ECUADOR'S ITT FIELDS UNDER CONSIDERATION ONCE AGAIN

UNCLAS QUITO 000906 SIPDIS SENSITIVE SIPDIS DEPT FOR WHA/EPSC FAITH CORNEILLE TREASURY FOR SGOOCH E.O. 12958: N/A TAGS: ECON EPET EINV EC SUBJECT: ECUADOR'S ITT FIELDS UNDER CONSIDERATION ONCE AGAIN REF A: Quito 394 REF B: 06 Quito 2386 REF C: 06 Quito 1920 ¶1. (SBU) Summary: Development of Ecuador's heavy crude ITT fields has been under discussion for over 10 years. Situated in the environmentally sensitive Yasuni National Park, the three fields contain an estimated billion barrels of reserves and could potentially produce 190,000 barrels of crude oil per day, with a project price tag of between 3 and 4 billion dollars. If realized, the project could boost Ecuador's petroleum production (now falling due to lack of investment, Ref A),the government's revenues, and Ecuador's balance of trade. However, environmental and legal concerns, the substantial investment costs required for a project of this magnitude, and unclear and seemingly divergent administration views on how to develop the fields could delay the project. The administration is clearly looking to move forward with ITT, but its message on how to do so is confused. Nevertheless, the fact that the project is moving at all could signal a change in policy for Ecuador's stagnant petroleum sector. End Summary. ¶2. (SBU) The size of the Ishpingo-Tambococha-Tiputini (ITT) fields means its development is of interest to oil majors, but to date the GOE has not presented a specific invitation for bids. In late 2006, Government of Ecuador (GOE) representatives in the Palacio administration told us they planned to put the project out for international bid before the end of the year (Ref B). In the end the GOE decided it was an issue "for the next government to decide," and took no action. In the early days of the Correa administration, development seemed unlikely under new Energy Minister Alberto Acosta, who favored a moratorium on new petroleum projects in the southern Oriente region and did not appear concerned about Ecuador's falling petroleum production. However, talk of possible ITT development surfaced again recently, spurred by Petroecuador President Carlos Pareja's efforts to coordinate a development proposal with a number of state oil companies. Controversy Over GOE Options -------------- ¶3. (SBU) Tension between Acosta and Pareja over possible development of ITT has been widely reported in the press. Acosta announced a proposal that the international environmental NGO community compensate the GOE $700 million for not developing the fields, to avoid the environmental damage such a large project could cause. Pareja had meanwhile been working with foreign state oil companies Petrobras (Brazil),SIPC-Sinopec (China),and ENAP (Chile) on the possibility of a joint consortium proposal to develop the fields (these firms had all previously expressed interest in the project). Acosta asserted to the press that only fully state-owned companies should be considered for ITT development and that it remained to be seen "whether Petrobras is considered a state company" (note: Petrobras is a "hybrid" company with significant private ownership). He later retracted his statement. ¶4. (SBU) Amidst the controversy, President Correa intervened to clarify the GOE position. Correa announced he was faced with a "dilemma of conscience" regarding the project. His first choice would be to leave the oil in the ground and receive compensation not to develop the fields (although he cut Acosta's compensation figure in half). Failing that, he would want Petroecuador to develop ITT using its own resources (industry experts, including from within Petroecuador, believe this is unrealistic given Petroecuador's poor financial situation (Ref C)). Development by a consortium of state oil companies would be a third option, followed by putting the project out for international bid. ¶5. (SBU) Petroecuador's Planning Director noted he believes that the consortium option is the favored "realistic" GOE option, but did not rule out a possible international tender. He commented that state companies don't always finalize contracts, and implied that their investment plans are influenced by their country's political objectives, which can easily change. Pareja has pushed the consortium idea, signing a preliminary MOU with the companies involved, but most recently announced that due to "unusual interest" the ITT project would be put out for international bid in May. With so many divergent public announcements on the issue, it is unclear how, or even whether, the ITT project will be awarded in the end. Petroecuador's Consortium MOU -------------- ¶6. (SBU) On April 4, Pareja accompanied President Correa on his trip to Brazil and signed a non-binding memorandum of understanding (MOU) between Petroecuador and Petrobras, ENAP, and SIPC-Sinopec on possible future development of the ITT fields. The consortium reportedly has a period of 90 days starting from March 26 to complete a technical evaluation of the fields and submit a joint proposal for development. The proposal would include a plan for confirming reserves, and a preliminary development plan and early production plan. It would also include a proposal, if feasible, for building a plant to upgrade the oil produced and an electricity plant that would use the upgrade plant's residues as fuel. Petrobras has told us they would be interested in leading