VENEZUELA AND ECUADOR SIGN COOPERATION ACCORDS

UNCLAS QUITO 000173

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR WHA/EPSC FAITH CORNEILLE
TREASURY FOR SGOOCH

E.O. 12958: N/A
TAGS: ECON EPET EFIN EC VE
SUBJECT: VENEZUELA AND ECUADOR SIGN COOPERATION ACCORDS

REF: A. QUITO 128


B. QUITO 1612


1. (SBU) Summary: Five cooperation agreements were signed between
Venezuela and Ecuador January 16, capping Venezuelan President
Chavez's visit to Ecuador for President Correa's inauguration.
These accords seek to strengthen bilateral cooperation and
integration focusing on social welfare, banking, and energy, with
particular emphasis on an exchange of crude oil from Ecuador for
petroleum derivatives from Venezuela. End summary.


2. (U) The energy cooperation agreement pledges cooperation and
integration in oil, natural gas, electricity, and petrochemicals.
Per the agreement, Venezuela will support modernization of
Ecuador's existing refineries and increasing Ecuador's refining
capacity; the support will include technical and financial
assistance (renovation of the aging refinery in Esmeraldas and
building a new refinery are two of Correa's energy sector
priorities). The agreement also provides for creating a "mixed
enterprise" between PDVSA (Venezuela's state oil company) and
Petroecuador (Ecuador's state oil company) for joint projects in
exploration, production, refining, processing, and
commercialization. It also mentions generating biofuels such as
ethanol.


3. (SBU) A separate petroleum exchange agreement between
Petroecuador and PDVSA provides that Petroecuador will sell crude
oil to PDVSA at "market rates" for refining, while PDVSA will
deliver derivatives to Ecuador at a to-be-determined price (the
contract notes "platts (a published market rate) plus a
differential"). Derivative products will include unleaded gasoline,
diesel fuel, fuel oil, and LPG. The exchange is planned to start at
the end of February, with a shipment of 220,000 barrels of diesel
from Venezuela to Ecuador. Ecuador will reportedly ship up to
36,000 barrels per day (bpd) of crude to Venezuela for refining
(although the contract allows for adjustments up to 100,000 bpd).
According to new Petroecuador president Carlos Pareja, Ecuador will
save money by cutting out intermediaries, although an industry
insider believes the exchange is a way for Chavez to subsidize
derivatives for Ecuador. (In 2006, the GOE spent over a billion
dollars to subsidize the importation of petroleum derivatives that
are sold at below cost.)


4. (U) Venezuelan and Ecuadorian Ministers also signed an MOU to
cooperate on social welfare issues and improve the quality of life
by strengthening productive sectors, dignified employment, popular
participation, and fair trade. This would be achieved through
exchanging instructors and technicians to develop training courses,
communal banks and other cooperative measures, and by promoting
"fair trade" of goods and services between the institutions and
popular organizations of each country.


5. (U) A joint declaration by the two countries on solidarity,
integration, and cooperation announced Venezuela's intent to open a
consultative office of its Economic and Social Development Bank
(Bandes) in Ecuador and create an Economic and Financial Cooperation
Fund. The fund will be capitalized with an initial amount of USD 25
million, of which USD 15 million will be for cooperative association
project loans and USD 10 million for grants for social projects. The
two countries agreed to form a working group to create a proposal
for a "Bank of the South" as soon as possible (reftel A).


6. (SBU) The declaration also reaffirmed the importance of Ecuador
joining TELESUR, a pan-Latin American television news network touted
as an "alternative to CNN" with majority ownership by the government
of Venezuela (GOV)and minority ownership by partner countries, and
in the planned Radio del Sur, which would be a similar network for
radio. A separate accord created a high-level "mixed commission" to
work on bilateral issues.


7. (SBU) Comment: As in previous accords, these agreements between
Ecuador and Venezuela largely lack details on how they would be
implemented (other than the petroleum exchange contract). Chavez
signed a similar energy cooperation agreement with former President
Palacio in summer 2006 calling for Venezuelan refining of Ecuadorian
crude, but the agreement was never implemented (reftel B). We
understand that Venezuelan energy agreements with other countries
also have not been implemented, and that Venezuelan refineries are
facing capacity restraints. It remains to be seen whether Venezuela
will be able to implement the swap of Ecuadorian crude for refined
products on terms that will be better than what Ecuador could obtain
on the open market, but Chavez and Correa may be more intent on
making at least some of these agreements work this time around.

JEWELL