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Cablegate: Ecuador's Itt Fields Under Consideration Once Again

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DE RUEHQT #0906/01 1101854
ZNR UUUUU ZZH
O 201854Z APR 07
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6818
INFO RUEHBO/AMEMBASSY BOGOTA PRIORITY 6593
RUEHCV/AMEMBASSY CARACAS PRIORITY 2504
RUEHLP/AMEMBASSY LA PAZ APR 0547
RUEHPE/AMEMBASSY LIMA PRIORITY 1591
RUEHBR/AMEMBASSY BRASILIA PRIORITY 3735
RUEHBJ/AMEMBASSY BEIJING PRIORITY 0183
RUEHSG/AMEMBASSY SANTIAGO PRIORITY 3049
RUEHGL/AMCONSUL GUAYAQUIL PRIORITY 2208
RUEHSO/AMCONSUL SAO PAULO PRIORITY 0190
RUEHRI/AMCONSUL RIO DE JANEIRO PRIORITY 0042
RHMFIUU/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS QUITO 000906

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR WHA/EPSC FAITH CORNEILLE
TREASURY FOR SGOOCH

E.O. 12958: N/A
TAGS: ECON EPET EINV EC
SUBJECT: ECUADOR'S ITT FIELDS UNDER CONSIDERATION ONCE AGAIN

REF A: Quito 394
REF B: 06 Quito 2386
REF C: 06 Quito 1920

1. (SBU) Summary: Development of Ecuador's heavy crude ITT fields
has been under discussion for over 10 years. Situated in the
environmentally sensitive Yasuni National Park, the three fields
contain an estimated billion barrels of reserves and could
potentially produce 190,000 barrels of crude oil per day, with a
project price tag of between 3 and 4 billion dollars. If realized,
the project could boost Ecuador's petroleum production (now falling
due to lack of investment, Ref A), the government's revenues, and
Ecuador's balance of trade. However, environmental and legal
concerns, the substantial investment costs required for a project of
this magnitude, and unclear and seemingly divergent administration
views on how to develop the fields could delay the project. The
administration is clearly looking to move forward with ITT, but its
message on how to do so is confused. Nevertheless, the fact that
the project is moving at all could signal a change in policy for
Ecuador's stagnant petroleum sector. End Summary.

2. (SBU) The size of the Ishpingo-Tambococha-Tiputini (ITT) fields
means its development is of interest to oil majors, but to date the
GOE has not presented a specific invitation for bids. In late 2006,
Government of Ecuador (GOE) representatives in the Palacio
administration told us they planned to put the project out for
international bid before the end of the year (Ref B). In the end
the GOE decided it was an issue "for the next government to decide,"
and took no action. In the early days of the Correa administration,
development seemed unlikely under new Energy Minister Alberto
Acosta, who favored a moratorium on new petroleum projects in the
southern Oriente region and did not appear concerned about Ecuador's
falling petroleum production. However, talk of possible ITT
development surfaced again recently, spurred by Petroecuador
President Carlos Pareja's efforts to coordinate a development
proposal with a number of state oil companies.

Controversy Over GOE Options
----------------------------

3. (SBU) Tension between Acosta and Pareja over possible
development of ITT has been widely reported in the press. Acosta
announced a proposal that the international environmental NGO
community compensate the GOE $700 million for not developing the
fields, to avoid the environmental damage such a large project could
cause. Pareja had meanwhile been working with foreign state oil
companies Petrobras (Brazil), SIPC-Sinopec (China), and ENAP (Chile)
on the possibility of a joint consortium proposal to develop the
fields (these firms had all previously expressed interest in the
project). Acosta asserted to the press that only fully state-owned
companies should be considered for ITT development and that it
remained to be seen "whether Petrobras is considered a state
company" (note: Petrobras is a "hybrid" company with significant
private ownership). He later retracted his statement.

4. (SBU) Amidst the controversy, President Correa intervened to
clarify the GOE position. Correa announced he was faced with a
"dilemma of conscience" regarding the project. His first choice
would be to leave the oil in the ground and receive compensation not
to develop the fields (although he cut Acosta's compensation figure
in half). Failing that, he would want Petroecuador to develop ITT
using its own resources (industry experts, including from within
Petroecuador, believe this is unrealistic given Petroecuador's poor
financial situation (Ref C)). Development by a consortium of state
oil companies would be a third option, followed by putting the
project out for international bid.

5. (SBU) Petroecuador's Planning Director noted he believes that
the consortium option is the favored "realistic" GOE option, but did
not rule out a possible international tender. He commented that
state companies don't always finalize contracts, and implied that
their investment plans are influenced by their country's political
objectives, which can easily change. Pareja has pushed the
consortium idea, signing a preliminary MOU with the companies
involved, but most recently announced that due to "unusual interest"
the ITT project would be put out for international bid in May. With
so many divergent public announcements on the issue, it is unclear
how, or even whether, the ITT project will be awarded in the end.

