US embassy cable - 05QUITO611

UNCLAS SECTION 01 OF 02 QUITO 000611 
 
SIPDIS 
 
SENSITIVE 
 
PASS USTR BENNETT HARMAN 
 
E.O. 12958: N/A 
TAGS: ETRD, EINV, EPET, ECON, EC 
SUBJECT: PROCURADOR BORJA PRONOUNCES ON OXY CASE 
 
REF: QUITO 601 
 
1. (SBU) Summary.  Procurador General Borja met with Embassy 
officers on March 16 and explained his position on Occidental 
Petroleum (Oxy).  Borja stated that the caducity (contract 
nullification and nationalization of Oxy's assets) and 
arbitration issues should be treated separately.  He did not 
answer why he sent the official notice (oficio) to 
PetroEcuador on March 14 (reftel), but said all he was 
looking for from PetroEcuador was a report of what 
PetroEcuador had done over the last six months since Borja 
requested that PetroEcuador declare caducity.  He claimed 
that there were strong legal grounds for declaring caducity 
and that PetroEcuador had sufficient time to act on the 
matter.  Borja could not specify what damages Ecuador had 
suffered as a result of Oxy's alleged breach of contract.  We 
explained that it would be less costly for the parties to 
negotiate and avoid another arbitration.  Acknowledging that 
a declaration of caducity is not imminent, he said Oxy should 
sit down with PetroEcuador and work out a resolution.  His 
role would be to review that agreement and present it to the 
Congress for approval, both dubious prospects.  End summary. 
 
 
Riding His High Horse 
--------------------- 
 
2. (SBU) Procurador General (Solicitor General equivalent) 
Jose Maria Borja met with Embassy officers March 16, at the 
Embassy's request.  He began his case by forcefully asserting 
that Oxy's VAT arbitration case (where Oxy was awarded $75 
million in July 2004) must be kept separate from Oxy's 
alleged contracts violations and the Procurador's demand that 
Oxy's contract be declared void (caducity) and Oxy's assets 
taken by the state.  Borja claimed the arbitration panel in 
the VAT case had no jurisdiction to hear the matter because 
it was a tax case with no confiscation of assets involved. 
We reminded Borja that the arbitration panel had already 
reviewed and rejected those arguments and that arbitral 
decisions are only overturned in the most extreme cases. 
Though asked, Borja never answered why he chose March 14 to 
send the oficio to PetroEcuador (reftel) demanding action on 
his request to declare caducity. 
 
3. (SBU) We explained that the parties had been in 
discussions to resolve their problems.  We added that a 
declaration of caducity would likely cause Oxy to bring yet 
another arbitration case against the GOE, which would be 
costly for everyone.  Washington was also concerned, we 
noted.  Borja seemed aware of the Ambassador's and 
Washington's concerns, stating that he met the night before 
with Minister of Economy on the matter. 
 
4. (SBU) Borja said that he was acting as the protector of 
the state and that we should bear in mind that Ecuador had 
its sovereign rights.  We agreed about national sovereignty, 
pointing out that the United States had its sovereign rights 
when it came to negotiating free trade agreements. 
 
5. (SBU) We asked Borja how Ecuador had been damaged by Oxy's 
alleged breach of contract.  With respect to the supposedly 
illegal transfer of 40% Oxy's interest in Block 15 to 
Canadian oil company EnCana in 2000, we noted that Ecuador 
actually stood to gain more now than had Oxy received the 
required permission from the Minister of Energy for the 
alleged 2000 transfer.  Oil prices now were much higher than 
they were in 2000.  Borja responded that Ecuador did not have 
to show that it was damaged in any way.  The fact that Oxy 
failed to get the Minister of Energy's permission before the 
alleged transfer was sufficient reason to seize Oxy's assets. 
 In response to our question, Borja asserted that the legal 
concept of a penalty appropriate to the offense 
(proportionality) was limited to criminal, not civil cases, 
as was Oxy's case. 
 
The Way Forward 
--------------- 
 
6. (SBU) Borja said that there were two ways forward: declare 
caducity, or PetroEcuador sits down with Oxy and works out an 
"administrative" resolution.  Agreeing that negotiation 
seemed the best resolution, we said that Oxy told us they 
were willing to sit down with PetroEcuador.  Still, we noted 
10 days (the period the Procurador gave PetroEcuador to 
respond to the oficio) was not much time for the parties to 
reach a resolution.  Borja said he was not looking for a 
resolution within 10 days or a declaration of caducity.  What 
he wanted within 10 days was a report from PetroEcuador as to 
what PetroEcuador had done for the past six months to respond 
to his request for caducity. 
 
7. (SBU) If the PetroEcuador and Oxy reached an agreement, he 
would review it for legal sufficiency, as was his duty, he 
said.  Borja bombastically added that he would not approve 
any "under the table" deals.  We responded that neither would 
Oxy accept such an under the table deal.  After we noted that 
there was a way forward for negotiations to proceed, Borja 
added that he would then bring the agreement to the 
Ecuadorian Congress for approval.  We noted that the 
Ecuadorian Congress at this point was having a rather 
difficult time agreeing on anything, let alone a deal between 
the state and a private oil company.  Bursting with hubris, 
Borja responded that whenever he brought something to the 
Ecuadorian Congress that he had received "unanimous" approval 
from them.  We congratulated him. 
 
Comment 
------- 
 
8. (SBU)  The good news is that a declaration of caducity is 
not imminent (besides, as Borja admitted to us, he does not 
have the legal authority to declare caducity on his own). 
Also, Borja agrees that Oxy should negotiate with 
PetroEcuador.  The bad news is that eventually the final 
resolution will have to go through Borja, and we will need to 
address his idea to involve the Ecuadorian Congress.  We 
think Oxy should take advantage of this small window of 
opportunity to start serious negotiations with PetroEcuador 
President Hugo Bonilla.  At the same time, Embassy and 
Washington officials must continue to pressure the GOE to 
seriously negotiate and remind them that once a resolution is 
reached we can work with the GOE to present the negotiated 
resolution in the best light - a win for everyone. 
KENNEY