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?
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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
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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
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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