ECUADOR SOLICITS OIL HELP FROM ABROAD

C O N F I D E N T I A L QUITO 001438

SIPDIS

SIPDIS

PASS TO USTR FOR BENNETT HARMAN

E.O. 12958: DECL: 06/12/2016
TAGS: EPET EINV ECON PREL EC
SUBJECT: ECUADOR SOLICITS OIL HELP FROM ABROAD

REF: A. QUITO 1066

B. QUITO 1216

C. MEXICO 2888

D. BOGOTA 5012

E. QUITO 1315

Classified By: Ambassador Linda L. Jewell, Reasons 1.4 (b&d)


1. (C) Summary. There are nearly daily press reports that
the GOE is about to get assistance from a variety of
countries to manage or invest in Ecuador's oil sector,
especially the fields previously managed by Occidental
Petroleum. Private reports we have received indicate the
rush to invest in Ecuador is not as great as the GOE would
like the world, and especially the Ecuadorian public, to
believe. The Palacio Administration is desperate to portray
the investment environment and oil sector as unaffected by
their seizure of Occidental Petroleum's assets. However,
their wishful thinking may not jibe with reality. End Summary.

Keep Saying it and it Might Come True
--------------


2. (C) Since the April unilateral revision of private oil
contracts (reftel A) and the May 15 contract nullification
and seizure of Occidental Petroleum's (Oxy) assets (reftel
B),the GOE has been desperate to show that foreign investors
are interested in the oil sector here and that it can run
Oxy's former operations. The Palacio Administration has said
in various press reports throughout the last several weeks
that Mexico, Chile, China, Colombia, Venezuela and Malaysia
have each said they were considering investing in Ecuador's
oil sector.


3. (C) Mexican oil company Pemex said it has not been
approached by the GOE and does not even engage in the type of
foreign investment that Ecuador is seeking (reftel C). The
General Manager of Andes Petroleum (the Chinese consortium
that purchased Canadian oil company EnCana's assets in
Ecuador) told Econoffs that the Chinese are not interested in
investing more in Ecuador, after having lost most of their
recent $1.4 billion investment here. Embassy Kuala Lumpur
reported in a recent email to Econoff that they had not heard
of any supposed Malaysian interest in the Ecuadorian oil
sector.


4. (C) Colombian President Uribe will likely offer some
technical cooperation with the GOE when he visits Quito this
week (reftel D). However, the GOC's sensitivity to USG
concerns and recognition that Oxy has considerable
investments in Colombia will likely limit the extent of their
interest in Oxy's former operations. There are repeated news
reports, including an interview with the outgoing Chilean
Ambassador on June 12, indicating that the Chilean state oil
company is interested in the Ecuadorian oil fields.


5. (C) In a recent visit and with much fanfare, Venezuelan
President Hugo Chavez announced two oil-related agreements
were reached with the GOE, but the agreements themselves
lacked the needed specifics for execution (reftel E). Last
week, the press again reported that Venezuela offered to
refine Ecuadorian crude for $5 per barrel, but again no
definitive agreement has been reached. While previous Chavez
economic offers to Ecuador have turned out to be more
rhetoric than real, his interest in gaining a foothold in
Ecuador is high, and he may be willing to make an offer too
good for the GOE to turn down.

Production Declines in Oxy's Former Fields
--------------


6. (C) According to various reports, production in Oxy's
former operations has dropped as much as 30% from its
previous 100,000 barrels per day production levels. The GOE
continues to maintain that there has been no significant drop
in production. But we continue to receive reports that
corroborate the rumored problems. French-based Schlumberger,
which supplies the deep well pumps in the former Oxy fields,
has allegedly had three pumps burn out and PetroEcuador was
forced to shut in production of several other wells.
PetroEcuador already supposedly owes Schlumberger $30 million
for work done at PetroEcuador's fields.


7. (C) U.S. oil supply company Baker Hughes has not done any
work for PetroEcuador since the May 15 takeover. Previously,
at a minimum, it conducted monthly maintenance on its
equipment at the Oxy site. Baker Hughes representatives told
Econoff last week that PetroEcuador does not have the
expertise to service the Baker Hughes equipment and that,
since PetroEcuador owes them $15 million from previous
services, they are reluctant to accept a subrogation offer
from PetroEcuador to substitute PetroEcuador for Oxy in their
maintenance agreement contract. They reported that other
suppliers are similarly concerned about payment prospects.


8. (U) PetroEcuador owes tens of millions of dollars to its
suppliers. Local communities are now also demanding that
PetroEcuador follow through on the millions of dollars worth
of road paving and other social projects that Oxy and EnCana
used to do.


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


9. (C) The Palacio Administration will continue to seek out
state-oil companies to bolster its lack of necessary
expertise to manage Oxy's high-tech former operation and to
bolster its assertion that its recent hydrocarbon law and Oxy
follies have not had a negative impact on the sector and the
country. At the same time, it will try to downplay or cover
up any production declines in the former Oxy operations.
Where there is this much money to be made, nothing can be
ruled out. But if recent history is any indication, the GOE
may fall short of its goals.
JEWELL