US embassy cable - 04QUITO2462

C O N F I D E N T I A L SECTION 01 OF 03 QUITO 002462 
 
SIPDIS 
 
STATE PASS TO USTR BENNETT HARMAN 
 
E.O. 12958: DECL: 09/10/2014 
TAGS: EPET, ETRD, ECON, EC, Oil Sector 
SUBJECT: OXY: GOE TAKES A SERIOUS WRONG TURN 
 
REF: A. QUITO 2418 
 
     B. QUITO 2380 
     C. QUITO 2327 
 
Classified By: Ambassador Kristie A. Kenney Reason 1.4 (b), (d) 
 
1. (U) See action request in paragraph 12. 
 
2. (C) Summary.  The GOE is proceeding with the contract 
nullification process (caducidad) against Occidental 
Petroleum (Oxy), potentially triggering the nationalization 
of Oxy's assets in Ecuador.  Presidential Legal Advisor 
Carlos Larrea acknowledged that the GOE action would amount 
to an expropriation, expressly prohibited by the Ecuadorian 
Constitution.  Still, he said President Gutierrez was too 
weak to negotiate a resolution with Oxy.  The GOE has grossly 
underestimated the strong negative reaction from the USG and 
the foreign investor community should the GOE follow through 
with the nullification.  We have spoken with Oxy's GM and are 
educating GOE officials about the severity of its 
miscalculation.  These efforts appear to bearing fruit as 
Gutierrez has apparently ordered Economy and Finance Minister 
Yepez to meet with Oxy on September 10 to explain that the 
Larrea position is not the GOE's official position.  We urge 
State, USTR and Commerce officials to send a similar message 
to Ecuador's Ambassador to the United States and other GOE 
officials.  End Summary. 
 
 
GOE to Pursue Contract Nullification/Nationalization 
--------------------------------------------- ------- 
 
4. (C) In a September 8 meeting with econoffs, Presidential 
Legal Advisor Carlos Larrea said the GOE would go forward 
with the nullification of Oxy's Block 15 contract (reftels), 
essentially nationalizing Oxy's Block 15 assets.  Econ 
Counselor explained to Larrea the serious nature of such 
action, comparing it to the expropriations of the 1970s.  He 
told Larrea that it could cost Ecuador its ATPDEA trade 
benefits and a free trade agreement with the United States. 
Larrea said he was aware of those risks.  He felt Oxy would 
be able to overturn the expropriation in local courts as the 
Ecuadorian Constitution prohibited expropriations, but said 
President Gutierrez was too weak politically to resolve the 
case through negotiation.  He suggested that after the 
administrative nullification, judicial action would be the 
only remedy left to Oxy. 
 
5. (U) Later that day, Minister of Energy and Mines (MEM) 
Eduardo Lopez announced in a press conference that he would 
seek the nullification of the Oxy contract.  The actual 
nullification and takeover of Oxy's Block 15 assets could 
occur within the next 30-70 days. 
 
 
Embassy Action 
-------------- 
 
6. (C) Ambassador met with Oxy Ecuador President and GM Jerry 
Ellis on September 9, who said that Oxy had not received the 
official notification of intent to nullify from the MEM.  He 
added that if the MEM declared nullification of the contract, 
Oxy would not seek relief in any Ecuadorian legal process, 
but seek a remedy through the Bilateral Investment Treaty 
(BIT) and/or the U.S. courts.  Ellis feared what could happen 
to Oxy's assets if they were left to Petroecuador to run for 
even a short period of time.  He was reluctant to 
characterize the GOE's action thus far as retaliation, but 
said Oxy would consider the takeover of its Block 15 assets 
nothing short of expropriation.  Still, he said Oxy was 
willing to sit down with the GOE to discuss a mutually 
beneficial resolution to the matter. 
 
