US COMPANY INVESTMENT DISPUTE WITH PARAGUAY

C O N F I D E N T I A L ASUNCION 000380

SIPDIS

STATE FOR WHA/BSC MDRUCKER, BFRIEDMAN AND MDASCHBACH,
COMMERCE FOR DOC/ITA LMARKOWITZ

E.O. 12958: DECL: 07/26/2027
TAGS: ENRG PREL KGHG KSUM SENV PA
SUBJECT: US COMPANY INVESTMENT DISPUTE WITH PARAGUAY

Classified By: DCM Michael J. Fitzpatrick; reasons 1.4 (b) and (d).


1. (C) SUMMARY: Texas-based Crescent Global Oil disputes with
the Ministry of Public Works and Communications (MOPC) the
starting date for an oil exploration contract. While
ambiguities in the contract were clarified by MOPC Resolution
583 in Crescent's favor under President Duarte's
administration, President Lugo's MOPC derogated Resolution
583 and issued May 19 Resolution 617 that terminates the
concession in December 2009 (as opposed to May 2012). There
are political, ideological, and special interests that
Crescent believes influenced the MOPC change in position.
After Crescent officially asked for Post's commercial and
advocacy support May 19, the Embassy has been facilitating
dialogue between the parties. However, if the dispute is not
resolved, Crescent will sue the government of Paraguay
(likely both here and in the U.S.) for the stated value of
the probable oil reserves under dispute, possibly upwards of
two billion dollars. The MOPC has the means to resolve this
dispute but political will appears to be waning. If this
lawsuit comes to fruition, it will send a strong public
message about the downside to investing in Paraguay. END
SUMMARY.

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ABOUT THE DISPUTE - BACKGROUND
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2. (SBU) Texas based companies Petro-Vitory and Crescent
Global Oil (Crescent),through their wholly-owned Paraguayan
subsidiaries Pirity SA and Crescent Global Oil - Paraguay,
hold several oil exploration concessions in Paraguay. Pirity
holds the southern Chaco concession (border with Argentina);
Crescent has invested over USD 2 million prospecting the
concession and is planning to invest up to USD 8.3 million in
the first stage of its exploration.


3. (SBU) A concessionaire has four years for exploration
under Paraguay's hydrocarbons law. In Crescent's case, there
are two possible interpretations defining the start date for
exploration: (a) the date the lot was selected and
adjudicated by the MOPC (December 30, 2005) or (b) the date
the law approving the exploration contract was approved by
Congress (May 13, 2008). Under option (a) Crescent's rights
to the concession end December 30, 2009, while under option
(b) the rights terminate on May 13, 2013. Two weeks after
Congress approved the exploration contract, Crescent paid the
cannon fees (80,000 USD or 10 cents per hectare for 800,000
hectares) to the MOPC, securing the rights to explore and
exploit its concession per the contractual terms. Because the
contract approved by Congress was ambiguous, Crescent asked
for, and the MOPC issued, Resolution 583 in May 2008,
clarifying that the exploration rights began on May 13, 2008.



4. (C) Crescent moved from the prospecting to the exploration
phase when Congress approved the exploration contract.
Crescent submitted in November 2008 its four-year investment
plan for exploration to the MOPC (including a Schlumberger
report from its prospecting phase that shows probable
reserves of 300 million barrels). Crescent's CEO Richard
Gonzalez and several U.S. investors met in November 2008 with
President Lugo and presented the company's investment plan.
From January 2009 to April 2009, Crescent made several
requests for exploration equipment permits to the MOPC.

5.(SBU) On May 19, 2009, the MOPC issued Resolution 617 which
invalidated Resolution 583, and set Crescent's end date for
exploration as December 30, 2009. The MOPC notified Crescent
of Resolution 617's existence on May 19. (NOTE: Prior to the
May 19 notification, Crescent did not receive any official
communication from the MOPC regarding its requests for
permits despite repeated attempts to get a response. END
NOTE.) Crescent contacted the Embassy May 19, and formally
asked for commercial assistance and investment advocacy
support. The same day, Crescent submitted to the MOPC a
motion to reconsider Resolution 617.

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PERCEPTIONS OF UNFAIR AND BIASED DEALINGS
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6. (C) There are political, ideological, and special
interests that Crescent believes influenced the MOPC change
in position. According to Crescent, MOPC Director of
Hydrocarbons Emilio Boungermini is the technocrat mastermind
behind Resolution 617. Crescent CEO Gonzalez argues that
Boungermini is working a political/ideological agenda
directed by Ausberto Rodriguez to revoke Crescent's
concession in Alto Parana and give it to Lan Oil, a company
from the Ecuadorian group Tripetrol. (NOTE: Ausberto
Rodriguez was proposed and then withdrawn as a candidate for
Paraguay's embassy in Uruguay. He is a close friend of former
Foreign Minister Hamed Franco, and the father of Education
Vice-Minister Karina Rodriguez, a leading member of the
socialist party P-MAS. END NOTE.) Gonzalez feels targeted by
Boungermini's political agenda, and does not see the MOPC as
a viable partner.


