US embassy cable - 04QUITO2380

C O N F I D E N T I A L SECTION 01 OF 02 QUITO 002380 
 
SIPDIS 
 
DEPT PLEASE PASS TO USTR BENNETT HARMAN 
 
E.O. 12958: DECL: 08/27/2014 
TAGS: EPET, ETRD, ECON, EC, Oil Sector 
SUBJECT: PROGRESS ON OCCIDENTAL CASE 
 
REF: QUITO 2327 
 
Classified By: CDA Frank Ledahawsky Reason 1.5 (b) and (d) 
 
1. (SBU) Summary. Occidental Petroleum (Oxy) and Embassy 
efforts to tone down the rhetoric and reach an amicable 
resolution with the GOE are starting to pay dividends.  Oxy 
had a productive meeting with the Procurador (Solicitor 
General).  President Gutierrez has selected a commission, 
comprised mostly of rational members, to address the latest 
accusations by the Procurador and Oxy's international 
arbitration with the GOE.  The Procurador said he would not 
link the two issues and has reportedly agreed to say nothing 
further in the press on the Oxy case.  Oxy is pleased with 
the progress that has been made over the last few days.  End 
Summary. 
 
Progress with the Procuraduria 
------------------------------ 
 
2. (SBU) Oxy's President and GM for Ecuador Jerry Ellis met 
with Procurador General Jose Maria Borja on August 24.  Ellis 
described the meeting as cordial and productive.  The 
following day, Econ Counselor met with attorneys from the 
Procuraduria (Solicitor General's Office).  Oxy asserts that 
its transfer of 40% of its Block 15 rights to Canadian Oil 
Company EnCana has not been completed.  The Procuraduria 
cites an October 1, 2000 agreement with City Investing 
Company Ltd. (at that time EnCana's subsidiary operating in 
Ecuador) and a November 1, 2000 "Farmout Agreement" that was 
filed with the US Securities and Exchange Commission (SEC) to 
support its allegation that the transfer was completed in 
2000.  Press reports refer to several SEC filings by Oxy that 
purportedly confirm the transfer. 
 
3. (SBU) The Procurador's representatives told us that it is 
not their desire to have the GOE cancel Oxy's Block 15 
participation contract and take over Oxy's Block 15 assets. 
Still, they asserted, the law could not be ignored.  In press 
statements, the Procurador has said he will not only look at 
Oxy, but will also review the contracts of all oil companies 
operating in Ecuador, starting next with EnCana. 
 
4. (C) On August 25, the Procuraduria officially notified 
Minister of Energy and Mines Eduardo Lopez of the violations, 
stating they were grounds for the termination (caducidad) of 
Oxy's Block 15 contract.  Attorneys for the Procuraduria told 
EconCouns August 25 that the Procuraduria would make no more 
public comments on the issue, now that it is in the hands of 
the MEM.  They also said that the Procurador would not link 
the alleged hydrocarbon law violations with Oxy's $75 million 
value added tax (VAT) international arbitration case, 
currently under appeal at the Queen's Court in London.  The 
Procurador's representatives told us that given Ecuador's 
Director of Internal Revenue Service (SRI) Elsa de Mena's 
public admission that the SRI owed Oxy at least $55 million 
in VAT drawbacks, even if the GOE won the appeal, it would 
make arrangements with Oxy for payment of that amount.  If 
the GOE lost the VAT case appeal, they said the GOE would 
meet its obligation to pay the $75 million in full. 
 
 
Case Generates Lots of Attention 
-------------------------------- 
 
5.  (SBU) The press has widely publicized the case.  Numerous 
articles and electronic media have expressed support for the 
Procurador and some criticize the international arbitration 
decision for allegedly ignoring the cases pending in 
Ecuadorian courts on the same issues.  Members of Congress, 
many of whom are already critical of private investment in 
the oil sector, have been quick to urge the cause against Oxy 
and the Procurador's investigations of other foreign oil 
companies.  In the meeting with Procuraduria staff, EconCouns 
emphasized the importance of reducing the quantity and tone 
of rhetoric on the issue.  In past cases in Ecuador the 
negative rhetoric had gotten out of control and the 
Government had painted itself into a corner.  Procuraduria 
staff acknowledged that this was a danger, but said that 
their boss had issued an order to his press staff that 
morning to stop making statements, and had said that he had 
made his last public pronouncements on the subject, for now. 
 
Oxy's Reaction 
-------------- 
6. (C) Oxy admits that it could have handled the transfer to 
EnCana better (reftel) and that it has violated the 
hydrocarbon law on a number of occasions (providing a list of 
51 possible violations to Econoffs, 17 more than originally 
cited by the Procuraduria and in press reports).  As to the 
other violations of the hydrocarbon law, Oxy notes that it 
has complied with all requests from the MEM and where Oxy has 
violated the law it has paid the statutory fine. 
 
 
7. (C) Ellis has repeatedly told Econoffs that Oxy is willing 
to sit down with the GOE to discuss the alleged hydrocarbon 
law violations and Oxy's VAT arbitration award.  Oxy views 
the August 26 formation of a commission composed of the 
Procurador, Ministers of Economy and Energy, a representative 
from the Corruption Commission, and two well-respected 
private sector representatives, Walter Spurrier and Galo 
Garcia Ferrat, as another positive development.  Oxy 
headquarters representatives will likely visit Quito next 
week to begin discussions. 
 
8. (C) Oxy headquarters lawyers called EconCouns on August 26 
to discuss the case and review the names of new counsel they 
intend to contract to work on this issue.  EconCouns 
recounted the meeting with Procuraduria lawyers, updated them 
on the formation of the commission, and provided background 
information on the lawyers they are considering hiring. 
 
Comment 
------- 
 
9. (C) Post's messages to the GOE about the gravity of the 
Procurador's (over) reaction to the Oxy transfer and other 
violations and the potential ramifications for ATPDEA 
benefits, FTA negotiations and other USG support are sinking 
in with the GOE.  Procuraduria representatives' statement 
that they have no desire to see Oxy's contract cancelled or 
Oxy leave Ecuador, a statement echoed by other members of the 
GOE, appears to be a result of the forceful position we have 
taken.  Oxy's willingness to sit down with the GOE to discuss 
the issues is also encouraging. 
 
10. (C) This latest crisis could be turned into an 
opportunity to not only resolve current issues, but also 
address additional development/foreign investment in the oil 
sector. The MEM announced August 26 the discovery of 4.6 
billion barrels in new reserves in the 
Ishpingo-Tambococha-Tiputini (ITT) fields.  However, there is 
also a risk, albeit small at this point, that the attention 
of the press and the Congress could put added pressure on the 
weak Gutierrez administration, making it more difficult to 
resolve the crisis in a quiet and amicable manner. 
LEDAHAWSKY