Identifier
Created
Classification
Origin
07QUITO2491
2007-11-13 21:16:00
CONFIDENTIAL
Embassy Quito
Cable title:  

PETROECUADOR RECOMMENDS CANCELLING U.S. CITY

Tags:  EPET EINV ENRG ECON PREL EC 
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FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8040
INFO RUEHBO/AMEMBASSY BOGOTA PRIORITY 7063
RUEHCV/AMEMBASSY CARACAS PRIORITY 2744
RUEHLP/AMEMBASSY LA PAZ NOV 0777
RUEHPE/AMEMBASSY LIMA PRIORITY 2095
RUEHGL/AMCONSUL GUAYAQUIL PRIORITY 3020
C O N F I D E N T I A L QUITO 002491 

SIPDIS

SIPDIS

TREASURY FOR MEWENS
DEPT FOR WHA/EPSC FAITH CORNEILLE

E.O. 12958: DECL: 11/13/2017
TAGS: EPET EINV ENRG ECON PREL EC
SUBJECT: PETROECUADOR RECOMMENDS CANCELLING U.S. CITY
ORIENTE,S PETROLEUM CONTRACT

REF: A. QUITO 2373


B. 06 QUITO 1722

C. QUITO 2277

Classified By: Classified by: DCM Jefferson Brown, Reasons 1.4 (b&d)

C O N F I D E N T I A L QUITO 002491

SIPDIS

SIPDIS

TREASURY FOR MEWENS
DEPT FOR WHA/EPSC FAITH CORNEILLE

E.O. 12958: DECL: 11/13/2017
TAGS: EPET EINV ENRG ECON PREL EC
SUBJECT: PETROECUADOR RECOMMENDS CANCELLING U.S. CITY
ORIENTE,S PETROLEUM CONTRACT

REF: A. QUITO 2373


B. 06 QUITO 1722

C. QUITO 2277

Classified By: Classified by: DCM Jefferson Brown, Reasons 1.4 (b&d)


1. (C) Summary: Petroecuador recommended on November 8
that the GOE cancel U.S. oil company City Oriente,s
contract, since the company has not made any payments to the
GOE under a 2006 law requiring companies to provide the
government with at least 50% of "extraordinary" petroleum
revenues. A final decision on whether to cancel the contract
will be made by the Petroleum Minister Chiriboga, who was
surprised by the Petroecuador recommendation. On November 5,
Chiriboga told the Ambassador that the GOE was not planning
to seek contract cancellation at this time. End Summary.


2. (SBU) The GOE has been investigating foreign oil
companies (reftel A) that have not fully paid all the money
they owe under Ecuador,s &50/50 law8 of 2006. The law
requires that companies share at least 50 percent of
extraordinary revenues with the State (reftel B). On
November 1, state oil company Petroecuador issued a statement
claiming that it would initiate "coactiva" (embargoing or
seizing a company,s barrels of oil as they go through the
pipeline) or "caducity" (canceling a company,s contract and
seizing its assets) in payment for debts owed under the law.
It also issued a report detailing which companies have
allegedly not complied with the law (basically five major
foreign oil operators in Ecuador ) Chinese Andes Petroleum,
Brazilian Petrobras, Spanish Repsol, French Perenco, and
American City Oriente (the smallest). City is the only
company to have refrained from making even partial payments.
Petroecuador estimates the unpaid debt owed by all companies
totals $236 million.

Ambassador Speaks with Energy Minister
--------------


3. (C) On November 5, the Ambassador spoke with Petroleum
Minister Galo Chiriboga about City Oriente,s situation,

after City Oriente had heard that Petroecuador,s legal
office would recommend caducity. She made the point that
since City Oriente is negotiating with the GOE to revise its
contract, a recommendation of caducity could be very
difficult to stop and could preclude a negotiated agreement.
She suggested delaying a formal recommendation for caducity
so the two sides would have more room to pursue a negotiated
settlement. After a brief interval, when he presumably
checked with Petroecuador, Chiriboga called the Ambassador
back to state that the report was not true and that the GOE
was not going to pursue caducity at this time.