7. (C) According to Crescent, Rodriguez organized two
meetings with Lan Oil representatives and President Lugo.
Lugo first met September 3, 2008 with Edgar Gonzalez and
Ausberto Rodriguez, representing Lan Oil, to discuss and
analyze the possibility of oil exploration in Paraguay. The
second meeting was February 2009, when Paraguay's Controller
Enrique Garcia, Boungermini, and Lan Oil's Edgar Gonzalez and
Ausberto Rodriguez met with Lugo to supposedly discuss the
legal and administrative processes for the concession in Alto
Parana.


8. (C) In a lunch Crescent CEO Gonzalez had in April 2009
with Boungermini, Boungermini told Gonzalez that Crescent
should get out of Alto Parana or "face the consequences",
asserting that the government wanted Lan Oil to have the Alto
Parana concession. Gonzalez is convinced that Boungermini
promulgated Resolution 617 as retaliation for Crescent's
failure to give up the Alto Parana concession. Gonzalez
argues that Crescent has the greatest potential to find oil
in Paraguay and this has increased the motivation of special
interest groups to get Crescent out.

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ABOUT OUR ADVOCACY
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9. (C) Ambassador Ayalde called MOPC Minister Alegre May 19
to share our concerns about the apparent lack of objectivity
and due process in Crescent's case. Following the call,
Crescent representatives and Econoff met May 20 with Minister
Alegre and his team. In the meeting, Director of Legal
Affairs Baez Infante and Director Boungermini defended
Resolution 617, arguing that Resolution 583 was
unconstitutional because it modified a law, and the
performance period started the date the lot was adjudicated.
Crescent, in turn, argued that Resolution 583 clarified the
performance period. (NOTE: The MOPC has the authority to
issue resolutions to clarify contractual terms. END NOTE.)
Minister Alegre repeatedly mentioned that the MOPC wants to
help and promote private investment, not create obstacles.
Gonzalez repeated to the Minister what Boungermini had said
about Lan Oil, including what he threatened would happen if
Crescent did not abandon the Alto Parana concession. The
Minister reacted with surprise, and said the MOPC would take
an objective look at Crescent's motion to reconsider.


10. (C) As agreed, Minister Alegre and the same MOPC team met
again May 22 with Crescent and Econoff to go over Crescent's
motion to reconsider. The MOPC team, however, admitted they
had not read Crescent's motion, and continued to argue in
favor of Resolution 617. Minister Alegre again emphasized his
interest in resolving the dispute, and suggested that the
matter could be resolved with a Congressional modification of
the exploration contract -- Alegre said he would personally
take the issue to Congress to ensure its speedy approval.
Crescent argued that a congressional option is not realistic,
considering that it took over three years for Congress to
approve the exploration contract. The MOPC team agreed to
meet with Crescent lawyers to discuss the motion to
reconsider.


11. (C) At the Ambassador's request, Minister Alegre met with
Ambassador Ayalde on Saturday May 23 about the serious
implications of Crescent's investment dispute, and tried to
determine how involved he was in the case. During a very
frank two-hour meeting Minister Alegre confessed he did not
realize the negative impact the resolution would have when he
signed it. He was visibly concerned with the implications
this would have not only on this operation but on Paraguay's
international image. He admitted he had delegated this part
of his portfolio to Director of Hydrocarbons Boungermini.
Alegre said he inherited a cesspool of corruption regarding
public works contracts and had focused his attention on this,
as well as the political demands of being an active member of
the Liberal Party supporting the government alliance. He
relied heavily on Boungermini and had been convinced that
Resolution 617 was needed to better align the process for the
future. He offered Crescent a different interlocutor (new
MOPC Vice Minister of Energy German Domingo); asked to meet
with Crescent himself to hear from them directly as to the
reasons they thought there was a political agenda behind all
this; and offered a meeting between the Embassy and the
Ministry's lawyers to walk through their reasons behind the
issuance of Resolution 617. He was clear that he wanted to
find a solution to the impasse.


