US embassy cable - 04QUITO2509

C O N F I D E N T I A L SECTION 01 OF 02 QUITO 002509 
 
SIPDIS 
 
STATE PASS TO USTR BENNETT HARMAN 
 
E.O. 12958: DECL: 09/15/2014 
TAGS: EPET, ETRD, ECON, EC, Oil Sector 
SUBJECT: OXY:  THE CALM BEFORE THE STORM - OR PROGRESS? 
 
REF: A. QUITO 2462 
 
     B. QUITO 2418: QUITO 2380 
     C. QUITO 2327 
 
Classified By: Ambassador Kristie A. Kenney, Reasons 1.4 (b), (d) 
 
1. (C) Summary.  Occidental Petroleum's (Oxy) meetings in the 
US and USG efforts have provided a temporary calm in the 
contract nullification process.  Oxy has still not been 
officially notified of its alleged violations of the 
hydrocarbon law, thus the statutory time period for it to 
respond has not commenced.  Privately, the Procurador 
(Solicitor General equivalent) has said he would support a 
negotiated settlement with Oxy, but said he could not say so 
publicly.  GOE sources think an offer for a negotiated 
settlement could be tabled in the next 2-3 weeks.  Oxy is 
pleased with the calm, but is also waiting for the possible 
storm ahead.  Canadian oil company EnCana's international 
arbitration is back on track.  Likely unrelated, but worth 
consideration, EnCana's pipeline was recently 
vandalized/sabotaged causing an oil spill and environmental 
damage.  End Summary. 
 
Washington Meetings Successful 
------------------------------ 
 
2. (C) Economy and Finance Minister Mauricio Yepez told 
Ambassador on September 14 that his meetings with Oxy in New 
York were productive and opened the door to a negotiated 
settlement.  He also mentioned that A/S Tony Wayne had raised 
the Oxy matter during their meeting.  When Yepez returned to 
Quito on September 13, he spoke with President Gutierrez, 
Minister of Government Raul Baca and the Procurador about 
Oxy.  All agreed that a negotiated settlement was the route 
to take and that none of them wanted to nullify Oxy's 
contract.  Though, Yepez told the Ambassador that the 
Procurador said he could not say so publicly.  Yepez said he 
did not discuss the Oxy matter with Minister of Energy and 
Mines Eduardo Lopez, because Lopez was too scared to take 
action.  Still, Yepez thought the parties could put an offer 
on the table within the next 2-3 weeks. 
 
3. (C) Minister of Trade Ivonne Baki also told Ambassador 
September 13 that she had received a strong message from USTR 
that Oxy and other commercial disputes had to be quickly 
resolved or Ecuador would face serious trade consequences. 
Baki said she too explained this to Gutierrez. 
 
Public Debate Less Polemical - For Now 
--------------------------------------- 
 
4. (C) Procurador Borja announced September 14 in the press 
that he would continue to review all oil company contracts 
for compliance with Ecuadorian law.  Next on the list is 
Canadian oil company EnCana.  However, Borja's statements 
were not inflammatory.  Ecuadorian Ambassador to the USA Raul 
Gangotena's comments on a local radio show were conciliatory 
towards Oxy and stressed the need to work out a long term 
relationship with the company. However, Minister of Energy 
Lopez is scheduled to appear before the Ecuadorian Congress 
on September 17 and it is unclear whether he will wilt under 
Congressional pressure and adopt a more nationalistic 
attitude. 
 
Oxy: Is It Progress or the Calm Before the Storm? 
--------------------------------------------- ---- 
 
5.  (C) Oxy President and GM of Ecuador Jerry Ellis told 
econoff September 14 that Oxy thought its meeting with Yepez 
in New York had been productive.  He also said that he was 
pleased that things were relatively calm in the press in 
recent days.  He added that Oxy continues to be willing to 
negotiate a settlement, but it is unclear with whom they 
would negotiate.  He agreed that Energy Minister Lopez was 
too afraid to take any action and that it was far from 
certain that the Procurador could be trusted, even though 
Borja eventually would probably have to approve any 
settlement agreement.  He was waiting to see what Lopez would 
say before Congress and moderately encouraged by the fact 
that Oxy has yet to be officially notified of its alleged 
hydrocarbon law violations and the statutory time for Oxy's 
response had not yet begun. 
 
EnCana Waiting in the Wings 
--------------------------- 
 
6.  (C) EnCana's GM John Keplinger told econoff on September 
14 that the GOE had appointed its replacement arbitrator for 
EnCana's international arbitration case on the value added 
tax (VAT) refunds.  Keplinger said that the final hearing in 
that VAT arbitration would be held on November 18 and they 
expected a decision in the first quarter of 2005.  EnCana had 
closely followed Oxy's international arbitration case on the 
same topic.  He noted that the Minister of Energy has refused 
to sign anything involving EnCana (the purchaser of Oxy's 40% 
share of Block 15, see reftels) or Oxy. 
 
7.  (C) Keplinger also told econoff that someone had either 
vandalized or sabotaged one of its pipelines.  He said the 
person had to know something about what they were doing 
because they dug 1.5 meters to get to the underground 
pipeline and then used a power drill to penetrate the pipe. 
However, the vandals/saboteurs were not that expert, as oil 
flows through that pipeline at 700 psi; thus, the person 
drilling the hole received quite a jolt when the pipe was 
penetrated.  He theorized that the shock scared the person/s 
off.  EnCana security personnel do not believe this was an 
act by any of the Colombian insurgents, but continue their 
investigation. 
 
8.  (C) Unfortunately, because of the small size of the hole, 
the oil leak was not discovered for some time, until a local 
farmer notified EnCana.  Some 11 hectares could be affected 
by the spillage of approximately 200 barrels of oil.  Local 
colonos (settlers from other parts of Ecuador) living in the 
area tried to extract a $25,000 payment from EnCana for 
access to repair the pipeline and clean up the environment. 
As a result, EnCana was forced to go to environmental 
authorities to get access to the land.  Keplinger hoped that 
the incident was not a reaction to the recent developments in 
the oil sector involving Oxy and EnCana. 
 
Comment 
------- 
 
9.  (C) Oxy is right to be wary of reaching a negotiated 
settlement with the GOE.  Still, the right people in the GOE 
are involved, Ministers Yepez, Baca and Baki and President 
Gutierrez.  However, the weak links are the two people that 
need to be most involved, Minister of Energy Lopez and 
Procurador Borja.  It is a good sign that the statutory time 
for Oxy to respond has not commenced and that both parties 
have agreed on that is imperative to reach a settlement and 
keep Oxy in Ecuador.  Our task now is to encourage the GOE to 
get a responsible person with the authority to act to sit 
down with Oxy sooner, rather than later.  As long as problems 
like Oxy's VAT and contractual problems remain, Ecuador 
cannot hope to attract the foreign investment in the oil 
sector it desperately needs.  As the case involving EnCana 
also points out, there are plenty more problems in the oil 
sector waiting for the GOE in the very near future. 
Responsible development of Ecuador's oil sector is crucial to 
its economic and political stability, both of which are in 
the USG's best interests. 
KENNEY