MACHALA POWER MAY BE CLOSE TO AGREEMENT WITH GOE

C O N F I D E N T I A L QUITO 000966 SIPDIS TREASURY FOR MEWENS DEPT FOR WHA/EPSC FAITH CORNEILLE USTR FOR BENNETT HARMAN E.O. 12958: DECL: 10/07/2018 TAGS: EINV ENRG ECON EC SUBJECT: MACHALA POWER MAY BE CLOSE TO AGREEMENT WITH GOE ON INVESTMENT DISPUTE REF: A. QUITO 525 ¶B. QUITO 672 ¶C. QUITO 259 ¶D. QUITO 681 Classified By: Ambassador Heather M. Hodges for Reasons 1.4(b) and (d) ¶1. (C) Summary: The GOE has agreed with U.S.-owned electricity generator and natural gas producer Machala Power/EDC that it owes Machala Power $59.8 million in unpaid electricity tariffs. The GOE has asked Machala Power to drop its international arbitration case upon payment. However, a number of outstanding issues remain before the company will agree to drop its arbitration and invest additional money in natural gas production in Ecuador. End summary. Agreement to Pay Arrears -------------- ¶2. (C) On October 1, the Government of Ecuador reported through the media that it had reached an initial agreement with U.S.-owned electricity company Machala Power, which filed for international arbitration because of payment arrears and other charges (ref A). The GOE offered to pay Machala $59.8 million to settle the arrears if Machala Power would drop its arbitration claim. Machala Power temporarily suspended its arbitration case, but is seeking a more comprehensive arrangement with the GOE before it drops arbitration. Comprehensive Solution Would Bring More Investment -------------- -------------- ¶3. (C) Machala Power generates electricity from natural gas produced by its sister company EDC. Both are owned by Houston-based Noble Energy. Noble Energy is looking to shift its business in Ecuador, focusing more on gas production (to be sold to state oil company Petroecuador) rather than electricity generation. Petroecuador could use the gas for producing electricity in state owned generators, or sell it to private generators. Noble is prepared to invest $42 million in 2009 to expand natural gas production, and is ready to add over $100 million more in 2012. ¶4. (C) In seeking a comprehensive, forward-looking solution to its investment problems, Machala Power/EDC wants to resolve four other issues in addition to clearing the arrears. One is a guarantee that it will not suffer arrears for future delivery of electricity, since electricity tariff controls leave distributors perpetually short of cash to pay generators. A second is an agreed price to sell its natural gas, given Noble's plans to focus on gas production. Third, EDC needs GOE approval of its plan to increase gas production. Finally, Machala Power needs to be released from its investment commitment to expand its own generating capacity. ¶5. (C) According to Machala Power General Manager John Tomich, the key stumbling block now appears to be agreeing on a price for the natural gas. He complained that the GOE was trying to lowball him on prices, bringing in Bolivian advisors who were more "ideologues" than experts, who contested his cost projections. Correa Sees as Win-win -------------- ¶6. (C) In July, President Correa told the former Ambassador that he saw resolving the Machala Power dispute as a win-win for Ecuador and the company, and that he had instructed his team to resolve the matter quickly (ref B). Tomich notes that if his company increases natural gas production, several companies could convert high-cost diesel thermal electricity generators (which use GOE-subsidized fuel) to lower cost and cleaner natural gas generators. He estimates that converting one generator would save Ecuador roughly $500 million in imported diesel. ¶7. (C) Tomich said that his headquarters is not in favor of dropping arbitration with so many outstanding issues, but he thinks he is close to convincing them to agree. Tomich believes the positive economics of the proposal and the need for his company's expertise and investment will convince Correa to agree on the remaining issues. Comment -------------- ¶8. (C) The overall investment climate in Ecuador is cloudy, and a number of big petroleum and mining projects are on hold until the GOE provides greater clarity in those sectors. At the same time, the Correa Administration has worked to address investment disputes with U.S. companies. In two instances, it made payments to companies that had left Ecuador or left immediately thereafter (Occidental Petroleum (ref C) and City Oriente (ref D)). In working with Machala Power, the company and the GOE see the payment as a first step before addressing other investment hurdles that would allow the company to increase its investment in Ecuador. HODGES