PETROBRAS THREATENED WITH CONTRACT CANCELLATION

C O N F I D E N T I A L QUITO 000164 SIPDIS SIPDIS TREASURY FOR MEWENS DEPT FOR WHA/EPSC FAITH CORNEILLE E.O. 12958: DECL: 02/22/2018 TAGS: EPET EINV ENRG ECON PREL EC SUBJECT: PETROBRAS THREATENED WITH CONTRACT CANCELLATION REF: A. QUITO 2665 ¶B. 07 QUITO 2491 Classified By: DCM Jefferson Brown, Reasons 1.4 (B and D). ¶1. (C) Summary: Ecuador's Solicitor General recommended that Petrobras's contract be cancelled for transferring shares of its holding to a Japanese company without government authorization (very similar charges as those that led to the cancellation of Occidental's contract in 2006). The Brazilian Embassy maintains that the transfer was authorized by the previous government. End Summary. "Caducity" Recommendation -------------- ¶2. (U) On February 19, Procurador General (Solicitor General) Xavier Garaicoa recommended that the Minister of Petroleum initiate a caducity process to cancel Petrobras, contract for Block 18 (Petrobras also has Block 31),since it had allegedly entered into an unauthorized agreement with Teikoku, a Japanese petroleum company, in January 2005. (Occidental Petroleum's contract was cancelled in 2006 on similar grounds, for purportedly transferring shares to a Canadian company without authorization.) The following day, sources at the Ministry of Petroleum were quoted as saying that Petroecuador, rather than the Procurador, is responsible for recommending caducity. Petroleum Minister Galo Chiriboga has not publicly commented on this case. Was the Transfer Approved by the Palacio Government? -------------- -------------- ¶3. (C) Per Brazilian Embassy Economic Counselor Roberto Goidanich, the agreement between Petrobras and Teikoku was reviewed and approved by the previous government. Petrobras announced on January 24, 2005 its intent to enter into an agreement to transfer 40 percent of its obligations to Teikoku. It informed the GOE the next day of its intentions. The letter of intent included a clause that stated the agreement would not be finalized until all appropriate Ecuadorian authorizations were obtained. According to Goidanich, on January 11, 2007 (in the waning days of the Palacio government),Petrobras and Teikoku signed ministerial-approved agreements, following a complete review of the case. In June 2007, Alberto Acosta, the first Minister of Energy and Mines in the Correa government (and currently the President of the Constituent Assembly) claimed there were irregularities in the transfer of obligations between companies. Goidanich maintains that there is no new evidence that the contract was unauthorized and Petrobras has not received any communication from the GOE. Comment -------------- ¶4. (C) This case has strong parallels to Oxy's, which led to a cancellation of its contract and seizure of its assets. In his meeting with Codel Engel, Correa touched upon the Petrobras and Oxy cases and said that these moves should not be read as anti-investment signals, but as long overdue efforts to level the playing field by consistent and objective enforcement of the rule of law. If a company's actions are not in compliance with the law and contract, then caducity should be invoked. However, it is not clear in this case that the Procurador's recommendation will lead to caducity. In November, the then-President of Petroecuador recommended caducity for the City Oriente contract (reftel b),but his recommendation was quietly shelved and the GOE is instead negotiating with City Oriente (reftel a). Canceling Petrobras's contact would not only roil Ecuador's relations with Brazil, but would also force Petroecuador to take on another field when it is already hard pressed to manage the former Oxy fields as well as its own mature fields. JEWELL