US embassy cable - 05QUITO2578

C O N F I D E N T I A L SECTION 01 OF 03 QUITO 002578 
 
SIPDIS 
 
SECSTATE PASS USTR 
 
E.O. 12958: DECL: 11/10/2010 
TAGS: EPET, ECON, PGOV, EC, Oil Sector 
SUBJECT: PROCURADOR'S INVOLVEMENT IN OXY AND OTHER MATTERS 
 
REF: QUITO 2236 
 
Classified By: EconCouns Larry L. Memmott, Reasons 1.4 (b&d) 
 
1. (C) Summary: At Occidental Petroleum's (Oxy) and the GOE's 
request, EconOffs met with Ecuador Solicitor General 
(Procurador General) Jose Maria Borja November 7, to lay the 
groundwork for Borja's buy-in to the ongoing discussions 
between Oxy and members of the GOE.  Recently, Oxy has had 
its most serious discussions to date with members of the GOE 
regarding a resolution to its commercial disputes with the 
GOE.  The involvement of the Procurador, who actually created 
the problem, is not welcome by anyone, but is unavoidable. 
The fact that the GOE thinks it's time to bring Borja into 
the talks could be construed as progress.  However, Borja 
cannot be trusted and his involvement will complicate 
matters.  In the end, pressure from a variety of sources will 
be needed to get Borja to do the right thing, as his 
interpretation of the law depends upon how he is feeling at 
any particular moment.  End Summary. 
 
Bring in Jose Maria and Hold On to Your Wallets 
--------------------------------------------- -- 
 
2. (C) Oxy has held secret discussions over the last two 
months with the President of PetroEcuador Luis Roman and 
President Palacio's advisor and now Ambassador to the United 
Nations Diego Cordovez.   In a refreshing change for Oxy, 
Roman actually knows the oil sector very well.  While the GOE 
has still not responded with its own counteroffer to Oxy's 
various offers, the two sides have developed a good working 
relationship and some progress had been made toward a 
resolution.  At Palacio's express instruction, knowledge of 
the discussions was kept strictly to Oxy, Palacio, Roman, 
Cordovez, and us.  When Minister of Energy Ivan Rodriguez 
threatened to resign (reftel) he too was informed of the 
discussions, but had not participated in them. 
 
3. (C) Oxy called Econoff November 4 to request that Embassy 
officials approach Procurador General (similar to the U.S. 
Solicitor General) Jose Maria Borja.  Roman had called Oxy 
and said the GOE needed to get Borja on board in the 
negotiations and wanted the Embassy to approach Borja first 
to lay the groundwork for Roman and Rodriguez to meet with 
him. 
 
4. (C) Econoffs met with Borja on November 7 to deliver the 
message.  Borja first regaled Econoffs with his efforts to 
insert himself into any area where there was a vacuum in the 
government.  For instance, he claimed that he was "taking 
over" the two state phone companies.  The following day, the 
newspapers reported changes in the directors of both 
Pacifictel and Andinatel.  Borja said he also intended to 
insert himself into the electric sector and we heard through 
other sources that he had tried to negotiate a gas deal with 
Venezuela. 
 
5. (C) Borja then offered a "resolution" to the multi-billion 
dollar Chevron lawsuit (reftel) pending in Ecuador (with 
other legal processes in the United States).  His resolution 
- Chevron need only place $500 million into a trust fund for 
environmental remediation and the GOE would put up the same 
amount.  As to Chevron's remediation agreement that releases 
the company from further liability, Borja responded that it 
was agreed to by corrupt former Ecuadorian officials and 
therefore was not binding.  He did not explain why the GOE 
has not prosecuted these allegedly corrupt officials.  Econ 
Counselor responded that Chevron believed it had a strong 
case and that it would ultimately prevail in court. 
 
6. (C) Taking advantage of Borja's hubris, Econ Counselor 
asked the Procurador about the sale of Canadian oil company 
EnCana's Ecuadorian assets to a Chinese consortium.  That 
sale is contingent on resolution of the Oxy caducity issue. 
A smiling Borja told Econoffs that the Chinese had been in to 
see him on the matter.  He said that he told the Chinese that 
they had just bought themselves a lottery ticket! 
 
7. (C) Apparently delighted that he was now being asked by us 
to become involved in the Oxy discussions, Borja was quick to 
offer his views to Econoffs.  First, the state/company share 
of revenues would have to be changed.  Incorrectly stating 
the Oxy received 72% of the oil revenues to the GOE's 38% 
share, Borja said the split should be 60/40, in favor of Oxy 
and should be backdated to 2000, when the Block 15 
transaction between Oxy and EnCana began. (Note: when 
royalty, tax and other payments are taken into account, the 
state share is already over 60%.)  Second, Oxy would have to 
accept the declaration of caducity (contract nullification, 
which under Ecuadorian law would mean that Oxy's assets in 
Ecuador would devolve to state-oil-company PetroEcuador, 
without compensation to Oxy).  However, Borja said that we 
should not worry because immediately after the declaration of 
caducity, the GOE could announce the new contract the GOE 
negotiated with Oxy to resolve Oxy's violation of the law. 
Econ Counselor pointed out that if caducity was declared it 
seemed that under Ecuadorian law a bid solicitation process 
might be needed, as Oxy's assets would have devolved to 
PetroEcuador as a result of the caducity declaration.  Borja 
dismissed that as unnecessary. 
 
