PROCURADOR BORJA PRONOUNCES ON OXY CASE

UNCLAS SECTION 01 OF 02 QUITO 000611

SIPDIS

SENSITIVE

PASS USTR BENNETT HARMAN

E.O. 12958: N/A
TAGS: ETRD EINV EPET ECON EC
SUBJECT: PROCURADOR BORJA PRONOUNCES ON OXY CASE

REF: QUITO 601


1. (SBU) Summary. Procurador General Borja met with Embassy
officers on March 16 and explained his position on Occidental
Petroleum (Oxy). Borja stated that the caducity (contract
nullification and nationalization of Oxy's assets) and
arbitration issues should be treated separately. He did not
answer why he sent the official notice (oficio) to
PetroEcuador on March 14 (reftel),but said all he was
looking for from PetroEcuador was a report of what
PetroEcuador had done over the last six months since Borja
requested that PetroEcuador declare caducity. He claimed
that there were strong legal grounds for declaring caducity
and that PetroEcuador had sufficient time to act on the
matter. Borja could not specify what damages Ecuador had
suffered as a result of Oxy's alleged breach of contract. We
explained that it would be less costly for the parties to
negotiate and avoid another arbitration. Acknowledging that
a declaration of caducity is not imminent, he said Oxy should
sit down with PetroEcuador and work out a resolution. His
role would be to review that agreement and present it to the
Congress for approval, both dubious prospects. End summary.


Riding His High Horse
--------------


2. (SBU) Procurador General (Solicitor General equivalent)
Jose Maria Borja met with Embassy officers March 16, at the
Embassy's request. He began his case by forcefully asserting
that Oxy's VAT arbitration case (where Oxy was awarded $75
million in July 2004) must be kept separate from Oxy's
alleged contracts violations and the Procurador's demand that
Oxy's contract be declared void (caducity) and Oxy's assets
taken by the state. Borja claimed the arbitration panel in
the VAT case had no jurisdiction to hear the matter because
it was a tax case with no confiscation of assets involved.
We reminded Borja that the arbitration panel had already
reviewed and rejected those arguments and that arbitral
decisions are only overturned in the most extreme cases.
Though asked, Borja never answered why he chose March 14 to
send the oficio to PetroEcuador (reftel) demanding action on
his request to declare caducity.


3. (SBU) We explained that the parties had been in
discussions to resolve their problems. We added that a
declaration of caducity would likely cause Oxy to bring yet
another arbitration case against the GOE, which would be
costly for everyone. Washington was also concerned, we
noted. Borja seemed aware of the Ambassador's and
Washington's concerns, stating that he met the night before
with Minister of Economy on the matter.


4. (SBU) Borja said that he was acting as the protector of
the state and that we should bear in mind that Ecuador had
its sovereign rights. We agreed about national sovereignty,
pointing out that the United States had its sovereign rights
when it came to negotiating free trade agreements.


5. (SBU) We asked Borja how Ecuador had been damaged by Oxy's
alleged breach of contract. With respect to the supposedly
illegal transfer of 40% Oxy's interest in Block 15 to
Canadian oil company EnCana in 2000, we noted that Ecuador
actually stood to gain more now than had Oxy received the
required permission from the Minister of Energy for the
alleged 2000 transfer. Oil prices now were much higher than
they were in 2000. Borja responded that Ecuador did not have
to show that it was damaged in any way. The fact that Oxy
failed to get the Minister of Energy's permission before the
alleged transfer was sufficient reason to seize Oxy's assets.
In response to our question, Borja asserted that the legal
concept of a penalty appropriate to the offense
(proportionality) was limited to criminal, not civil cases,
as was Oxy's case.

The Way Forward
--------------


6. (SBU) Borja said that there were two ways forward: declare
caducity, or PetroEcuador sits down with Oxy and works out an
"administrative" resolution. Agreeing that negotiation
seemed the best resolution, we said that Oxy told us they
were willing to sit down with PetroEcuador. Still, we noted
10 days (the period the Procurador gave PetroEcuador to
respond to the oficio) was not much time for the parties to
reach a resolution. Borja said he was not looking for a
resolution within 10 days or a declaration of caducity. What
he wanted within 10 days was a report from PetroEcuador as to
what PetroEcuador had done for the past six months to respond
to his request for caducity.


7. (SBU) If the PetroEcuador and Oxy reached an agreement, he
would review it for legal sufficiency, as was his duty, he
said. Borja bombastically added that he would not approve
any "under the table" deals. We responded that neither would
Oxy accept such an under the table deal. After we noted that
there was a way forward for negotiations to proceed, Borja
added that he would then bring the agreement to the
Ecuadorian Congress for approval. We noted that the
Ecuadorian Congress at this point was having a rather
difficult time agreeing on anything, let alone a deal between
the state and a private oil company. Bursting with hubris,
Borja responded that whenever he brought something to the
Ecuadorian Congress that he had received "unanimous" approval
from them. We congratulated him.

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


8. (SBU) The good news is that a declaration of caducity is
not imminent (besides, as Borja admitted to us, he does not
have the legal authority to declare caducity on his own).
Also, Borja agrees that Oxy should negotiate with
PetroEcuador. The bad news is that eventually the final
resolution will have to go through Borja, and we will need to
address his idea to involve the Ecuadorian Congress. We
think Oxy should take advantage of this small window of
opportunity to start serious negotiations with PetroEcuador
President Hugo Bonilla. At the same time, Embassy and
Washington officials must continue to pressure the GOE to
seriously negotiate and remind them that once a resolution is
reached we can work with the GOE to present the negotiated
resolution in the best light - a win for everyone.
KENNEY