ECUADOR EVALUATES HURRIED CONCESSION OF

C O N F I D E N T I A L QUITO 002386

SIPDIS

SIPDIS

TREASURY FOR SGOOCH

E.O. 12958: DECL: 09/27/2016
TAGS: ECON EPET EINV
SUBJECT: ECUADOR EVALUATES HURRIED CONCESSION OF
LONG-NEGLECTED ITT OIL FIELDS - WHY NOW?

REF: A. A. QUITO 2138


B. B. QUITO 1231

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


1. (C) Summary: Ecuador's Hydrocarbons Vice-Minister
reports that Chinese company Sinopec has made a strong offer
to develop Ecuador's large ITT oil fields and the GOE is
considering soliciting bids for the field before the Palacio
government leaves in January. Post and industry insiders
view the announcement with skepticism due to the challenge of
bidding for and establishing a contract to develop these
complex and isolated fields in the last four months of an
outgoing administration. In addition, the fields overlap
with environmentally sensitive areas that may contain
uncontacted indigenous tribes, and any proposal to develop
the fields will be opposed by environmental and
indigenous-rights NGOs. Chinese government officials
discount the Vice-Minister's comments as exaggerated. End
Summary.


2. (SBU) Ecuador's new Vice Minister of Hydrocarbons Hugo
Coronel (who has been in office a scant 4 weeks) told econoff
of the GOE's plan to put the Ishpingo-Tambococha-Tiputini
(ITT) fields project out for bid by the end of the year.
Coronel was accompanied by Houston-based petroleum advisor,

J. Raul Ortiz.


3. (SBU) The ITT project would be very large for Ecuador -
large enough to attract the interest of oil majors who
habitually pass over smaller reserves. Coronel reports the
fields have 1 billion barrels of heavy oil reserves and the
project could mean 3-4 billion dollars in investment.
Petroecuador representatives noted in a separate meeting that
the oil in the fields is very heavy (14% API),so the project
ideally would include a refinery to convert the petroleum
into lighter crude or derivatives to facilitate
transportation through existing pipelines.


4. (C) Ortiz and Coronel noted they have received a "superb"
offer from Sinopec, the Chinese oil company, which would be
very difficult to turn down. The GOE is currently analyzing
the offer through an interagency committee, which will decide
on next steps. Coronel mentioned that the project might be
put out for bid in a "Swiss Challenge" process, where one
offer is presented to the public (in this case, Sinopec's),
and other companies are invited to top it. The two lauded
the Swiss Challenge process as transparent, but skeptics
assert it could be subject to manipulation - for example, by
limiting the bid circulation or time frame for responding.
Comment: this process was used in awarding the concession
for Quito's international airport, and with a short window
for bid submission during the month of December, no
competitive bids were submitted.


5. (C) In a separate meeting, Petroecuador representatives
confirmed the plan to move forward with the ITT project, and
that Sinopec is a candidate. However, they suggested there
may be other interested players, noting Brazil's Petrobras as
a possible investor (and a news article suggested that
Argentina's Enarsa may also be interested). India,
Indonesia, and Malaysia have also expressed interest in ITT
(India and Indonesia have both signed energy cooperation
agreements with Ecuador). We are not aware of any U.S. oil
firms that are interested in investing in the ITT fields at
this time, although Chevron and Exxon had expressed some
interest in the past. Russia's Lukoil is reported to have
offered a large bribe in 2005 to develop the ITT fields, but
we are not aware of any current interest on the part of
Lukoil.


6. (C) EconOff spoke with Zou Chuanming, Commercial
Counselor at the Chinese Embassy in Ecuador (protect),about
the ITT offer. Mr. Zou said that "no offer had been made"
but that Sinopec had "expressed interest, like a number of
other companies." Mr. Zou said everything depended on "if
and when the bid would occur." When asked if Chinese oil
companies were worried about investing in Ecuador after
watching the value of Andes Petroleum's assets plummet after
the passing of the Hydrocarbons Law (reftel b),Mr. Zou said
"yes it influences" their attitude, and noted that "the
political environment in Ecuador is still uncertain." (Note:
Sinopec does not have its own assets in Ecuador. It is a

minority partner in the Andes Petroleum consortium. The
majority partner, CNPC, has its own separate project in Block
11.)


7. (SBU) One of the reasons the ITT fields have not yet been
developed is that they lie in the heart of Yasuni National
Park, one of Ecuador's major protected areas and biosphere
reserves, which may also contain uncontacted tribes. U.S.
firm Burlington Oil, recently purchased by Conoco Philips,
owns concession rights in an area that has not historically
been considered environmentally sensitive. However, its
concession has been in force majeure for five years due to
opposition from indigenous groups in its block. Burlington
has not yet been able to start preliminary work or even open
an office in their concession area. Petrobras has a field
that has been in a state of suspended activity for more than
a year based on an Environment Ministry decree. Plans to
develop ITT have in the past assumed the oil investor would
commit to minimizing environmental impacts by flying in
drilling rigs by helicopter instead of building roads, and
where roads were necessary to construct buried pipelines,
that the roads be removed after construction. However, even
with these methods, the GOE would likely face vocal
opposition from local and international NGOs.


8. (C) Comment: This project has been under discussion for
10 years, and its development has been hampered by the
fields' heavy oil, relative isolation, and environmental
sensitivity. Sinopec may have made such an attractive offer
that the GOE feels compelled to move on it, although the
Chinese Embassy denies the discussions were that advanced.
(See reftel a on China's long-term interest in Ecuadorian
petroleum in spite of the setback suffered by Oxy's erstwhile
partner Andes Petroleum - ref b). We are skeptical that the
GOE and Petroecuador have the ability to move such a complex
matter to conclusion in the limited time remaining under the
Palacio administration. End Comment.
JEWELL