7. (C) He agreed with the Ambassador's recommendation that 
she contact President Gutierrez again about the issue.  The 
Ambassador also explained the she had raised the matter with 
the President of Congress that morning and he too admitted 
that it appeared that the GOE was trying to nationalize Oxy's 
assets.  Econoffs also explained the MEM's latest step in the 
nullification process to USTR on the morning of September 9 
as USTR was preparing for a meeting between Ambassador 
Zoellick and Trade Minister Baki.  Our efforts appear to be 
bearing fruit. Late September 9, Ellis told Econ Counselor 
that President Gutierrez had ordered Economy and Finance 
Minister Yepez to meet with Oxy in New York on September 10, 
and to tell Oxy that the policy espoused by Presidential 
Legal Advisor Carlos Larrea was not the GOE policy. 
The Oxy Nullification Case as a Political Landmine 
--------------------------------------------- ----- 
 
8. (C) The Procurador has put the Gutierrez government in an 
extremely difficult position with his actions on the 
Occidental case.  The press and public have swallowed, hook, 
line and sinker, the Procurador's oft-repeated public line 
that Oxy has violated the terms of its contract, that the 
Minister of Energy is legally bound to nullify the contract, 
and that that process should be expedited.  The Procurador 
stated a week ago to the press that anyone opposing his 
involvement in the case was "a traitor to the fatherland" - 
clearly an attempt to create a political climate in which the 
government would have no choice but to expropriate Oxy's 
property.  On September 6, he announced that if the Ministry 
of Energy and the state oil company did not move 
expeditiously he would request that the Controlaria (an 
investigatory body analogous to our GAO, but with the 
authority to bring charges against government officials for 
malfeasance) open investigations.  Less than 24 hours later 
the Minister of Energy acted. 
 
9. (SBU) The effect of the Procurador's tactics has been wide 
and deep.  Opinions expressed in the press and on the street 
are almost unanimous:  "the GOE must nullify the Oxy 
contract, anything less would be a breach of rule of law." 
 
10. (C) Our contacts universally believe that the Procurador 
is acting with the support of the Guayaquil-based Social 
Christian Party (PSC, by its Spanish acronym) in order to 
place the Gutierrez government in a position in which it must 
choose against a position that the whole country has equated 
with basic Ecuadorian national interests or against the 
United States.  Many believe that this trap has been laid in 
order to bring the government down.  Presidential Legal 
Advisor Larrea told us that top PSC insiders such as Miguel 
Orellana and Javier Neira, but maybe not party leader Leon 
Febres Cordero, were behind the Procurador's actions. 
Consulate General officers in Guayaquil will continue to make 
clear to PSC officials our support for constitutional 
democracy as well our expectations of a level playing field 
for US companies. 
 
Comment and Action Request 
-------------------------- 
 
11. (C) A strong message must be sent to the GOE that if it 
follows through with the nullification it could amount to 
expropriation of an American company's assets.  Should an 
expropriation occur, Ecuador would risk losing its ATPDEA 
trade benefits, a possible free trade agreement with the 
United States and the support of the international community, 
both investors and multilateral lenders.  The Ambassador will 
again explain to President Gutierrez the potential serious 
consequences of this latest misstep by the GOE and Embassy 
officials will continue to raise the matter with their GOE 
counterparts. 
 
12. (C) Action Request.  We recommend State and Commerce 
raise with Ecuador's Ambassador to the United States Raul 
Gangotena and other high-ranking GOE officials our serious 
concern about the possible expropriation of an American 
company's assets.  We suggest the following talking points: 
 
-- The action by the Procurador was taken on the heels of 
Oxy's international arbitration award, making it appear to be 
a case of retaliation. 
 
-- Regardless of whether the GOE or Oxy are right on the 
merits of the case, the remedy sought by the GOE is not 
proportionate to the alleged offense and could amount to an 
expropriation, an unconstitutional act in Ecuador, and an act 
penalized under U.S. law. 
 
-- It is in everyone's interest for both sides to sit down 
and discuss a reasonable solution to this matter. 
 
-- If Oxy's assets are expropriated, Ecuador risks losing 
ATPDEA trade benefits, a free trade agreement with the United 
States and the support of the international community, both 
private investors and multilateral lenders, not to mention 
the certain ruin of its investment climate. 
KENNEY