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