delusions of
grandeur, and a general lack of GOE will to resolve any
difficult problem, reaching a negotiated settlement in the
near future is by no means assured.
JEWELL