US embassy cable - 05QUITO601

C O N F I D E N T I A L SECTION 01 OF 02 QUITO 000601 
 
SIPDIS 
 
DEPT PASS USTR BENNETT HARMAN 
 
E.O. 12958: DECL: 03/15/2015 
TAGS: ETRD, EINV, EPET, ECON, EC 
SUBJECT: OXY - PROCURADOR RENEWS CONTRACT NULLIFICATION 
REQUEST 
 
 
Classified By: DCM Arnold A. Chacon, reasons 1.4 (b), (d) 
 
1.  (C) Summary.  Ecuador's Procurador March 14 once again 
called for the nullification (caducity) of Occidental 
Petroleum's (Oxy) contract and seizure of Oxy's assets.  We 
told GOE Presidential Advisor Carlos Larrea (as we had other 
GOE officials numerous times before) that the USG would react 
very strongly to any expropriation of Oxy assets.  After 
months of negotiating with the Ministry of Economy and 
Finance (MEF), the MEF told Oxy two weeks ago that they would 
no longer participate in the negotiations.  Last week, Hugo 
Bonilla, President of state-owned oil company PetroEcuador, 
told Oxy that Oxy should be negotiating with him.  After the 
latest volley from Procurador Borja, Bonilla is meeting with 
President Gutierrez to consider next steps.  End Summary. 
 
Procurador Borja Strikes Again 
------------------------------ 
 
2. (U) Procurador General Jose Maria Borja (Solicitor General 
equivalent) March 14 sent a letter to President Gutierrez 
notifying Gutierrez of the Procurador's official notice to 
PetroEcuador President Hugo Bonilla asking Bonilla to respond 
within 10 days as to why Bonilla had not begun contract 
nullification proceedings against Oxy.  Under Ecuadorian law, 
it is up to the Minister of Energy to declare caducity. 
However, Borja's notice to Bonilla cites other legal grounds 
for the Procurador's action. 
 
Negotiations Going Nowhere 
-------------------------- 
 
3.  (C) Oxy spent the last several months negotiating through 
Ministry of Economy and Finance (MEF) officials (some of the 
most dependable in the GOE), but was told about two weeks ago 
that the MEF would no longer participate in the negotiations. 
 Vice Minister Ramiro Galarza told Oxy officials that the MEF 
had lost credibility with Gutierrez on the issue and would 
withdraw from the negotiations. 
 
4. (C) There have been rumors that Presidential brother 
Gilmar Gutierrez wanted a piece of the action.  According to 
those rumors, once caducity was declared, the Chinese would 
come in to purchase the fields from the GOE and Gilmar would 
get a nice commission.  Not surprisingly, when approached by 
the Ambassador and Political Counselor about corruption 
rumors surrounding Gilmar, both President Gutierrez and 
brother Gilmar separately claimed Gilmar was innocent and 
others were misusing his name. 
 
5. (C) Last week Bonilla told Oxy officials that Oxy had made 
a mistake in negotiating with the MEF.  Bonilla told Oxy he 
was the guy to solve their problems.  However, he had earlier 
told Oxy that he would have the problem resolved by 
mid-February.  Oxy Ecuador President Jerry Ellis spoke with 
Bonilla March 15, after the latest salvo from Borja.  Bonilla 
was not sure what to do, but said he was going to Gutierrez 
to discuss next steps after the Procurador's latest move. 
Ellis said Oxy would keep a low profile in the matter, unless 
his headquarters advised him otherwise. 
 
GOE Warned Again 
---------------- 
 
6. (C) Econoff spoke with Presidential Legal Advisor Carlos 
Larrea on March 15.  When asked why Borja raised the matter 
again, Larrea responded that Borja was "crazy" and perhaps 
positioning himself for the future.  Econoff explained that 
the GOE had been told again recently that if Oxy's assets 
were expropriated the USG would take strong action against 
the GOE.  Larrea said in his meetings at the White House 
(with NSC officials) he had also been given a strong message 
about the Oxy case.  Econoff reminded Larrea that not only 
was the FTA at stake, but other foreign investment, Ecuador's 
attempt to re-enter the private foreign debt market and USG 
support in international financial institutions.  Larrea 
responded that he was going immediately to President 
Gutierrez to pass that message.  Offering several seemingly 
unworkable options, Larrea finally concluded that it was 
perhaps time to get the President more directly involved in 
the case. 
 
7. (C) The Ambassador, both before and after her meetings 
with Oxy's Oil and Gas President John Morgan, Executive VP 
for International Production John Allen and Oxy Ecuador 
President Jerry Ellis last week, spoke with Trade Minister 
Baki and President Gutierrez about Oxy.  Repeating the same 
message that she had given them numerous times before, she 
warned Baki and Gutierrez that the Oxy case needed to be 
resolved as soon as possible.  She stressed what the Oxy 
officials had told her; Oxy was willing to sit down and 
seriously negotiate, but it had to be with someone who could 
resolve the matter. 
 
Comment 
------- 
 
8. (C) For the third time in the last several weeks, a GOE 
official has needlessly put the Oxy case back in the 
headlines.  The case has been a political hot potato that no 
one wants to touch.  Gutierrez even told the Ambassador that 
he would be damned by the people if he settled with Oxy and 
damned by the USG if he did not.  Still, he said that 
securing an FTA is a top priority.  The Procurador's latest 
volley will make it even harder for him to not declare 
caducity, unless we can offer either a better, or perhaps 
worse, alternative.  We working with Oxy and reaching out to 
the GOE, including the Procurador, to explore the 
alternatives. 
KENNEY