OXY - PROCURADOR RENEWS CONTRACT NULLIFICATION

C O N F I D E N T I A L SECTION 01 OF 02 QUITO 000601

SIPDIS

DEPT PASS USTR BENNETT HARMAN

E.O. 12958: DECL: 03/15/2015
TAGS: ETRD EINV EPET ECON EC
SUBJECT: OXY - PROCURADOR RENEWS CONTRACT NULLIFICATION
REQUEST


Classified By: DCM Arnold A. Chacon, reasons 1.4 (b),(d)


1. (C) Summary. Ecuador's Procurador March 14 once again
called for the nullification (caducity) of Occidental
Petroleum's (Oxy) contract and seizure of Oxy's assets. We
told GOE Presidential Advisor Carlos Larrea (as we had other
GOE officials numerous times before) that the USG would react
very strongly to any expropriation of Oxy assets. After
months of negotiating with the Ministry of Economy and
Finance (MEF),the MEF told Oxy two weeks ago that they would
no longer participate in the negotiations. Last week, Hugo
Bonilla, President of state-owned oil company PetroEcuador,
told Oxy that Oxy should be negotiating with him. After the
latest volley from Procurador Borja, Bonilla is meeting with
President Gutierrez to consider next steps. End Summary.

Procurador Borja Strikes Again
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2. (U) Procurador General Jose Maria Borja (Solicitor General
equivalent) March 14 sent a letter to President Gutierrez
notifying Gutierrez of the Procurador's official notice to
PetroEcuador President Hugo Bonilla asking Bonilla to respond
within 10 days as to why Bonilla had not begun contract
nullification proceedings against Oxy. Under Ecuadorian law,
it is up to the Minister of Energy to declare caducity.
However, Borja's notice to Bonilla cites other legal grounds
for the Procurador's action.

Negotiations Going Nowhere
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3. (C) Oxy spent the last several months negotiating through
Ministry of Economy and Finance (MEF) officials (some of the
most dependable in the GOE),but was told about two weeks ago
that the MEF would no longer participate in the negotiations.
Vice Minister Ramiro Galarza told Oxy officials that the MEF
had lost credibility with Gutierrez on the issue and would
withdraw from the negotiations.


4. (C) There have been rumors that Presidential brother
Gilmar Gutierrez wanted a piece of the action. According to
those rumors, once caducity was declared, the Chinese would
come in to purchase the fields from the GOE and Gilmar would
get a nice commission. Not surprisingly, when approached by
the Ambassador and Political Counselor about corruption
rumors surrounding Gilmar, both President Gutierrez and
brother Gilmar separately claimed Gilmar was innocent and
others were misusing his name.


5. (C) Last week Bonilla told Oxy officials that Oxy had made
a mistake in negotiating with the MEF. Bonilla told Oxy he
was the guy to solve their problems. However, he had earlier
told Oxy that he would have the problem resolved by
mid-February. Oxy Ecuador President Jerry Ellis spoke with
Bonilla March 15, after the latest salvo from Borja. Bonilla
was not sure what to do, but said he was going to Gutierrez
to discuss next steps after the Procurador's latest move.
Ellis said Oxy would keep a low profile in the matter, unless
his headquarters advised him otherwise.

GOE Warned Again
--------------


6. (C) Econoff spoke with Presidential Legal Advisor Carlos
Larrea on March 15. When asked why Borja raised the matter
again, Larrea responded that Borja was "crazy" and perhaps
positioning himself for the future. Econoff explained that
the GOE had been told again recently that if Oxy's assets
were expropriated the USG would take strong action against
the GOE. Larrea said in his meetings at the White House
(with NSC officials) he had also been given a strong message
about the Oxy case. Econoff reminded Larrea that not only
was the FTA at stake, but other foreign investment, Ecuador's
attempt to re-enter the private foreign debt market and USG
support in international financial institutions. Larrea
responded that he was going immediately to President
Gutierrez to pass that message. Offering several seemingly
unworkable options, Larrea finally concluded that it was
perhaps time to get the President more directly involved in
the case.


7. (C) The Ambassador, both before and after her meetings
with Oxy's Oil and Gas President John Morgan, Executive VP
for International Production John Allen and Oxy Ecuador
President Jerry Ellis last week, spoke with Trade Minister
Baki and President Gutierrez about Oxy. Repeating the same
message that she had given them numerous times before, she
warned Baki and Gutierrez that the Oxy case needed to be
resolved as soon as possible. She stressed what the Oxy
officials had told her; Oxy was willing to sit down and
seriously negotiate, but it had to be with someone who could
resolve the matter.

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


8. (C) For the third time in the last several weeks, a GOE
official has needlessly put the Oxy case back in the
headlines. The case has been a political hot potato that no
one wants to touch. Gutierrez even told the Ambassador that
he would be damned by the people if he settled with Oxy and
damned by the USG if he did not. Still, he said that
securing an FTA is a top priority. The Procurador's latest
volley will make it even harder for him to not declare
caducity, unless we can offer either a better, or perhaps
worse, alternative. We working with Oxy and reaching out to
the GOE, including the Procurador, to explore the
alternatives.
KENNEY