Petroecuador Recommends &Caducity8 Regardless
--------------


4. (SBU) On November 8, Petroecuador Executive President
Carlos Pareja sent forward to Minister Chiriboga a formal
recommendation of caducity for City Oriente, recommending the
company,s contract be cancelled because it has not paid any
money owed under the extraordinary revenue law. (Note: the
Petroecuador recommendation is not a final decision. A
formal decision on whether to cancel City Oriente,s contract
will be made by Minister Chiriboga.)


5. (C) Petroecuador is also looking at the other foreign oil
companies who have not paid what they have been billed under
the 50/50 law (City Oriente reportedly owes $28 million; some
companies owe even more). The state company is considering
"coactiva" for the other companies. Of the five major
foreign operators, Repsol and Perenco are currently possible
candidates for coactiva. Petroecuador has noted that Andes
Petroleum and Petrobras already have price indices in their
current contracts (when prices increase, they share more
petroleum revenue with the state),so may already be paying
at least a share of what is required under the law.
Petroecuador will conduct further analysis of these two
contracts.

Background:
--------------


6. (C) While most oil companies have failed to pay all of
the money billed by Petroecuador under last year,s law, City
Oriente is the only firm that has paid nothing. (Because it

is a small operation and highly leveraged, City Oriente
claims it is simply not able to make any other financial
arrangements.) City Oriente considers the law a unilateral
change to the terms of its contract, and has sought
international arbitration to resolve the issue. It has put
some of the money owed into an offshore account pending the
conclusion of its international arbitration case but has not
paid any to the GOE.


7. (C) On October 31, the ICSID tribunal for the case
participated in a conference call with City Oriente and GOE
representatives. The tribunal asked that the GOE not take
any actions against City Oriente that would change the status
quo, including embargoing City Oriente,s oil or nullifying
its contract. It further reinforced this with a letter
ordering the GOE not to make said changes until it had the
opportunity to consider City Oriente's request for
provisional measures. The arbitration panel heard City
Oriente's arguments for provisional measures on November 9.
The GOE, which does not yet have a legal team for this case,
did not participate in the hearing.


8. (U) In response to press questions November 9, Ambassador
Jewell refrained from comment on the specific merits of the
case but noted that the Embassy supports City Oriente,s
right to arbitration as an impartial, legal and appropriate
recourse to address the company,s contract dispute. On
November 13, the Ambassador reiterated this position when the
matter came up during a meeting with the acting Foreign
Minister.

Comment:
--------------


9. (C) All of the foreign oil companies are struggling to
cope with the GOE's changing rules of the game, and we do not
believe that City Oriente was targeted solely because it is a
U.S. company. City Oriente has been more vulnerable than
other companies to GOE retaliation for underpayment under the
50/50 law since it decided not to pay anything. Unlike some
of the other players, it is also marginal in terms of
production and, as a fully private company, does not benefit
from strategic considerations that may mitigate in favor of
some of the other state-owned companies. The firm,s General
Manager Kyle Ford expressed his appreciation for the
Ambassador,s call to Minister Chiriboga, but even at the
time City Oriente appeared to be resigned to an eventual
caducity declaration and is now focusing its efforts on the
arbitration process. Minister Chiriboga appeared to be
blindsided by the caducity recommendation, the second time in
a month that he did not appear to be in the loop on a key
decision affecting the petroleum sector (it also appeared
that he was not consulted before President Correa issued the
99 percent revenue sharing decree on October 4 ) reftel C.)
We will continue to consult with City Oriente on possible
next steps, but based on the experience of Occidental
Petroleum, whose contract was cancelled in 2006, it will be
difficult to reverse the caducity process now that a formal
recommendation has been made.
JEWELL