12. (C) Crescent's lawyers tried to meet with MOPC Director
of Legal Affairs Infante May 25 to go over the motion to
reconsider. Infante, however, was "busy" and instead they met
Ruben Ocampos, Minister Alegre's closest personal advisor. As
reported by Crescent, the meeting was a productive review of
the motion to reconsider. Minister Alegre stopped-by while
they were meeting, and Ocampos suggested that Minister Alegre
send the case to an external law firm for a legal opinion.
Minister Alegre concurred. (NOTE: From this point forward,
Ocampos has been the main MOPC interlocutor for Crescent's
case. END NOTE.) Econoff meet twice with Ocampos (May 26 and
May 28) and once with Infante and Boungermini (May 25) to
stress the importance of being objective in evaluating
Crescent's motion to reconsider. Econoff also met June 1 and
June 8 with Ocampos to encourage dialogue with the company,
and to follow up on Crescent's meeting with Minister Alegre,
per Minister Alegre's conversation with Ambassador Ayalde.


13. (C) Ambassador Ayalde also underscored Crescent's
concerns in a June 8 meeting with Finance Minister Borda in
the larger context of U.S. investments in Paraguay. Along
with ongoing regulatory difficulties impacting Cargill's
investments (septel),the Ambassador discussed the Crescent
case in detail. Minister Borda expressed his unconditional
support for objectivity and fair dealing, arguing that
Paraguay needs to attract investment to grow and can not
afford to lose credibility. Borda expressed his frustration
with middle ranks in the civil service that for political or
ideological reasons can initiate bureaucratic actions that
become virtually unstoppable by the time they reach a
Minister for action. (NOTE: Post is becoming increasingly
aware of this kind of bureaucratic "mafia" working to
undermine leadership in various ministries. END NOTE.) Borda
quickly internalized the domestic and international
implications of a Crescent law suit, and said he would talk
to Minister Alegre. On June 10, Ambassador Ayalde called
Alegre to thank him in advance for seeing Crescent CEO
Gonzalez and alerted him to the conversation with Minister
Borda. Alegre confirmed the meeting with Crescent and
indicated that he works well with Borda as part of a team on
a common agenda.


14. (C) Minister Alegre agreed to meet with Crescent CEO
Gonzalez June 12. Although the meeting was confirmed,
Minister Alegre did not show up, and delegated the meeting to
Ocampos. (NOTE: During the meeting, Minister Alegre quickly
walked by but did not even greet the participants. He was
caught and seemed surprised and embarrassed as he quickly
walked away. END NOTE.) Ocampos reaffirmed the MOPC's
interest in promoting investment and reaching a solution. He
said the MOPC is now waiting for input from its external
legal advisor, and agreed to a technical meeting between the
parties before issuing an official response to Crescent's
motion to reconsider. Gonzalez detailed the perception
issues, arguing that the company has significant financial
interests tied to the concession, and asking the MOPC for
collaboration as a partner.

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WORKING PERMITS - A POSSIBLE SIGNAL
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15. (C) Crescent has close to USD one million in equipment
waiting in Paraguay's customs pending permits from the MOPC.
Crescent first requested the permits in January; it asked for
the permits a third time June 9. Econoff met with Ocampos
June 17 to follow up on Crescent's permit requests. Ocampos
received a copy of the permit applications and said that he
will personally see to it, mentioning that he had no
knowledge of the requests.


16. (C) Crescent CEO Gonzalez argues that MOPC delays in
approving the permits is consistent with the perception of
unfair dealings, and stated that a positive signal from the
MOPC would be to approve the permits expeditiously to avoid
further losses. Gonzalez, however, remains skeptical about
MOPC's willingness to work as a partner, and will wait and
see how the MOPC responds. (NOTE: Post concurs with Gonzalez
about the signals the MOPC sends by issuing the permits -- a
simple process authorized under the current contract
regardless of which end date one believes to be valid. The
manner in which the MOPC resolves the permits issue will
provide clues about the MOPC's intention to work as a partner
with Crescent. END NOTE.)


17. COMMENT: If the dispute is not resolved in the near
future, Crescent says it will take legal action against the
government of Paraguay (likely both in Paraguay and the U.S.)
in what could be a two billion dollar plus lawsuit (NOTE:
Punitive damages alone could reach USD 2.2 billion; 300
million oil barrels in probable reserves times the current
price per barrel of around USD 70. END NOTE.) Crescent
maintains that legal action is its last recourse, but is
ready, if necessary, to move forward with litigation and
public relations campaign to press its case. Although the
MOPC maintains that wants to work with Crescent, its record
tells a different story. For the time being, Crescent will
wait for two signals: (a) the meeting with the MOPC before
the MOPC issues its official response to Crescent's motion to
reconsider, and (b) MOPC's actions regarding the equipment
permits. The MOPC has the capacity to resolve this dispute,
but it appears that political will is waning. If this lawsuit
comes to fruition, it will send a strong public message about
the downside to investing in Paraguay. END COMMENT.

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AYALDE