US embassy cable - 04QUITO2613

C O N F I D E N T I A L SECTION 01 OF 02 QUITO 002613 
 
SIPDIS 
 
DEPT PASS USTR BENNETT HARMAN 
 
E.O. 12958: DECL: 09/28/2014 
TAGS: EPET, ETRD, ECON, PREL, EC, Oil Sector 
SUBJECT: TIDE TURNING IN OXY'S FAVOR BUT A LONG WAY TO GO 
 
REF: A. QUITO 2509 
 
     B. QUITO 2462 
     C. QUITO 2418 
     D. QUITO 2380 
     E. QUITO 2327 
 
Classified By: Ambassador Kristie A. Kenney, Reason 1.4 (b), (d) 
 
1. (C) Summary.  The efforts of Occidental Petroleum (Oxy) 
and the Mission are gathering momentum in blunting 
misperceptions raised by the Procurador's (solicitor general 
equivalent) allegations against Oxy.  Business chambers, 
financial analysts and GOE officials are coming to understand 
what Ecuador has to lose if it nationalizes Oxy's Block 15 
oil interests, but more work needs to be done.  The 
Procurador continues to send mixed messages, allegedly 
seeking a negotiated solution in private while making 
inflammatory statements calling for the review of the 
US-Ecuador Bilateral Investment Treaty (BIT) and vigorously 
defending the national patrimony in public.  With Embassy 
assistance, Oxy is seeking an amicable resolution, using two 
different tracks.  Still, a final resolution will require the 
Procurador's buy-in, which is by no means assured.  In the 
meantime, Oxy filed its answer to the allegations to the 
President of state-owned Petroecuador, who assured Emboffs 
that he would need time to fully and fairly review the 
matter.  End summary. 
 
Public and Opinion Leaders - Getting the Message 
--------------------------------------------- --- 
 
2. (C) Over the last several days, a number of media have 
carried stories about the risks of "persecuting" Oxy (quoting 
business chamber representatives) and expropriating (in 
another article by a respected financial analyst) Oxy's 
assets. They warned that Ecuador was putting at risk current 
trade benefits and a future FTA with the United States. 
Minister of Economy and Finance Mauricio Yepez publicly 
warned that Ecuador risks losing USG support in its efforts 
to obtain financing from multilateral development banks if it 
did not act fairly in the Oxy case.  The Ambassador continues 
to press for the fair treatment of Oxy through her daily 
meetings with the GOE, business and opinion leaders, pressing 
the same message that Ecuador has much to lose, including in 
its efforts to attract new investment to the country. 
 
The Procurador - Getting Nervous? 
--------------------------------- 
 
3. (C) We have also received several reports that Procurador 
General Jose Maria Borja wants to discuss the case to explain 
his views, including his desire to reach an agreement with 
Oxy.  He has reached out privately, through intermediaries, 
to Oxy and the Ambassador.   Still, his public comments belie 
his private overtures.  Last week he publicly called on 
Congress to review the US-Ecuador Bilateral Investment Treaty 
(BIT).   (Note: The earliest Ecuador could file notice of 
terminating the BIT is 2007; a legal fact that escaped Borja, 
the GOE's lead attorney.) On September 27, he again claimed 
to be defending the national sovereignty of Ecuador in his 
prosecution of cases against Oxy and Canadian oil company 
EnCana.  He is also publicly defending himself against 
comments from the business chambers.  One of the attorneys in 
Borja's office told econoff that Borja's statements, like his 
call to review the BIT, had been misunderstood and that he 
would like the chance to explain himself in a private meeting 
with the Ambassador.  The Ambassador has made clear there 
will be no meeting with Borja until he changes his public 
posture in line with what his intermediaries claim to be his 
real intentions. 
 
 
4. (C) Minister of Economy Yepez and Minister of Government 
Baca have told the Ambassador that Borja is a reasonable 
person who will approve a settlement reached by Oxy and the 
Minister of Energy, who is the person charged with finally 
deciding the fate of the accusations against Oxy (see 
reftels).  However, past experiences in the Duke Energy and 
BellSouth cases indicate that Borja may not be true to his 
word.  Still, Borja now appears to be on the defensive.  This 
is likely due in part to Oxy's voluminous response to 
Petroecuador on the allegations and other efforts to get the 
full story out in the public.  Yepez told the Ambassador on 
September 28 that Borja wanted to find a solution and did not 
want Oxy to leave Ecuador.  Yepez and Baca have also been 
speaking with Borja, whom they now believe is coming to 
understand the gravity of the situation.  Borja also met with 
Oxy GM Jerry Ellis on September 27, to enlist Oxy in 
promoting the formation of a commission to review the matter. 
Pursuing Two Tracks 
------------------- 
 
5. (C) Econoff and Commercial Attach met privately with 
state-owned oil company Petroecuador President Luis Camacho 
on September 23.  Camacho said that once he received Oxy's 
response to the allegations, he would take his time to fully 
and fairly review the matter.  He said he would not bow to 
public or private pressure to speed up his review or be 
prejudiced against one side or the other.  He said he would 
like to appoint a respected, independent commission to help 
review the matter, stating that he would receive no help from 
those within Petroecuador.  Camacho believed that, whether or 
not there was a commission, his review of the matter would 
not be completed before the October 17 local elections in 
Ecuador, reducing the possibility that the Oxy case could 
become an election issue.  In a separate meeting between 
Emboffs and Oxy GM Ellis, he too welcomed the commission 
approach and hoped to discuss the matter with Camacho. 
 
6. (C) Ellis said that Oxy is also continuing its work with 
the Ministry of Economy and Finance (MEF) on a possible 
resolution.  Oxy is providing the MEF with a variety of data 
to allow the GOE to analyze the impact of the transaction 
between Oxy and EnCana (the most serious allegation against 
Oxy concerns that transaction).  Minister of Economy Yepez 
told the Ambassador that the MEF hopes to present an offer to 
Oxy within the next two weeks. 
 
Comment 
------- 
 
7. (C) Oxy's side of the story on the allegations lodged 
against it by the Procurador is finally coming to light in 
the press.  Our education efforts with GOE interlocutors and 
business chamber leaders also appear to be working.  The 
Procurador's outreach efforts are a good indication that 
those efforts are having some impact.  Oxy continues to say 
it is willing to talk while also forcefully arguing its 
strong case.  Petroecuador's Camacho and the MEF are sending 
positive signals that the case can be resolved without 
declaring a contract nullification and expropriation.  Oxy is 
also sending its public relations representatives from Los 
Angeles, with whom Post will work with to keep up the 
positive momentum in the press and with local opinion 
leaders. 
 
8. (C) It appears that any further official GOE pronouncement 
on contract nullification will not be made until after the 
October 17 elections, but it cannot be totally ruled out. 
The additional time will allow for more discussions between 
the parties and a cooling off period.  We can also use that 
time to reach out to business, GOE and opinion leaders, many 
of whom have not yet heard the full story on the matter or do 
not fully appreciate what is at risk for Ecuador.  In the 
end, the Procurador will also have to be brought on board to 
finalize any agreement, which is by no means assured.  We 
will continue to encourage Ministers Yepez and Baca to engage 
with Borja to ensure he will back a fair and rational 
resolution to the problem that he largely created. 
KENNEY