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Cablegate: Another U.S. Oil Company Pulling Out of Ecuador

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OO RUEHWEB

DE RUEHQT #1091/01 1351332
ZNR UUUUU ZZH
O 151332Z MAY 07
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6972
INFO RUEHBO/AMEMBASSY BOGOTA PRIORITY 6647
RUEHCV/AMEMBASSY CARACAS PRIORITY 2546
RUEHLP/AMEMBASSY LA PAZ MAY 0589
RUEHPE/AMEMBASSY LIMA PRIORITY 1653
RUEHGL/AMCONSUL GUAYAQUIL PRIORITY 2309
RHMFIUU/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS QUITO 001091

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR WHA/EPSC FAITH CORNEILLE
TREASURY FOR SGOOCH

E.O. 12958: N/A
TAGS: ECON EPET EINV EC
SUBJECT: ANOTHER U.S. OIL COMPANY PULLING OUT OF ECUADOR

Reftel: 06 QUITO 2147

1. (SBU) Summary: Conoco Philips has decided to sell its assets in
Ecuador. Conoco acquired several production and exploration blocks
in Ecuador when it purchased Burlington Resources in 2006, and
concluded that the Ecuadorian assets are not economically attractive
compared to other holdings in its portfolio. With Conoco's
departure, City Oriente is the last U.S.-owned operating oil company
in Ecuador (of the two other remaining U.S. companies, one produces
natural gas and the other is a portfolio investor). End Summary.

2. (SBU) Herb Vickers, General Manager of Burlington Resources
Ecuador (acquired by major oil company Conoco Phillips in May 2006)
informed the Ambassador on May 10 that Conoco has decided to dispose
of its assets in Ecuador. Conoco had tried to privately arrange a
purchase with some of its business partners in Ecuador, but those
partners backed out. Conoco will now open a data room so potential
buyers can review its assets. Conoco informed the GOE of its plans,
and wanted to advise the Embassy as well.

3. (SBU) Conoco has minority shares in two blocks in Ecuador
currently producing oil (Blocks 7 and 21), which are operated by the
French company Perenco. Conoco also holds the rights to two
exploration blocks (Block 24 is wholly owned and Block 23 is owned
jointly with Argentine firm CGC). Both exploration blocks have been
in force majeure for years due to problems with indigenous and
environmental groups opposed to petroleum operations.

4. (SBU) Vickers explained that a large petroleum company like
Conoco requires a high rate of return for its assets, and the
holdings in Ecuador would be hard pressed to reach that threshold.
Returns in Ecuador deteriorated with the revenue sharing
requirements imposed by the 2006 amendment to the Hydrocarbon Reform
Law. Further complicating the equation is uncertainty regarding
additional changes that might be imposed by the Correa
administration, which, when incorporated into estimates of future
returns, further reduce the financial attractiveness of the
Ecuadorian holdings.

5. (SBU) Conoco first attempted to sell its assets in Ecuador to
Perenco, which was interested and close to finalizing a sale in
December 2006. Perenco said that it backed out of the purchase
because it did not want to take on the exploration blocks that
Conoco was trying to sell as port of the package. However, Vickers
speculates that Perenco withdrew due to uncertainty over the
direction the new Correa government might take. (Other sources
ascribe Perenco's non-interest to the death of the French owner in a
December 2006 French Alps skiing accident, and his heirs' desire to
sell their Ecuadorian operation.)

6. (SBU) Vickers said Conoco tried to package the production and
exploration blocks together, so that the buyer would take over a $1
million guarantee that the company might have to pay if it abandons
the exploration blocks. However, when Conoco opens a data room for
its assets, it will no longer try to sell all its blocks as a
package, but would be willing to give away the exploration blocks to
any interested company. Vickers said that there is interest from
Ecuadorian operators for the production blocks, but little interest
in the exploration blocks due to the difficulties with indigenous
and environmental interests. Vickers speculated that the government
might cancel its exploration rights, rather than see a different
company attempt to explore the area, given Energy Minister Acosta's
statements that he wants to limit new exploration. If so, that
would also cancel Conoco's guarantee.

7. (SBU) Vickers said that Conoco is framing its departure as a
financial decision following the consolidation of Conoco's and
Burlington's assets. Given Conoco's other holdings in the region,
particularly Peru where indigenous groups also oppose its
activities, Conoco does not want to give any public play to the
political uncertainty that went into its calculations or the
indigenous problems that also have hampered its operations.
However, Vickers speculated that the international NGO community
will paint Conoco's departure as a win for environmentalists.

8. (SBU) Comment. Ecuador's difficult and uncertain investment
climate, particularly in the petroleum sector, was an important
factor behind the Conoco decision to withdraw and explains its
inability even to give its exploration rights gratis to another oil
company. This is the second time it has left (it also pulled out in
the early 1990s), rejoining the list of U.S. companies that have
left Ecuador (among those that have left in the last 15 years:
ARCO, Exxon, Maxus, Occidental, Tenneco, Texaco, Unocal, and
Vintage). Vickers, who also worked in Indonesia, said that
Indonesians kept pressing for more benefits from foreign oil
companies, but knew not to push the foreign investors over a line
that would force them to leave. Ecuador, he said, does not know
where that line is.

9. (SBU) With Conoco/Burlington's withdrawal, U.S. participation in
Ecuador's oil and gas sector is confined to City Oriente, EDC (Noble
Energy), and Murphy Oil. City Oriente, a small, family-operated
company, is the sole U.S.-owned company producing oil in Ecuador.
City, like Conoco, is worried about its ability to maintain its
Ecuador operation and has filed for international arbitration over
the conditions imposed unilaterally by the hydrocarbons law. Noble
Energy produces natural gas in offshore Block 3 to supply their
electricity generator, Machala Power. Noble Energy has filed for
international arbitration to recover $60m owed by the GOE for
electricity sold. Murphy Oil, based in El Dorado, Arkansas, is a
20% portfolio investor in Repsol YPF's Block 16. Income from Murphy
Oil's share of production fell from $7.7m in 2006 to $4.1m in 2007
due to increased royalty payments mandated in a 2006 amendment to
Ecuador's Hydrocarbons Law.

JEWELL

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