US embassy cable - 04QUITO2418

C O N F I D E N T I A L SECTION 01 OF 02 QUITO 002418 
 
SIPDIS 
 
DEPT PASS TO USTR BENNETT HARMAN 
 
E.O. 12958: DECL: 09/02/2014 
TAGS: EPET, ETRD, ECON, EC, Oil Sector 
SUBJECT: OXY BRINGS IN THE BIG GUNS - EMBASSY KEEPS FIRING 
AWAY 
 
REF: A. QUITO 2327 
     B. QUITO 2380 
 
Classified By: Ambassador Kristie A. Kenney, Reasons 1.5 (b), (d) 
 
1.  (U) Summary.  Occidental Petroleum (Oxy) brought a team 
of lawyers and executives to Ecuador to discuss the GOE's 
claims that Oxy failed to comply with the hydrocarbon law in 
the transfer of 40% share of its Block 15 interest to 
Canadian oil company EnCana.  Oxy is confident that it is on 
solid legal ground in the matter, but remains willing to 
discuss this and other issues (i.e., its $75 million VAT 
award) with the GOE.  Oxy prefers to keep the matter as low 
profile as possible, for the time being.  GOE officials 
expressed confidence that they were right that Oxy failed to 
get GOE authorization for the transfer, but that is likely 
due more to their lack of understanding of the issue than the 
strength of their legal argument.  The Ambassador met with 
the Oxy representatives explaining the efforts that she and 
the Embassy team have made on Oxy's behalf and offered Oxy 
advice on how to proceed with the GOE.  Oxy representatives 
were meeting with the Procurador, Minister of Government and 
perhaps other GOE officials in the coming days.  This is yet 
another instance in which one person can do great harm to a 
US company and Ecuador's best interests.  End Summary. 
 
Oxy Reps Come to Town - With Strong Legal Arguments 
--------------------------------------------- ------ 
 
2.  (C) President and General Manager of Occidental Petroleum 
(Oxy) Exploration and Production Company John Morgan is in 
Quito to discuss the GOE allegations of an unauthorized 
transfer of 40% of Oxy's share of the Block 15 oil field to 
Canadian oil company EnCana (reftels).  He and his team of 
seven lawyers and executives met with the Ambassador on 
September 1.  Oxy officials cited Ecuadorian law, regulations 
and constitutional provisions and the transfer contract 
language supporting its position that it was operating within 
Ecuadorian law in the transfer to EnCana.  The Ambassador 
explained that in contacts with the GOE it appeared that 
Procurador Jose Maria Borja was becoming quite nervous about 
the case.  She added that it is unclear whether Borja was 
acting on his own or at the behest of someone else, but the 
former seemed more likely.  Borja's efforts may be an attempt 
to soften the blow of the expected Queen's Court ruling in 
Oxy's favor on the GOE appeal of the $75 million 
international arbitration award against the GOE.  All in the 
meeting agreed that Borja was a loose cannon and not to be 
trusted.  The Ambassador explained that she had spoken with 
President Gutierrez about the case and the day before has 
also raised it with Minister of Economy and Finance Mauricio 
Yepez.  According to GOE sources, Gutierrez instructed the 
Minister of Energy in a subsequent meeting with his cabinet 
that under no circumstances should Oxy's Block 15 contract be 
declared void (caducidad). 
 
3.  (SBU) In conversations with the Ambassador and econoffs, 
several GOE officials said they were certain that Oxy had 
made the transfer without authorization and they expected Oxy 
to acknowledge its alleged transgression and compensate the 
GOE.  GOE officials base their arguments heavily on U.S. SEC 
filings by Oxy and other public documents that imply that the 
sale to EnCana was completed some time ago.  Incredibly, none 
of our GOE interlocutors seemed aware of a GOE regulation 
controlling the transfer between Oxy and EnCana that stated 
the procedures for the transfer and the amount of 
compensation to be paid to the GOE.  They were also 
apparently unaware of the transfer contract provisions 
(though the GOE has copies of the contract) stating the 
transfer would not be complete until authorization was 
provided by the GOE.  Nonetheless, none of the officials we 
have spoken to have said they wanted the contract terminated. 
 
 
4.  (C) Morgan said Oxy wanted to keep a low profile in the 
case.  Confident of Oxy's legal position, he wanted to avoid 
the sensationalism of the Ecuadorian press to give the GOE an 
opportunity to "save face" in a quiet manner.  He said Oxy is 
willing to discuss with the GOE how it has complied with the 
hydrocarbon law and would be willing to discuss how they 
could work out the payment of the $75 million arbitration 
award.  On the advice of the Ambassador, Oxy sent two lawyers 
to talk with Borja, instead of sending higher-ranking Oxy 
officials to the meeting.  Oxy officials plan to meet with 
Minister of Government Raul Baca on September 2 and will seek 
meetings with Minister of Trade Ivonne Baki and Minister of 
Economy Yepez when they are in the USA (separately) next 
week.  The Ambassador said she would be raising the Oxy case 
with President Gutierrez again, upon his return from the 
Panamanian presidential inauguration.  Oxy and Embassy 
officials will continue to quietly press the case with GOE 
officials and keep one another informed of developments in 
the matter. 
 
Comment 
------- 
 
5.  (C) This latest commercial dispute highlights a 
continuing problem in Ecuador.  The dearth of any 
institutional or transparent processes leaves room for 
individuals (e.g., Procurador Borja) or GOE entities (GOE 
regulators) to act with whim and caprice without fear of 
being held accountable, under the banner of national 
sovereignty so long as they can argue it is good for Ecuador. 
 These officials only fear pursuit by the Contraloria 
(Inspector General equivalent) and the Civil Corruption 
Commission, both subject to considerable political influence, 
or the vengeance of some future government administration. 
A free trade agreement can help build the institutions 
Ecuador desperately needs, but political will and a 
fundamental change of attitude will be crucial to the real 
improvements in the rule of law and respect for contracts 
Ecuador desperately needs.  We are driving those points home 
to the GOE and explaining that such capricious behavior has 
its costs, in lack of investment and trade benefits. 
KENNEY