City Oriente Requesting Arbitration

UNCLAS QUITO 002465 SIPDIS SENSITIVE SIPDIS DEPT FOR WHA/AND TREASURY FOR SGOOCH USTR FOR BENNETT HARMAN E.O. 12958: N/A TAGS: EINV EPET ENRG EC SUBJECT: City Oriente Requesting Arbitration Ref. a) Quito 2147, b) Quito 889, c) Quito 809 ¶1. (SBU) Summary. City Oriente is presenting on October 10 its request for international arbitration, asserting that its contract has been violated by the revised hydrocarbons law. The company asserts that it is still focused on a negotiated solution, but believes that it should file for arbitration as a defensive measure. It is driven in large part by concerns that either the current or future government may try to cancel its contract since it has not yet made the additional payments to the GOE that are required under the revised hydrocarbons law. End summary. ¶2. (SBU) On October 5, City Oriente officials Kyle Ford and Jose Paez informed the Ambassador that City Oriente is planning to request international arbitration to challenge the hyrocarbons law reform that requires them to share 50 percent of extraordinary revenue with the GOE (reftels). They said that would request the arbitration under the terms of their contract, not under the Bilateral Investment Treaty. The arbitration would be under ICSID rules but they expect the venue would be Quito, as stipulated in their contract. Ford said that they believe that filing for arbitration under their contract rather than the BIT would be seen as less confrontational by Ecuadorian authorities. Ford said that City Oriente would inform GOE officials of the arbitration request right after they file, in an effort to defuse any possible tension and stress City Oriente's desire for a mutually agreeable settlement. (On October 10, Ford confirmed that its attorney (Baker and Botts) was filing the arbitration request the same day.) ¶3. (SBU) Ford said that City Oriente would prefer a negotiated solution, and intends to continue negotiations with the GOE to rework its contract under the hydrocarbons law, but City Oriente officials are skeptical that they would be able to reach an acceptable agreement with the current administration. Meanwhile, they expect to receive a letter from the GOE asking City Oriente to explain why it has not made any payments as required under the revised hydrocarbons law. (City Oriente has been depositing the required payments in an offshore account.) Ford said that by filing for arbitration now City Oriente believes it will be establishing a degree of protection against the current or future administration declaring caducity (i.e., canceling the contract) because City Oriente has refused to make payments under the revised hydrocarbons law. ¶4. (SBU) The Ambassador suggested that City Oriente carefully develop its public relations strategy prior to filing the arbitration request, given the risk that the request could be given a negative spin in Ecuador following the Oxy saga. Ford said that City Oriente had discussed their public relations approach internally, and believe that they have good story to tell, focusing on their small size, investments in Ecuador, desire for a negotiated solution, and that the arbitration request was taken for defensive purposes. However, he did say that City Oriente would consider hiring a professional public relations firm to help it manage the issue. ¶5. (SBU) Comment: If City Oriente does file for arbitration, it would join seven other arbitration cases that are ongoing against the GOE or its parastatals. It is unfortunate, but not surprising, that City Oriente believes that its discussions with the GOE probably will not bring an acceptable solution to contractual changes required by the hydrocarbons law. It remains to be seen whether filing for arbitration will spur the GOE toward finding a resolution, or whether arbitration would protect City Oriente from caducity. Jewell