ECUADOR SEIZED FRENCH OIL COMPANY'S FIELDS ON THREAT TO HALT

C O N F I D E N T I A L QUITO 000644

SIPDIS

DEPT FOR WHA/EPSC FAITH CORNEILLE

E.O. 12958: DECL 3/07/2019
TAGS: EPET ENRG EINV ECON EC
SUBJECT: ECUADOR SEIZED FRENCH OIL COMPANY'S FIELDS ON THREAT TO HALT
PRODUCTION

REFTEL A: QUITO 173
B: QUITO 13

Classified By: Ambassador Heather Hodges for reasons 1.4 b & d.


1. (C) Summary: Ecuador seized French oil company Perenco's oil
fields after the company threatened to halt output amid a tax dispute
and oil embargo. Perenco's senior executive and spokesman for Latin
America confirmed the assets expropriation, and said that Perenco
would file another case with the arbitration court ICSID. End
summary.


2. (U) On July 16, state-owned oil company Petroecuador took over
Perenco's concessions on Block 7 and 21, which together produce about
25,000 barrels/day (4.5% of Ecuador's total production). According
to Petroecuador spokesman Byron Galarza, "Operations are continuing
normally, with supervision. Galarza told the press that "this
(seizure) will stand until there is a judicial solution."

3. (C) Rodrigo Marquez, Perenco's senior executive and spokesman for
Latin America, confirmed to us the assets expropriation. Marquez
said that Petroecuador seized Perenco's oil fields illegally, and he
thinks that this situation might be irreversible, which would rule
out future investment in Ecuador. Marquez considers it unlikely
Perenco will regain its assets, but he said that Perenco was open to
continuing operations if Ecuador gives it back the concessions.
Marquez told us that Perenco would seek compensation for its assets
and would file another case with the arbitration court ICSID on
illegal expropriation.

EVENTS LEADING UP TO SEIZURE
--------------

4.(U) On July 15, in a press interview with El Comercio newspaper,
Marquez had said that Perenco would temporarily stop its operations
in Ecuador as a result of the dispute with the GOE concerning the oil
embargo for not paying windfall tax. According to Marquez, the
company planned to stop operations starting July 16, as a measure to
warn the GOE. Marquez said that the production would stop temporarily
because they were keeping their staff.


5. (U) Also on July 15, Minister of Petroleum and Mines Germanico
Pinto warned that if Perenco decided to stop production, there would
be legal action against the company. Pinto said that stopping
production was illegal, and had not been authorized by the National
Direction of Hydrocarbons.


6. (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 B). Burlington refused to give up its
arbitration claim unless it received compensation for money lost
under the windfall revenue tax law. Perenco's U.S. partner Burlington
has approximately 40% ownership; Burlington is now owned by
ConocoPhillips.


7. (U) Since March 2009, the GOE has confiscated 2.5 million barrels
of crude from Perenco for not paying the windfall tax of $445 million
and attempted to auction the crude. The auction was a failure
because there were no buyers (ref A). As a consequence
Perenco/Burlington reactivated its claim and asked the ICSID tribunal
to consider "precautionary measures" to prevent the GOE from
embargoing the consortium's oil. ICSID requested the GOE to refrain
from taking any action in the case until a formal hearing was
scheduled. However, Minister Pinto said that the ICSID requests were
not mandatory but merely recommendations.

COMMENT
--------------


8. (C) It appears that President Correa took over Perenco's fields
as a result of Ecuador's fear of falling petroleum production.
Perenco's production halt would have been a significant decline in
oil output. Expropriation with compensation could prove expensive at
a moment when the GOE is short on liquidity.

HODGES