Petroecuador's Consortium MOU
-----------------------------

6. (SBU) On April 4, Pareja accompanied President Correa on his
trip to Brazil and signed a non-binding memorandum of understanding
(MOU) between Petroecuador and Petrobras, ENAP, and SIPC-Sinopec on
possible future development of the ITT fields. The consortium
reportedly has a period of 90 days starting from March 26 to
complete a technical evaluation of the fields and submit a joint
proposal for development. The proposal would include a plan for
confirming reserves, and a preliminary development plan and early
production plan. It would also include a proposal, if feasible, for
building a plant to upgrade the oil produced and an electricity
plant that would use the upgrade plant's residues as fuel.
Petrobras has told us they would be interested in leading the
potential project, based on their experience in Ecuador and the fact
that their Block 31 (not currently operational due to environmental
issues) adjoins the ITT fields.

7. (SBU) A team of experts from the consortium are working together
to analyze Petroecuador's existing data on the fields. A 2005
analysis by French engineers serves as the basis for the work, but
lacks the hard technical data needed to develop a substantive
proposal. GOE requirements include strict compliance with
environmental laws, and a minimum 50 percent share of revenues
(based on reforms to Ecuador's hydrocarbons law in 2006). Referring
to the consortium, Petroecuador's Planning Director remarked that
Petroecuador will review proposals in June or July and then make a
decision on the project. He predicts that it will take 12-18 months
to be ready for production, and an additional 12-18 months for the
plants to be operational. He noted that Petroecuador could decide
to start petroleum production before a potential plant-building
phase.

Will Venezuela Join In?
-----------------------

8. (SBU) Another key player that might be involved in ITT is
Venezuela state oil company PDVSA. Pareja had not included PDVSA in
his initial plans for ITT (some local analysts believe it is because
he does not consider PDVSA to be a viable player). However, Acosta
reportedly supports PDVSA for the project, and when Pareja
accompanied Acosta to a regional energy summit in Venezuela on April
16 and 17, he extended an offer to PDVSA to join the existing
consortium or present a separate bid. Press from the summit
reported that PDVSA Vice President Luis Vierma said PDVSA "is
negotiating, and there is a large possibility" of participation.
Whether PDVSA would join the consortium or choose to submit a
separate proposal on its own remains to be seen (Petroecuador's
Planning Director commented that PDVSA might be interested in
submitting a joint proposal with Turkish Petroleum). Petrobras
representatives noted that PDVSA involvement might increase the
political viability of the project within Ecuador.

Other Countries Interested
--------------------------

9. (SBU) Other countries reportedly interested in the project
include state companies from Japan, Malaysia, India, Argentina,
Colombia, and Peru, and private French company Total. Post is not
aware of any U.S. companies that are interested in investing in ITT.


Environmental and Legal Issues
------------------------------

10. (SBU) In the environment arena, a number of issues will likely
challenge ITT development. First, the project is located in an
environmentally sensitive national park that could contain
uncontacted indigenous tribes. The park would be disturbed not only
by the wells, but by the transportation links needed to build the
project and the pipelines needed to get the oil out. Environmental
and indigenous-rights NGOs will likely protest the development
project. Petroleum projects must also receive approval of
environmental impact studies from the Ministry of Environment before
any activities can take place. This approval could be contentious
if environmental activists and indigenous community members actively
protest. Another consideration is that half of the Ishpingo field
in the south part of the ITT block is partially located in an area
the Environment Minister declared as "untouchable" in 2006, meaning
that that part of the field will likely not be available for
development.

11. (SBU) There are also differing legal opinions regarding whether
an alliance or consortium of companies would be permitted to develop
the fields, and whether private or only state companies could
participate. Some experts also point to an existing Ecuadorian law
which requires heavy crude fields to be developed through integrated
projects that include both upstream and downstream operations. They
believe that only a development project that includes
industrialization would be permitted under Ecuadorian law. In the
complex legal framework surrounding the petroleum sector, concerns
of a legal challenge to a development project are very real.

COMMENT:
--------
12. (SBU) It is notable that the GOE is focusing on this project at
the beginning of the administration, when there is potential for
real progress. Based on initial GOE comments that oil contracts
would be renegotiated and that there could be a moratorium on
exploration in certain areas of the country, we believed the
petroleum sector in Ecuador would stagnate. However, there appears
to be an effort, at least by the state oil company, to move forward,
and Pareja appears (for now) to have the political clout to bring
the Energy Ministry along with him. In fact, although messages to
the press on how to develop ITT have been confused, they indicate
that Acosta's idea of receiving compensation to "leave the oil in
the ground" no longer appears to be in contention.

13. (SBU) The GOE is groping for a solution on how to deal with
ITT, but how it will play out is very unclear. The power struggle
between Acosta and Pareja may resurface, should PDVSA (who Acosta
reportedly supports) submit its own proposal for development.
Although Pareja reportedly favors the consortium option, it is not
necessarily the best way to develop the fields. State companies may
not have the most advanced technologies and environmental expertise,
and foregoing a competitive bid process could reduce transparency
and competition for best price and proposals. END COMMENT.

JEWELL

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