CITY ORIENTE CONTINUES TO NEGOTIATE; DEPARTURE THE

C O N F I D E N T I A L QUITO 000226

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/07/2018
TAGS: EPET EINV ECON EC
SUBJECT: CITY ORIENTE CONTINUES TO NEGOTIATE; DEPARTURE THE
MOST LIKELY OPTION

REF: A. QUITO 55

B. 07 QUITO 2665

C. 07 QUITO 2277

Classified By: Classified by Charge Jefferson Brown. Reason: 1.4 b an
d d.


1. (C) Summary. U.S. oil company City Oriente continues to
negotiate with the Government of Ecuador on restructuring its
contract following the imposition of a windfall income tax.
The most likely option is that City Oriente will terminate
its contract and receive compensation from the GOE. Renewing
the contract is not appealing to City Oriente in the absence
of strong international arbitration provisions. End summary.

Departure the Most Likely Option
--------------


2. (C) City Oriente, a small U.S.-owned petroleum company,
continues to negotiate with the Government of Ecuador over
restructuring or terminating its oil production contract.
According to manager Kyle Ford, City Oriente has based its
negotiations around the three possibilities put forward by
President Correa in one of his Saturday radio addresses: pay
the 99 percent windfall income tax (reftel c),migrate to a

services contract, or terminate the contract with
compensation from the government.


3. (C) Ford said that a production sharing contract is not
viable with a 99 percent windfall tax, so City Oriente has
not focused on that option. He said that Minister of Mines
and Petroleum Galo Chiriboga has said that if a company signs
a new production sharing contract, the reference price would
reset to current prices, and the contract would be subject to
the 70 percent windfall tax contained in the new tax law
(reftel a),rather than the 99 percent tax which is based on
oil prices prevailing at the time the initial contract was
signed. However, Ford said, City Oriente has not focused on
that option since implementing regulations for the 70 percent
windfall tax have not been issued.


4. (C) Ford said that City Oriente has presented a proposal
to move to a services contract. However, Ford said that
given the GOE's refusal to accept the World Bank's ICSID
arbitration body in new contracts, City Oriente is reluctant
to sign a new contract. He said his company has looked at
other arbitration bodies that might be acceptable to the GOE,
but does not find them as attractive as ICSID. He continued
that City Oriente has lost the loan it had to finance its
project as a result of the windfall income tax. If City
Oriente were to stay it would have to invest its own capital,
which it is reluctant to do without strong arbitration
provisions.


5. (C) Since the first two options do not look attractive,
City Oriente believes that the most likely outcome is that it
will agree to be bought out. Ford said that his company has
presented an offer whereby City Oriente would be compensated
for its investment. The GOE has presented a counter offer,
but the two sides are far apart. One of the major problems,
Ford said, is that the GOE wants to deduct what City Oriente
owes under the windfall tax law. City Oriente's position is
that it has to recover its investment, and adding the
windfall tax to the equation only raises the overall cost of
buying out its contract. An additional complication is that
the government negotiating group proposed that City Oriente
be repaid out of future production from its block. City
Oriente wants prompt, full compensation, but the GOE
negotiators are not authorized to discuss cash repayment.

Is March 8 a "Deadline?"
--------------


6. (C) On January 26, Correa had stated in his weekly radio
address that companies would have 45 days to renegotiate
their contacts (which would notionally end March 8). Ford
said that City Oriente told Chiriboga that they view that
date as an artificial deadline, that they have been
negotiating for almost two years, and would continue to
negotiate after March 8.

Negotiations Continue...
--------------


7. (C) Ford reported that the City Oriente and the GOE
negotiating team met again on March 6. Ford said that City
Oriente had feared that the GOE negotiating team might take a
tough position, given the pending deadline. Instead, the GOE

team continued to negotiate, and the two side exchanged
ideas, including discussing how to address the windfall
income tax "arrears." The negotiating team said that it
would need to consult with Minister Chiriboga, who has been
traveling, and would be back in touch next week (after the
March 8 "deadline").

...as Does International Arbitration...
--------------


8. (C) City Oriente is also continuing with its
international arbitration case. Ford said that Ecuador
lodged a request that the arbitration panel overturn its
provisional measure ordering Ecuador not to take any
additional steps against City Oriente, such as cancelling its
contract, until the panel is able to rule on the merits of
the case. Ford said that the panel will issue its decision
on the request sometime after March 6, and that he expect it
will uphold the provisional measure. He said that the
government wants City Oriente to withdraw its arbitration
case, which City Oriente would do, but only as part of a
comprehensive settlement.

...and a Criminal Investigation...
--------------


9. (C) Kyle reported that City Oriente continues to
cooperate with a criminal investigation initiated by Attorney
General's office following complaints filed by congressional
deputy and the Solicitor General (reftel b). The Attorney
General's office has to conclude its investigation by March

17. City Oriente believes that the charges to not have any
merit. However, it reported that the official investigating
the case asked questions that went beyond the specific
charges and inquired about unrelated contractual matters.
City Oriente is concerned that the investigator might file a
report addressing tangential contractual issues that could
undermine its ongoing contract negotiations.


10. (C) At City Oriente's request, EconCouns met with
Attorney General Washington Pesantez to note that we
understand the need for his office to investigate a
complaint, but at the same time we want to highlight that the
investigation involves issues that are also being addressed
in contract negotiations and international arbitration.
Pesantez replied that he would proceed carefully in the
investigation.

...and City Oriente's Regular Operations
--------------


11. (C) Ford commented that City Oriente has been allowed to
operate normally, producing and exporting petroleum in
compliance with the terms of its contract, even as it juggles
the contractual negotiations and legal challenges.

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


12. (C) It would be unfortunate if another U.S. petroleum
company leaves Ecuador because of the difficult investment
climate. City Oriente is the last U.S. petroleum production
operating in Ecuador (although two other U.S. companies are
minority partners in other consortiums.) However, if City
Oriente does leave, better that it do so under mutually
agreed terms with the GOE. City Oriente believes that
Minister Chiriboga is negotiating in good faith and wants to
reach an agreement, in part because he wants to maintain good
ties with the United States. It remains to be seen if the
GOE and City Oriente can agree to terms or whether the GOE
will find the financing to pay City Oriente up front to
terminate the contract.
BROWN