CONOCO WILL FILE FOR INTERNATIONAL ARBITRATION

C O N F I D E N T I A L QUITO 000349 SIPDIS SIPDIS E.O. 12958: DECL: 04/18/2018 TAGS: EINV EPET ECON EC SUBJECT: CONOCO WILL FILE FOR INTERNATIONAL ARBITRATION REF: A. QUITO 314 ¶B. 07 QUITO 2277 ¶C. 07 QUITO 1091 ¶D. QUITO 293 Classified By: Classified by DCM Jefferson Brown. Reason: 1.4 b and d. ¶1. (C) Summary. ConocoPhillips plans to initiate arbitration against Ecuador under the terms of its oil production and exploration contracts. For two production blocks that it shares with the French company Perenco, it appears the underlying grounds for arbitration are the windfall income tax (which they argue arbitrarily changed the contractual terms) and the government's failure to negotiate a satisfactory restructuring of the contracts. Local communities have blocked access to two exploration blocks for five years, and Conoco plans to include those blocks in the arbitration, presumably arguing that the government did not address the blockade. End summary. Arbitration -------------- ¶2. (C) On April 17, Roy Lyons, ConocoPhillips' President of Latin America, told the Ambassador that Conoco has decided to file for arbitration against Ecuador. He said that Conoco would file, perhaps as early as the week of April 21, with the World Bank's International Centre for Settlement of Investment Disputes (ICSID),as allowed under its contact (it will not be invoking the Bilateral Investment Treaty). He did not provide details on the legal grounds for the arbitration, simply saying that Conoco will claim expropriation. ¶3. (C) When asked if its consortium partner Perenco is also going to file for arbitration, Lyon said that he could not speak for Perenco but added that the two companies have similar views. ¶4. (C) Lyon said that Conoco had already decided to initiate arbitration before President Correa announced on April 12 that he was suspending contract renegotiations with the foreign oil companies (septel). He did say, though, that Correa's announcement reinforced Conoco's view that arbitration is the appropriate way to go. Meeting with Minister of Petroleum -------------- ¶5. (C) Lyons said that on April 16 he informed Minister of Petroleum Galo Chiriboga of Conoco's intent to file for arbitration, and that Chiriboga did not have any comments about the pending arbitration. Lyons added that he stressed to Chiriboga that Conoco would be open to a negotiated settlement, such as compensation for its investment, or would be interested in selling its assets to a third party. Chiriboga reportedly said that he would be willing to approve a sale to a reputable company. ¶6. (C) Lyons said that he told Chiriboga that Conoco does not intend to make a public announcement when it files for arbitration, but noted that once the arbitration is registered by ICSID it will become public information. Background on Conoco's Operation -------------- ¶7. (C) Lyons explained that Conoco acquired four blocks in Ecuador when it purchased Burlington Resources in 2006 (reftel c). In two of the blocks it holds a minority share in a consortium operated by the French company Perenco. The other two blocks are not in operation and have been in force majeure for five years since the local communities blocked access to the sites. The arbitration will address all four blocks. ¶8. (C) Lyons said that Conoco has been trying to sell its holdings in Ecuador. He said that a U.S. company was seriously interested in purchasing its shares of the Perenco blocks, had made a down payment, and had just finished its final due diligence visit the day before Correa announced that he was raising the windfall income tax from 50% to 99% (reftel b). The would-be buyer backed out. ¶9. (C) Lyons reported that the GOE had terminated negotiations to restructure the contract for one of the Perenco blocks with the two sides relatively far apart. He allowed that there had been some discussion to lower the windfall income tax and extend the terms of the contract, but said no agreement had been reached. He said that discussions for the other block had hardly begun. He said that the consortium had been paying the 99% windfall tax, and that one block was barely profitable while the other was losing money. He stressed, however, that it is not economical to invest in either block, and that the consortium has frozen its 2008 investment program. Comment -------------- ¶10. (C) Shortly after the GOE settled the Oxy VAT arbitration case (reftel a),Ecuador is facing yet more international arbitration cases. In addition to Conoco, Murphy Petroleum, a U.S. company that holds a share in the Repsol consortium, has also filed for arbitration (reftel d). Jewell