AMBASSADOR'S MEETING WITH MINISTER OF ENERGY ACOSTA

C O N F I D E N T I A L QUITO 000321

SIPDIS

SIPDIS

TREASURY FOR S.GOOCH

E.O. 12958: DECL: 02/07/2017
TAGS: ENRG EINV ECON PREL EC
SUBJECT: AMBASSADOR'S MEETING WITH MINISTER OF ENERGY ACOSTA

REF: A. QUITO 173


B. 06 QUITO 2807

C. 06 QUITO 1735

Classified By: AMBASSADOR LINDA JEWELL. REASON: 1.4 B AND D


1. (C) Summary. In a wide-ranging meeting with the
Ambassador, Minister of Energy Acosta presented himself as a
problem-solver. He said that he intends to solve the
problems of U.S.-owned electric generator Machala Power and
would study the situation of City Oriente, a small U.S.-owned
petroleum company. He wants to bring more low-cost
electricity generators on-line, find a solution to the
long-festering problems for Guayaquil's electricity company,
and promote the production and use of natural gas. Acosta
criticized the GOE's existing oil production contracts with
private oil companies and said that bilateral investment
treaties are not the solution to Ecuador's investment woes.
However, he was silent on what, if anything, the GOE will do
about falling oil production. End summary.


2. (C) The Ambassador met with Minister of Energy and Mines
Alberto Acosta on February 2. Acosta opened the meeting by
stressing the importance for Ecuador of maintaining good
relations with the United States. He said that this may not
always be easy, but we should maintain relations based on
mutual respect, and that he would always have an open door
for the Ambassador. The Ambassador responded that the United
States has commercial disagreements with our largest trading
partners, such as Canada, and that it is critical to address
these disagreements in their proper channels and not allow
them to affect the broader relationship.

U.S. Energy Companies
--------------


3. (C) Acosta said that the government's relations with U.S.
companies are "complex" and he intends to resolve them "bit
by bit." The Ambassador said that resolving problems with
U.S. companies would allow them to increase their investment
in Ecuador and help address Ecuador's energy needs. She
noted Machala Power's interest in doubling its generating
capacity.


4. (C) Acosta made the following comments on U.S. energy
companies:

Machala Power: He met with Machala Power, understands its
problem, and intends to find a solution since Machala Power
is prepared to boost Ecuador's generating capacity. He said
a complicating factor is that Machala Power has filed for
arbitration, to which the Ambassador replied that Machala
Power would prefer a negotiated solution. (Note: the GOE
has failed to compensate Machala Power for insufficient
payments by electricity distributors.)

City Oriente: He opened with a broad statement that the
current oil production contracts are unfavorable for Ecuador.
The Ambassador noted that City Oriente is a small company
which is relying heavily on loans, which limits its
flexibility. Acosta replied that he would study the matter,
but cautioned that any special treatment for City Oriente
would be carefully scrutinized by the other oil companies.
(Note: The revised hydrocarbons law requires City Oriente to
share 50% of extraordinary revenue with the GOE, which City
Oriente maintains it cannot do and service its debt. The
outgoing administration failed to develop a solution to
City's dilemma.)

Occidental Petroleum: Acosta said that the Oxy case is
"complicated," to which the Ambassador replied that the
matter is not complicated if it is addressed in arbitration.
Acosta repeated the government's position that Ecuadorian law
governs the dispute and that ICSID does not have
jurisdiction. When the Ambassador said that Ecuador should
make its jurisdictional argument before the arbitral panel,
Acosta said that would be a decision for the government's
lawyer, the Solicitor General (Procurador General),to make.
(Note: The acting Solicitor General told the Embassy in late
January that he believes the GOE should defend its position
before the arbitral panel, but was awaiting guidance from the
Correa administration.)

Electrical Sector
--------------


5. (C) Several times in the course of the meeting Acosta
raised the problems of Ecuador's electrical sector (see also
reftels b and c for a discussion of the problems). The basic
problem, Acosta said, is that the sector is under
capitalized, the result of limiting the rates that
electricity distributors can change at levels below the cost
of generating electricity. The other problem has been the
government's failure to invest in the sector. He said that
Ecuador has for long time understood its electricity problems
(he asserted a 1984 analysis of the sector could still be
used today),but has failed to act.


6. (C) Acosta said the best response to the tariff mismatch
is to increase production of inexpensive electricity, hence
his desire to address Machala Power's problem so it could
expand its generating capacity. Acosta said that the
government is already moving forward with a project to
increase reservoir capacity on the same river as Ecuador's
largest hydroelectric dam, Paute, which is currently
underutilized. The project would be funded by the FEISEH
petroleum reserve fund, which is financed by revenue from the
former Oxy fields.


