ODEBRECHT AND PETROBRAS - ECUADOR MOVES AGAINST

C O N F I D E N T I A L QUITO 000996

SIPDIS

DEPT FOR WHA/EPSC FAITH CORNEILLE

E.O. 12958: DECL: 10/22/2018
TAGS: EPET ENRG PREL EINV ECON EC BR
SUBJECT: ODEBRECHT AND PETROBRAS - ECUADOR MOVES AGAINST
BRAZILIAN COMPANIES

REF: A. 07 QUITO 1678

B. QUITO 345

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


1. (C) Summary: President Correa raised the rhetoric level
against two big Brazilian companies, and went further with
the construction firm Odebrecht, cancelling its projects in
Ecuador and its employees' visas. Correa also pressed
Petrobras to quickly renegotiate its contract or face
expulsion; on Oct. 18 he announced that Petrobras had agreed
to a short-term transitional contract. In response to the
Odebrecht expulsion, Brazil cancelled a planned ministerial
visit, but in a TV interview Ecuadorian Foreign Minister
Salvador attempted to separate the two business-related
events from the broader Ecuador-Brazil relationship.
Odebrecht's standing in Ecuador has been tainted by
allegations of corruption and shoddy construction, while the
heavy-handed pressure for Petrobras to renegotiate its
contract is comparable to that on other foreign oil
companies. End Summary.

Odebrecht Forced to Leave Ecuador
--------------


2. (C) On September 23, President Correa issued an emergency
decree ordering the military to take over the San Francisco
hydroelectric plant and four other Odebrecht projects (the
Baba and Toachi Pilaton hydroelectric plants, an airport in
the town of Tena, and an irrigation system in Manabi
province). The order initially stemmed from faulty
construction of the San Francisco plant built by Odebrecht
for the GOE. The GOE and Odebrecht had been in discussions
on repairing the plant and reached an agreement on September
19, but the agreement fell apart. In the following weeks,
Odebrecht had reportedly agreed to all of the GOE's demands
regarding the plant. However, in early October Correa
announced that Odebrecht would have to leave the country, due
to "irregularities" in the projects (referring to
corruption). Another issue was loans from Brazil's national
development bank BNDES to Odebrecht for the construction
projects. The GOE has said Odebrecht was responsible for the
loans, although the loans have GOE state guarantees.


3. (C) On October 9, Correa issued another presidential
decree revoking the visas of executives from Odebrecht and
its partner in the San Francisco project, the Brazilian state
utility company Furnas-Centrais Electricas. The executives
were given 48 hours to leave the country. The decree
directed GOE partners in Odebrecht projects to take legal
steps to terminate their contracts, and ordered an
investigation into the BNDES loan for the San Francisco
project. GOE officials have said that the projects will be
taken over by local contractors. (Comment: It appears that
most of the local contractors do not have the capacity to
manage large projects.)

Allegations of Corruption
--------------


4. (C) Alfredo Vera, head of Ecuador's anti-corruption
secretariat, raised questions about the pricing and financing
of the Odebrecht contracts. Although we have no insights
into the San Francisco project, Post has heard credible
allegations of corruption involving Odebrecht's irrigation
project in Manabi from a former Minister of Finance who
refused to sign the project documents because of his concerns
about corruption. Post also heard concerns from a Central
Bank official about unfavorable terms in the BNDES loan that
supported the irrigation project. Both of these officials
approached us separately to report on developments that took
place in 2006, the final year of the Palacio Administration.


The Petrobras Situation
--------------


5. (C) On several occasions in 2007 and 2008, Petrobras has
been threatened with "caducity" (cancellation of its
contract) for contract irregularities (refs A and B).
Petrobras contacts and some petroleum industry contacts have

claimed the threats were intended to put pressure on the
company to reach agreement with the GOE on a new oil
contract. In early October 2008, the GOE threatened
Petrobras with expulsion if the company did not agree to
finalize quickly negotiations for a new oil contract.


6. (C) On October 17, the GOE and Petrobras quietly reached
agreement on a transitory one-year production sharing
contract. During this transition period the company must
negotiate a services contract. Petrobras contact Patricio
Vergara reported that the GOE has agreed to drop the caducity
threat. According to Vergara, one of the major obstacles
towards reaching a new agreement was that Petrobras strongly
resisted the GOE demand that the government receive 70
percent of windfall revenue, since Petrobras's current
agreement already has a 50 percent windfall revenue sharing
mechanism. Vergara did not provide any details on the final
arrangement, but implied that the two sides agreed to split
the difference.

Relations with Brazil
--------------


7. (C) The Correa Administration has tried to distinguish
between its relations with Brazil and its actions toward the
two companies. Foreign Minister Salvador commented in a
television interview October 16 that Ecuador would "advance
positively" with Brazil, and noted that the Odebrecht case
had been decided and the Petrobras case was being resolved in
a manner that would be "absolutely positive" for bilateral
relations. In Correa's October 18 radio address, he
emphasized that the Odebrecht case was an issue between
Ecuador and a private company that did not comply with its
contract, not an issue between states. He added that he was
sure Brazilian President Lula understood his position. Lula,
however, canceled an October 15 visit by the Brazilian
Transportation Minister on the subject of the Manta-Manaus
transportation link.

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


8. (C) Two Brazilian firms have undergone unpleasant
experiences brought on by Correa's practice of employing
intemperate rhetoric (and, in some cases, actions) against
those that have displeased him. However, we believe these
statements and actions were brought on by what the companies
had done, rather than any sense of underlying problems with
Brazil. While we do not have the full story behind Correa's
ire with Odebrecht, we suspect that corruption and poor
construction by the company may largely explain his actions.
In the case of Petrobras, it appears that he was frustrated
with Petrobras's refusal to improve the government's share of
windfall oil income and he therefore used threats of
expelling Petrobras to improve his negotiating position.


9. (C) Regardless of the merits of the GOE's claims
regarding the Brazilian companies, these were fundamentally
contractual disputes, although one may have been colored by
malfeasance. Rather than deal with them as such, Correa
instead addressed them through dramatic actions and threats,
gestures that will continue to undermine investor confidence
in Ecuador and that have complicated broader relations with
Brazil.
HODGES