Identifier
Created
Classification
Origin
08QUITO983
2008-10-14 20:16:00
CONFIDENTIAL
Embassy Quito
Cable title:  

CANADIAN-US IVANHOE ENERGY SIGNS OIL CONTRACT WITH

Tags:  EPET ENRG EINV ECON EC 
pdf how-to read a cable
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ZNY CCCCC ZZH
O 142016Z OCT 08
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9483
INFO RUEHBO/AMEMBASSY BOGOTA PRIORITY 7781
RUEHCV/AMEMBASSY CARACAS PRIORITY 3217
RUEHLP/AMEMBASSY LA PAZ OCT 1241
RUEHPE/AMEMBASSY LIMA PRIORITY 2842
RUEHOT/AMEMBASSY OTTAWA PRIORITY 0637
RUEHGL/AMCONSUL GUAYAQUIL PRIORITY 3846
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
C O N F I D E N T I A L QUITO 000983 

SIPDIS

DEPT FOR WHA/EPSC FAITH CORNEILLE
TREASURY FOR MEWENS

E.O. 12958: DECL: 10/15/2018
TAGS: EPET ENRG EINV ECON EC
SUBJECT: CANADIAN-US IVANHOE ENERGY SIGNS OIL CONTRACT WITH
GOE

REF: QUITO 2650

Classified By: DCM Andrew Chritton, Reasons 1.4(b) and (d)

C O N F I D E N T I A L QUITO 000983

SIPDIS

DEPT FOR WHA/EPSC FAITH CORNEILLE
TREASURY FOR MEWENS

E.O. 12958: DECL: 10/15/2018
TAGS: EPET ENRG EINV ECON EC
SUBJECT: CANADIAN-US IVANHOE ENERGY SIGNS OIL CONTRACT WITH
GOE

REF: QUITO 2650

Classified By: DCM Andrew Chritton, Reasons 1.4(b) and (d)


1. (U) Summary: Following 11 months of negotiations, on
October 8 Ivanhoe Energy signed a contract with the GOE to
develop a field of super-heavy oil using its proprietary
technology. In a ceremony where he also announced
replacement of the Energy Minister (septel),President Correa
hailed the project as one of the "largest investments ever"
in Ecuador, and emphasized that the investment showed that
Ecuador welcomed foreign investment. Ivanhoe expects to
invest $2-6 billion and hopes to eventually produce 100,000
barrels per day from the field. End Summary.


2. (U) On October 8, Ivanhoe representatives were called to
a last minute ceremony at the Presidential Palace, where
President Correa presided over the signing of the company's
30-year contract with the GOE and also announced Ecuador's
new Energy Minister, Derlis Palacios. Ivanhoe
representatives, Ecuador's Minister of Petroleum and Mines,
the Minister for Strategic Sectors, the President of state
oil company Petroecuador, the Canadian Ambassador, and the
U.S. Deputy Chief of Mission were present. Following the
signing, Correa praised the project and commented on its
importance. After giving a brief summary of the contract, he
welcomed foreign investment and pointed to the project as an
example of how foreign companies can do business with
Ecuador.

Ivanhoe and the Pungarayacu Field
--------------


3. (C) Although Ivanhoe Energy is a Canadian-registered
company, it has significant U.S. investment and largely U.S.
management. It has offices in Bakersfield, California, and
Ivanhoe President and CEO for Latin America is American David
Martin, a former President of Occidental Petroleum. The
small firm claims a proprietary technology that can convert
extra heavy oil (tar sands) into higher quality, light weight
petroleum (reftel). It has been negotiating for close to a
year with the GOE for a services contract to develop a large
oil field that has never been exploited due to the heaviness

of its crude (the Pungarayacu field, located in Napo province
in the Amazon basin). Per the GOE, the field has 320 million
barrels of proven reserves and is expected to produce 100,000
barrels per day (20% of Ecuador's current production).

The Contract
--------------


4. (C) Ivanhoe's service contract will likely be used as a
model for future oil contracts as the GOE works to move all
of its foreign oil contracts from production sharing (where
companies bear price risk) to service contracts (where firms
are paid a fixed fee for their services). The contract is
for 30 years, and is really a hybrid of a production sharing
contract and a service contract. In this contract, the GOE
pays a fixed fee of $37 per barrel to Ivanhoe for its
services. However, if the price of Ecuadorian crude falls
below $37, an economic stabilization clause means Ivanhoe
would share 80% of the loss. Ivanhoe would be able to recoup
its 80% share of losses when oil prices rise again. The
service fee will be adjusted monthly for inflation based on
industry price indices. Provisions for international
arbitration were a difficult issue during negotiations - the
GOE only wanted to allow for local or regional arbitration
and rejected the World Bank's ICSID forum (or any U.S. or
British forums). However, in the end the GOE agreed to the
International Chamber of Commerce in Paris as an arbitral
forum.


5. (U) Now that the contract has been signed, Ivanhoe must
obtain an environmental license, which will likely take
several months, before it can initiate exploration. Ivanhoe
representatives said they will not have a good understanding
of what the field will produce until they conduct seismic
exploration and drill several exploratory wells. Initially
the firm will set up an exploration pilot project for three
years, which is expected to produce 30,000 barrels per day.
Following that, Ivanhoe would move to development and then

full production of the field. The company expects to invest
$100 million in its first year of exploration.

Comment:
--------------


6. (C) Ecuador has a difficult investment climate in the
petroleum sector, a point that Post made repeatedly to
Ivanhoe. However, thus far, the GOE and the Canadian/U.S.
company have been able to work constructively towards
launching what has the potential to be a large, new foreign
investment in Ecuador.


7. (C) Correa rescheduled the signing event so that he could
participate personally. He declared "we welcome foreign
investment" several times during his remarks. He emphasized
that foreign companies "are willing to invest in a
responsible contract in Ecuador," and noted that his
government "is serious and has clear policies." For its
part, Ivanhoe has been careful about cultivating its local
image by developing an Ecuadorian side to its business,
bringing in a local partner, hiring an Ecuadorian as manager
of the project, and considering options to bring in
Ecuadorian investment. It has also announced plans to open a
petroleum center at one of Ecuador's universities so that it
can help train potential employees.
HODGES