GOE PRESSURES FRENCH, SPANISH OIL COMPANIES

C O N F I D E N T I A L QUITO 000173 SIPDIS DEPT FOR WHA/EPSC FAITH CORNEILLE E.O. 12958: DECL 3/07/2019 TAGS: EPET ENRG EINV ECON EC SUBJECT: GOE PRESSURES FRENCH, SPANISH OIL COMPANIES REFTEL A: QUITO 13 B: 08 QUITO 1058 Classified By: DCM Andrew Chritton, Reasons 1.4 (b&d) ¶1. (C) Summary: In another move to pressure foreign oil companies to sign new contracts, on February 21 the GOE told French Perenco and Spanish Repsol that they had 72 hours to pay monies owed under Ecuador's windfall petroleum revenue sharing law or their oil shipments could be withheld by the GOE in compensation. Repsol reached agreement with the GOE to pay its outstanding balance over a period of time; in return, it will receive a six-year extension on its concession. To make this happen, it will buy out its U.S. minority partner Murphy. Perenco has not reached agreement with the GOE, constrained in part by different perspectives between Perenco and its U.S. minority partner Burlington on how to proceed. Perenco/Burlington has asked its arbitral panel to take precautionary measures to prevent Ecuador from embargoing its oil. End Summary. ¶2. (U) President Correa announced February 21 that Repsol and Perenco had 72 hours to pay monies owed under the windfall petroleum revenue sharing law, or face "coactiva" (legal proceedings that could result in the freezing of assets). If no agreement were reached under the process, the government could embargo the company's oil for payments due. The GOE claimed that Repsol and Perenco, the last remaining foreign oil companies without agreement on new contracts, had already been given more than enough time to negotiate new contracts and must pay the $445 million and $327 million (respectively) that they owed. Company Operations -------------- ¶3. (U) Both companies operate oil fields in Ecuador under consortiums which include U.S. minority partners. Repsol operates Block 16-Tivacuno in the Amazon region, which produces approximately 58,000 barrels of oil per day, as 35% owner of a consortium that also includes Taiwanese Overseas Petroleum and Investment Corporation (31%),U.S. Murphy Oil (20%),and Chinese Sinochem (14%). French Perenco operates Blocks 7 and 21, which together produce about 25,000 barrels/day, with minority U.S. partner Burlington (approximately 40% ownership; Burlington is now owned by ConocoPhilips). Both European companies and their minority U.S. partners have international arbitration claims pending regarding Ecuador's windfall revenue sharing law. �A; Repsol Reaches Agreement with the GOE...Again -------------- ¶4. (C) In response to the announcement, Repsol quickly reached agreement with the GOE on a new contract and a schedule to pay the back taxes. The new agreement will be signed on March 12. Spanish Foreign Minister Miguel Moratinos visited Ecuador at that time, although his role in the negotiations was not clear. Facilitating these discussions was the fact that Repsol had already reached agreement with the GOE to sign a new transitory production sharing contract in November 2008 (ref B). At that time, U.S. minority partner Murphy did not agree with the terms of the accord and the agreement was delayed until Repsol could buy out Murphy's share of the consortium. ¶5. (C) The terms of the contract that Repsol will sign on March 12 are almost the same as those in the November agreement. Repsol will make an $88 million cash payment towards the tax arrears upon signing, with additional payments over the next 5 years. The accord will extend Repsol's concession, currently set to expire in 2012, for six more years. The windfall revenue tax will be reduced from 99% to 70% and the base price for calculating the windfall will increase from $25.5/barrel to $42.5/barrel. The agreement will be valid for one year, during which time Repsol must negotiate a new contract based on a service contract model that has yet to be defined. (Note: agreements signed with other foreign operators follow this same approach -- a one-year transitional agreement while the parties discuss a new services contract model.) ¶6. (C) Repsol's local representative noted that the company would only buy out Murphy's share if the agreement with the GOE goes through, and that the sale would take place the day the agreement was signed. He noted that Repsol was "not happy" about buying out Murphy and believed the price was too high, but that there was no other choice. He said that his company was "optimistic but cautious". U.S. minority partner Murphy Oil continues to be "fed up" with E Ecuador and government demands, according to U.S. Manager Ignacio Herrera. He characterized the offer from Repsol as a compromise, but was glad that Murphy would be getting out of Ecuador. The Ecuadorian operation is less than 10% of Murphy's production and reserves. Perenco Faces "Coactiva" -------------- ¶7. (U) In response to the February announcement, Perenco, which had suspended its arbitration claim temporarily while oil negotiations were taking place, reactivated its claim and asked its ICSID tribunal to consider "precautionary measures" to prevent the GOE from embargoing the consortium's oil or terminating its contract until the arbitration process was complete. According to Ecuadorian press on March 7, during the previous week ICSID requested that the GOE refrain from taking any action in the case until a formal hearing on the issue took place March 19. ¶8. (C) Perenco had tried to negotiate a new contract with the GOE in late 2008 but could not agree on a common approach with minority partner Burlington (ref A). Burlington refused to give up its arbitration claim unless it received compensation for money lost under the windfall revenue tax law (a claim the GOE was not willing to consider). Burlington no longer has any representatives in Ecuador, and its U.S.-based officials could not be reached for comment on the most recent developments. Comment -------------- ¶9. (C) Correa is continuing his practice of threatening oil companies in high profile media rants to pressure them to agree to contracts that he considers acceptable. One reason this issue has flared up again is that the GOE desperately wants to be paid the windfall income tax arrears because of a sharp reduction in petroleum income due to low oil prices. The European companies appear willing to continue to work with the GOE, but both their U.S. partners appear fed-up with the GOE tactics. In Repsol's case, they are winning an important concession from the GOE -- a six-year concession extension -- in return for paying the outstanding taxes. Repsol was willing to buy out its U.S. partner to make the deal happen. It is not clear to us that Perenco is willing or able to buy out its U.S. partner. HODGES