7. (C) Acosta criticized Guayaquil's electricity
distribution company, CATEG, as very inefficient and corrupt.
He said CATEG loses over 30% of the power that it
distributes, compared to the Latin American standard of
10-12%. Acosta said that he is not looking to lay blame, but
wants to find solutions to CATEG's problems. He contrasted
CATEG's performance to that of distributors for Cuenca (8%
loss) and Quito (11% loss).

Petroleum Sector
--------------


8. (C) Moving to the oil sector, Acosta said that the
current oil production contracts are unfair for the state,
and would have to be renegotiated to establish a more
equitable return for the state.


9. (C) Acosta volunteered that his ministry is working on
regulations to allow for the sale of natural gas. Currently
Ecuador's one natural gas field is managed by EDC, the sister
company of Machala Power, and can only sell to Machala Power.
Acosta would like to create a framework so EDC (and
hopefully eventually other producers) could sell to
commercial customers. Acosta also said that Cuenca is
interesting in building a natural gas pipeline to Cuenca from
either the EDC field or a field in northern Peru, which would
reduce its consumption of subsidized diesel and fuel oil.


10. (C) When asked about the status of Ecuador's proposed
crude-for-refined-product swap with Venezuela (reftel a),
Acosta said that the government is also looking at other
options, since the cost of shipping crude and refined
products between Ecuador and Venezuela is high. He said that
the government is exploring refining options in Peru and
Chile while Ecuador constructs a new refinery.

Fuel Subsidies
--------------


11. (C) Acosta acknowledged that the GOE heavily subsidizes
refined petroleum products and that these subsidies "do not
have a future" (note: the 2007 budget estimates fuel
subsidies will total $2.3 billion). He said that a
significant portion of the refined products are smuggled out
of the country. He had met with former Minister of Defense
Larriva shortly before she died to discuss how the military
could help combat smuggling of refined products.


12. (C) The Ambassador asked whether the government is
considering targeted subsidies instead of subsidizing all
fuel. Acosta said that targeted subsidies are possible, but
would be very complicated and the government would need to be
very creative. He added that he is not opposed to all
subsidies, and that some are good and some are bad.

Transparency
--------------


13. (SBU) Acosta said that he wants to bring transparency to
Ecuador's petroleum and mining sector. He said that he had
met with an NGO, Revenue Watch, both before and after he
became minister, and he is planning to sign an agreement with
the NGO. He noted other nations, including Peru, also have
agreements with Revenue Watch.
BITs
--------------


14. (C) As an aside to his discussion of the Oxy case,
Acosta said that the bilateral investment treaty (BIT) with
the United States is not reciprocal, since "parts" do not
apply to Ecuadorian firms operating in the United States.
(Comment: it was not clear what parts Acosta believes are
not reciprocal.) He went on to say that BITs are not the
solution to Ecuador's investment problems; Ecuador has signed
25 BITs, and investment has not increased as a result.


15. (C) Acosta said that investment will go where there are
business opportunities. He noted that Colombia has only two
BITs but attracts more investment than Ecuador. He continued
that Ecuador needs to strengthen its legal framework to
promote investment.

Bio Notes
--------------


16. (SBU) Acosta's family has long been associated with
Ecuador's banking sector. His grandfather was manager of
what is now Ecuador's largest bank, Banco de Pichincha, and
his cousin is currently the bank's vice president. His
father served as Superintendent of Banks. Acosta has stayed
away from the banking sector, and lived 10 years in Germany,
where he obtained a degree in Energy Economics at the
University of Cologne. He also served as a vice-consul in
the Ecuadorian Embassy in Bonn.


17. (SBU) Acosta told the Ambassador that he loves jazz, and
that there is much that he could learn from the United
States. He said he does not know the United States well,
except for New York, where his son studied and now works for
a bank.

Comment
--------------


18. (C) Acosta was open, frank, and friendly throughout the
meeting. Before taking office, he was known for his
left-leaning newspaper columns that were often critical of
U.S. economic policies. In his meeting with the Ambassador,
Acosta largely came across as a pragmatic would-be problem
solver. His frank discussion of Ecuador's electric sector
and acknowledgement of the valuable contribution that private
investors can play in the electric and natural gas sectors
was refreshing. However, a notable shortcoming of Acosta's
problem-solving presentation is that in at least this meeting
he danced around one big economic challenge ) reducing
Ecuador's large subsidy bill ) and did not even mention
another huge challenge ) falling oil production, largely due
to Ecuador's highly corrupt and inefficient state oil company
(septel).


19. (C) Acosta also has some strongly-held views, as seen in
his criticism of oil production contracts, BITs, and the
"neo-liberal/neo-mercantilistic" model. There will be
tension between these views and Acosta's desire to be a
problem-solver. How that tension plays out could determine
whether U.S. energy investors make any progress with their
investment disputes or Ecuador successfully addresses its
energy sector challenges.
JEWELL