8. (C) Borja's other brilliant idea was to have the President 
of Oxy in the United States come to Quito to sit with Borja 
and President Palacio and the three of them would negotiate a 
resolution, including the terms of the new contract.  Borja 
backed away from that proposal when Econ Counselor noted the 
complexity of such negotiations and the need for technical 
discussions prior to presenting any agreement to Palacio. 
Still, he said, at some point Palacio, the President of Oxy 
and he would need to get together to agree on the final 
resolution.  Moments later, however, Borja contradicted 
himself and said that neither he, nor his office would be 
involved in the negotiations, other than to approve their 
outcome. 
 
9. (C) The night of November 7, Borja called Econoff at home 
to discuss a new procedure for settling the Oxy case.  Borja 
said that Minister of Energy Rodriguez, PetroEcuador 
President Roman and he had met that evening with President 
Palacio.  Borja announced that a commission had been formed 
to resolve the Oxy matter.  He would only give one of the 
names of the commission members to Econoff, Borja's designate 
Pedro Freile.  The other commission members would be one 
representative each from the Ministry of Energy, PetroEcuador 
and SRI (the Ecuadorian Internal Revenue Service).  The 
commission, according to Borja, is supposed to come up with a 
counteroffer by Sunday, November 13 to present to Oxy (whom 
he said should also name a commission, but did not explain 
why).  The two "commissions" would then agree on the final 
resolution.  Once that resolution was reached, the 
commissions would "disappear."  Minister of Energy Rodriguez 
would then appoint his own well-respected expert, who would 
recommend the same solution reached by the "disappeared" 
commissions, whom no one would know about.  Rodriguez would 
next present the proposal of the secret commissions to 
President Palacio for approval.  According to Borja, the 
entire process should only take 45 days. 
Borja Playing Fast and Loose with the Truth 
--------------------------------------------- 
 
10. (C) In his November 7 meeting with Palacio, Roman and 
Rodriguez, Borja told them that the U.S. Embassy agreed that 
Oxy would admit fault and thus accept caducity.  Roman and 
Rodriguez called Oxy to ask if this were true and Rodriguez 
contacted the Embassy to question Borja's assertions.  Econ 
Counselor and Senior Commercial Officer met with Minister 
Rodriguez November 8 to assure him that nothing of the sort 
was stated by EconOffs in their meeting with Borja the day 
before.  Oxy gave Roman and Rodriguez the same message. 
 
Oxy's Reaction 
------------------ 
 
11. (C) Oxy met with Roman and Rodriguez November 8 where the 
idea of a commission was discussed.  They agreed that they 
would move forward on their own with the talks between Oxy, 
Roman and Cordovez (and not wait for the commission to come 
up with any numbers).  The next meeting would be November 11 
and Roman provided Oxy with some "general" numbers, the 
closest that Oxy has seen to a counteroffer from the GOE.  At 
their next meeting, the parties would try to reach an agreed 
amount that could be presented to the new commission the 
following week. 
 
12. (C) The most positive developments to come out of this 
week's events is the affirmation by Minister Rodriguez that 
he would resign rather than declare caducity against Oxy. 
Rodriguez and Roman also believed that they were successful 
in convincing Borja that a declaration of caducity was not 
possible if the GOE wanted to negotiate a settlement with 
Oxy.  Roman told Oxy that he believed that Borja was "all 
show" and that President Palacio is now convinced that Borja 
is a liar because of his untrue allegations of the Embassy's 
position regarding Oxy's alleged acceptance of a caducity 
declaration. 
 
Herreria: Palacio Wants to Decide for Oxy 
---------------------------------------- 
 
13. (C) In a separate meeting, Presidential advisor Luis 
Herreria told Pol Counselor that President Palacio wants to 
decide in favor of Oxy on the caducity issue.  Herreria said 
that the U.S. Embassy should start laying the groundwork with 
the press to sway public opinion in favor of a negotiated 
solution that would keep Oxy in the country.  Pol Counselor 
asked Herreria if the GOE would also be working to create 
such an environment.  Herreria responded with an unconvincing 
yes. 
 
Comment 
----------- 
 
14. (C) We have kept the Procurador at arms length, 
particularly in the last two months when it appeared that 
discussions between Oxy and the GOE might finally start to 
show signs of progress.  It was inevitable that Borja had to 
be brought back into the process.  The fact that the GOE 
asked us to help bring him back in now is some indication 
that the GOE feels it is coming closer to being able to reach 
a settlement with Oxy.  As we expected, Borja will be more of 
a hindrance than help.  Still, the fact that the major 
participants in the process recognize Borja's true nature 
will help to limit his influence.  Besides, this is the first 
time that the Ministry of Energy, PetroEcuador, the 
Presidency, the Procurador and Oxy all seem to be working at 
the same time toward a common goal, a negotiated settlement 
with Oxy. 
 
15. (C) However, with Borja's dishonesty and delusions of 
grandeur, and a general lack of GOE will to resolve any 
difficult problem, reaching a negotiated settlement in the 
near future is by no means assured. 
JEWELL