the potential project, based on their experience in Ecuador and the fact that their Block 31 (not currently operational due to environmental issues) adjoins the ITT fields. ¶7. (SBU) A team of experts from the consortium are working together to analyze Petroecuador's existing data on the fields. A 2005 analysis by French engineers serves as the basis for the work, but lacks the hard technical data needed to develop a substantive proposal. GOE requirements include strict compliance with environmental laws, and a minimum 50 percent share of revenues (based on reforms to Ecuador's hydrocarbons law in 2006). Referring to the consortium, Petroecuador's Planning Director remarked that Petroecuador will review proposals in June or July and then make a decision on the project. He predicts that it will take 12-18 months to be ready for production, and an additional 12-18 months for the plants to be operational. He noted that Petroecuador could decide to start petroleum production before a potential plant-building phase. Will Venezuela Join In? -------------- ¶8. (SBU) Another key player that might be involved in ITT is Venezuela state oil company PDVSA. Pareja had not included PDVSA in his initial plans for ITT (some local analysts believe it is because he does not consider PDVSA to be a viable player). However, Acosta reportedly supports PDVSA for the project, and when Pareja accompanied Acosta to a regional energy summit in Venezuela on April 16 and 17, he extended an offer to PDVSA to join the existing consortium or present a separate bid. Press from the summit reported that PDVSA Vice President Luis Vierma said PDVSA "is negotiating, and there is a large possibility" of participation. Whether PDVSA would join the consortium or choose to submit a separate proposal on its own remains to be seen (Petroecuador's Planning Director commented that PDVSA might be interested in submitting a joint proposal with Turkish Petroleum). Petrobras representatives noted that PDVSA involvement might increase the political viability of the project within Ecuador. Other Countries Interested -------------- ¶9. (SBU) Other countries reportedly interested in the project include state companies from Japan, Malaysia, India, Argentina, Colombia, and Peru, and private French company Total. Post is not aware of any U.S. companies that are interested in investing in ITT. Environmental and Legal Issues -------------- ¶10. (SBU) In the environment arena, a number of issues will likely challenge ITT development. First, the project is located in an environmentally sensitive national park that could contain uncontacted indigenous tribes. The park would be disturbed not only by the wells, but by the transportation links needed to build the project and the pipelines needed to get the oil out. Environmental and indigenous-rights NGOs will likely protest the development project. Petroleum projects must also receive approval of environmental impact studies from the Ministry of Environment before any activities can take place. This approval could be contentious if environmental activists and indigenous community members actively protest. Another consideration is that half of the Ishpingo field in the south part of the ITT block is partially located in an area the Environment Minister declared as "untouchable" in 2006, meaning that that part of the field will likely not be available for development. ¶11. (SBU) There are also differing legal opinions regarding whether an alliance or consortium of companies would be permitted to develop the fields, and whether private or only state companies could participate. Some experts also point to an existing Ecuadorian law which requires heavy crude fields to be developed through integrated projects that include both upstream and downstream operations. They believe that only a development project that includes industrialization would be permitted under Ecuadorian law. In the complex legal framework surrounding the petroleum sector, concerns of a legal challenge to a development project are very real. COMMENT: -------------- ¶12. (SBU) It is notable that the GOE is focusing on this project at the beginning of the administration, when there is potential for real progress. Based on initial GOE comments that oil contracts would be renegotiated and that there could be a moratorium on exploration in certain areas of the country, we believed the petroleum sector in Ecuador would stagnate. However, there appears to be an effort, at least by the state oil company, to move forward, and Pareja appears (for now) to have the political clout to bring the Energy Ministry along with him. In fact, although messages to the press on how to develop ITT have been confused, they indicate that Acosta's idea of receiving compensation to "leave the oil in the ground" no longer appears to be in contention. ¶13. (SBU) The GOE is groping for a solution on how to deal with ITT, but how it will play out is very unclear. The power struggle between Acosta and Pareja may resurface, should PDVSA (who Acosta reportedly supports) submit its own proposal for development. Although Pareja reportedly favors the consortium option, it is not necessarily the best way to develop the fields. State companies may not have the most advanced technologies and environmental expertise, and foregoing a competitive bid process could reduce transparency and competition for best price and proposals. END COMMENT. JEWELL