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
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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?
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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
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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