GOE TALKS OF TERMINATING FRENCH, ITALIAN OIL CONTRACTS

C O N F I D E N T I A L QUITO 000013 SIPDIS DEPT FOR WHA/EPSC FAITH CORNEILLE E.O. 12958: DECL 1/14/2019 TAGS: EPET ENRG EINV ECON EC SUBJECT: GOE TALKS OF TERMINATING FRENCH, ITALIAN OIL CONTRACTS REFTEL A: 08 QUITO 1058 B: 08 QUITO 996 Classified By: DCM Andrew Chritton, Reasons 1.4 (b&d) ¶1. (C) Summary: Ecuador's Petroleum Minister announced January 8 that the GOE would terminate oil contracts with two European oil companies, Perenco (French) and AGIP (Italian),in order to comply with an OPEC-mandated production cut. Minister Palacios justified terminating the contracts because AGIP's service contract was no longer beneficial for the state and because Perenco could not reach agreement with its minority partner Burlington (U.S.) on a new oil contract. Industry experts think the announcement could be yet another heavy-handed pressure tactic by the GOE. It is not clear if the GEO even intends to comply with OPEC-mandated cuts. End Summary. ¶2. (U) On January 8, Minister of Petroleum and Mines Derlis Palacios announced that Italian oil company AGIP's and French oil company Perenco's contracts would be terminated "in a friendly way." Palacios commented that AGIP's service contract cost the government too much (with low oil prices, the government must reportedly pay more than it receives),so the GOE wanted to terminate its contract. With Perenco, he noted that since the company could not reach agreement with its partner Burlington, which did not want to sign a new contract, the GOE had decided to terminate Perenco's contract as well. ¶3. (SBU) AGIP operates Block 10, which produces 24,000 barrels/day of crude oil. Until the recent signing of Ivanhoe Energy's contract, AGIP was the only petroleum company in Ecuador with a services contract. (Note: under a services contract, the government pays the company a fee to cover production costs, which currently exceeds the value of the oil. When oil prices were high, AGIP's services contract had been highly attractive for the government and it had been pressuring companies with production sharing contracts to switch to services contracts.) ¶4. (C) To comply with a 40,000 barrel/day OPEC-mandated production cut, the GOE recently announced that AGIP would absorb part of the cut since its contract was not beneficial for the state. AGIP had brought a negotiating team to Ecuador at the end of the year, but was reportedly unprepared for the January 8 announcement. ¶5. (C) Perenco operates two oil production blocks with minority U.S. partner Burlington (now owned by Conoco-Philips),Blocks 7 and 21, which together produce about 25,000 barrels/day. Burlington/Conoco had been in the process of trying to sell its assets in Ecuador and subsequently filed for international arbitration over Ecuador's windfall petroleum revenue tax in April 2008. Perenco appeared to have been willing to negotiate a new contract with the GOE, but had not been able to reach agreement because Burlington had not wanted to give up its arbitration claim. TERMINATION ANNOUNCEMENT ANOTHER PRESSURE TACTIC? -------------- -------------- ¶6. (C) The head of Ecuador's hydrocarbon association, Rene Ortiz, believed the announcement was a GOE tactic to put pressure on the companies to reach agreement in negotiating new oil contracts. According to Ortiz, neither AGIP nor Perenco wanted to leave Ecuador. Perenco had been stuck, he claimed, because Burlington had been in total disagreement with the negotiation process. He believed the announcement gave Perenco the opportunity to push Burlington on the issue. Following the announcement, Perenco wrote a letter to the Minister indicating that it was not ready to terminate its contract, and that the company was seeking dialogue to see if there was a way to reach agreement. AGIP made its arguments verbally to the Minister, Ortiz said, arguing against terminating its contract for legal, economic and technical reasons. ¶7. (C) Federico Cruz of Spanish oil company Repsol agreed that the move was a pressure tactic by the GOE. He claimed that AGIP had never had problems with its contract or with the government until now. He thought AGIP would be able to reach agreement on a new contract with the GOE, but that Perenco's problem with Burlington could be insurmountable. Terminating the contracts "in a friendly way," Cruz believed, meant that the GOE would ask the companies for proposals to buy out their contracts, and would make "reasonable" offers based on those proposals. Regarding AGIP, the Italian Commercial Attache was very circumspect and said that "nothing was clear yet." BURLINGTON UNLIKELY TO REACH AGREEMENT WITH GOE -------------- -- ¶8. (C) A Burlington representative agreed that the announcement was likely made to pressure the companies. He said that the company was wide open to any option, including selling its shares to Perenco. However, he said that in order to sell, the GOE would demand Burlington drop its arbitration claim, which it would not do unless it was compensated for money lost under the hydrocarbons windfall revenue tax. He was highly skeptical that the GOE would consider paying for this. In the meantime, Burlington's relations with Perenco and with the GOE were becoming more difficult, he said. COMMENT -------------- ¶9. (C) Based on history, this appears to be more strong-arm negotiating tactics by the Correa government. On October 31, 2008, Palacios made a surprise announcement that Spanish Repsol's contract would be terminated because it had not concluded contract negotiations quickly enough, (ref A),but then reached agreement with the company (like Perenco, Repsol has a U.S. partner that grew exasperated with the GOE tactics; Repsol is in the process of buying out its U.S. partner). The GOE also threatened Brazilian Petrobras with expulsion in early October but later reached agreement (ref B). HODGES