US embassy cable - 05QUITO667

C O N F I D E N T I A L SECTION 01 OF 02 QUITO 000667 
 
SIPDIS 
 
DEPT PASS TO USTR BENNETT HARMAN 
 
E.O. 12958: DECL: 03/24/2015 
TAGS: EINV, ETRD, EPET, ECON, EC 
SUBJECT: SOME PROGRESS ON OXY 
 
REF: QUITO 601 
 
Classified By: Charge d'Affaires Arnold A. Chacon, Reason 1.4 (b),(d) 
 
1. (C) Summary The Procurador has, perhaps inadvertently, 
helped to create some momentum toward resolution of 
Occidental Petroleum's (Oxy) disputes with the GOE (reftel). 
Washington and Embassy efforts to move the parties to 
negotiate seem to also be paying some dividends.  Still, 
PetroEcuador President Hugo Bonilla could issue a report on 
March 28 stating there are grounds for declaring Oxy's 
contract void and GOE expropriation of Oxy's assets 
(caducity).  His report would not prompt an immediate 
declaration of caducity.  Oxy will present a general offer on 
March 28, which could even further delay Bonilla's report, 
which was due March 24.  Both sides a now moving closer to 
serious, specific negotiations.  End summary. 
 
 
Procurador Stirs the Pot 
------------------------ 
 
2. (C) Procurador General (Solicitor General equivalent) Jose 
Maria Borja March 14 sent an official letter to President 
Gutierrez and state oil company PetroEcuador President Hugo 
Bonilla asking them to explain within 10 days why the state 
had not taken action to declare Oxy's contract void and take 
Oxy's assets in Ecuador (reftel).  Most suspect Borja as 
having personal motives for his rekindled interest in the 
manner, especially since he has played it up in the press. 
However, the indirect effect was to add a greater sense of 
urgency to reach a negotiated resolution to Oxy's problems 
with the GOE. 
 
3. (C) Washington officials, including State, USTR, and USAID 
took advantage of the FTA mini-round of negotiations and 
visits by Minister of Trade Ivonne Baki to press effectively 
for a negotiated solution to the problem, making clear the 
serious adverse measures the USG would take should the GOE 
expropriate Oxy's investment of about $1 billion in Ecuador. 
The Ambassador and her team continue their dialogue with 
President Gutierrez, his legal advisor, the Ministries of 
Trade and Economy and PetroEcuador President Bonilla giving 
them similar messages. 
 
Oxy and PetroEcuador Talk 
------------------------- 
 
4. (C) Oxy officials from Ecuador and the home office spoke 
March 23.  For months, Oxy had been talking with the Ministry 
of Economy without success.  Borja, Bonilla and Gutierrez's 
advisors agreed that Oxy should talk with Bonilla, giving 
Oxy, for the first time, a focus point for serious 
discussions.  At their March 23 meeting, Oxy agreed to 
provide a written offer to Bonilla.  However, Oxy clarified 
that the offer would be general, because in addition to the 
caducity issue, other issues remained outstanding, making it 
difficult to get too specific.  In particular, Oxy's $75 
million arbitration award (now valued at about $100 million) 
should be addressed.  The GOE is also now threatening to 
disallow deductibility of interest from related company 
loans, significantly changing the economic conditions of the 
contract.  The oil sector regulatory body (DNH) has also, in 
Oxy's view, unfairly restricted production limits at numerous 
oil wells. 
 
5. (C) Bonilla claims that Oxy's production costs are too 
high and the GOE's participation share too low.  He also 
claims that because the GOE receives a fixed price set in the 
contract for the oil pumped that Oxy has unfairly benefited 
from the high oil prices.  Thus, Oxy needs to share more with 
the GOE.  Bonilla mentioned nothing about the fact that Oxy 
has assumed all of the costs and risks regarding its 
investment. 
 
 
A Step Closer 
------------- 
 
6. (C) As a result of their March 23 meeting, Oxy will 
present a draft offer in writing to Bonilla on March 28. 
Bonilla has told the press that he would issue his report, 
stating there are grounds for a caducity declaration that 
same day.  It is unclear whether the offer from Oxy will 
delay that report.  In any event, the report would not mean 
caducity has been declared.  It is up to the Minister of 
Energy to declare caducity.  He is under no deadline to 
declare caducity.  However, he too is subject to the 
political pressures that Bonilla has felt from the 
Procurador, Congress and the press. 
 
7. (C) The AmCham, as a result of Minister Baki and the 
Commercial Attach's efforts, will present its Energy 
Committee's report to Bonilla on March 24.  That report will 
cite a number of legal bases establishing why caducity is not 
legally justifiable in the Oxy case.  This will provide 
Bonilla with additional justification to either modify or 
delay issuing the report, but it is by no means certain he 
would do so. 
 
Comment 
------- 
8. (C) The most important development coming from USG, GOE 
and Oxy's efforts is that the latter two are now starting to 
talk about specific numbers in an effort to reach a 
resolution.  In the past, the GOE has been hesitant to 
discuss all of the issues together and this will still be an 
obstacle to overcome.  We also expect GOE officials to keep 
running to the press for personal reasons or to seek cover 
for their actions.  However, this is the first sign in a 
while that the parties are getting down to specifics. 
Gutierrez has named his respected and trusted advisor, Carlos 
Polit, to coordinate Oxy and the other outstanding commercial 
disputes with US companies.  We do not expect, but cannot 
entirely rule out, any rash action against Oxy right away, as 
our efforts seem to have once again pulled the GOE back from 
the brink of making a foolish mistake.  Oxy is pleased with 
the intervention from the USG, stating there is nothing more 
we can do right now.  However, Oxy will be talking with us 
after their March 28 meeting with Bonilla to explore follow 
up actions. 
CHACON