PETROECUADOR PRESIDENT RESIGNS OVER DECLINING

C O N F I D E N T I A L QUITO 000464

SIPDIS

TREASURY FOR MEWENS
DEPT FOR WHA/EPSC FAITH CORNEILLE

E.O. 12958: DECL: 05/29/2018
TAGS: EPET ECON EINV DOD EC
SUBJECT: PETROECUADOR PRESIDENT RESIGNS OVER DECLINING
PRODUCTION; ANOTHER NAVY ADMIRAL TAKES OVER

REF: A. 07 QUITO 2575

B. 06 QUITO 1920

Classified By: DCM Jeff Brown, Reasons 1.4 (b) and (d).


1. (U) Summary: Following harsh words from President Correa
about state oil company Petroecuador's inability to meet
petroleum production projections, its President Fernando
Zurita resigned on May 20. He was replaced by another Navy
Admiral, Luis Jaramillo, who will attempt to increase
production in spite of Petroecuador's difficulties in
spending its investment budget. End Summary.


2. (U) On May 19, Correa attended a Petroecuador board
meeting at which he expressed displeasure over reduced
petroleum production numbers and unrealized planned
investment.


3. (U) On May 20, Zurita resigned, saying that
Petroecuador's "executive priorities are not satisfying the
President's expectations." Zurita, a Navy Admiral, was
appointed by Correa to replace the previous Petroecuador
president in November 2007. He was appointed under a
presidential mandate that allows the Navy to manage
Petroecuador in an attempt to root out corruption (ref A).
On May 21, another Navy Admiral, Luis Jaramillo, was named to
replace Zurita. Jaramillo previously headed up Ecuador's
maritime authority and was only recently promoted to the rank
of admiral. Before that he was head of Ecuador's naval
academy, and served in various other positions within the
Navy. Although he has spent 28 years in the Navy, he does
not have petroleum experience (a fact that the Petroecuador
unions say should disqualify him from becoming president).


Unmet Production and Investment Goals
--------------


4. (U) Prior to its meeting with Correa, Petroecuador had
lowered its projected 2008 production for Petroproduccion
from 185,000 barrels per day (bpd) to 172,000 bpd. The new
projections, if met, would imply only a 1% increase over
2007, when production averaged 170,000 bpd. Current
production is approximately 167,000 bpd. In addition, only
12% of a planned annual investment budget of $2 billion has
been spent to date (and 10% more has been contracted).
(Note: These production and investment numbers exclude
Occidental Petroleum's former Block 15, where production
recovered in 2008 after dropping for much of 2007.)


5. (U) Zurita claimed natural declines in mature wells were
underestimated for 2008 and should have been measured at 16%
instead of 8%, and production of other wells had been
overestimated. In addition, he noted that Petroecuador has
not yet been able to obtain the drilling rigs it had planned
to use.


6. (SBU) Petroecuador has faced major difficulties in
implementing its investment plans. Petroleum industry
representatives have said that drilling rigs have been
leaving the country. They claim rigs are scarce worldwide.
Only one of two rigs promised by PDVSA of Venezuela has
arrived in Ecuador to begin drilling. One petroleum services
company noted that firms, even though they are hungry for
work, are reluctant to bid on contracts with Petroecuador
because the contracts are poorly written and subject to
frequent changes. In addition, the state oil company faces
opposition from its powerful unions, which benefit from the
current corrupt system (ref B) and are said to be blocking
efforts to make management changes and award contracts in a
transparent manner.

COMMENT:
--------------


7. (C) With an increased investment budget, Petroecuador has
come close to stabilizing production in its mature fields (in
itself an accomplishment since Petroecuador production had
been falling for years) but has not yet increased production.
Petroecuador's inability to fully spend its investment
budget implies the GOE's plan to reform Petroecuador and
improve production (by having Navy leadership make management
changes and eliminate corruption) has not been fully

realized. Instead, Petroecuador suffers from institutional
weaknesses that inhibit it from implementing the government's
ambitious infrastructure plans - problems that plague other
parts of the government as well - that cannot be easily fixed
by a few changes at the top and dictates from the Presidency.



8. (C) Post has had prior contact with Jaramillo, who
appears capable and accessible but lacks experience in the
petroleum sector. Navy contacts suggest that naval officials
do not want the Petroecuador presidency job but the Navy is
required to fill it by Presidential decree. With this
scenario, and a lack of petroleum background, it seems
unlikely that the new appointment will improve Petroecuador's
situation.
Jewell