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Cablegate: Ecuador to Offer More Flexibility in Petroleum

VZCZCXYZ0058
OO RUEHWEB

DE RUEHQT #0533/01 1691457
ZNR UUUUU ZZH
O 171457Z JUN 08
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9028
INFO RUEHBO/AMEMBASSY BOGOTA PRIORITY 7609
RUEHCV/AMEMBASSY CARACAS PRIORITY 3073
RUEHLP/AMEMBASSY LA PAZ JUN 1100
RUEHPE/AMEMBASSY LIMA PRIORITY 2656
RUEHGL/AMCONSUL GUAYAQUIL PRIORITY 3623
RHMFIUU/DEPT OF ENERGY WASHINGTON DC PRIORITY

UNCLAS QUITO 000533

SENSITIVE
SIPDIS

DEPT FOR WHA/EPSC FAITH CORNEILLE

E.O. 12958: N/A
TAGS: ECON EPET ENRG EINV EC
SUBJECT: ECUADOR TO OFFER MORE FLEXIBILITY IN PETROLEUM
NEGOTIATIONS

REFTEL A: QUITO 351
B: 07 QUITO 2277
C: QUITO 55

1. (U) Summary. The GOE has offered to restart contract
renegotiations with petroleum companies that it froze in April 2008,
with additional flexibilities for firms such as a lower state share
of extra revenues and a one-year extension of participation
contracts. In exchange, companies would need to drop arbitration
demands and commit to increase investments, and switch to services
contracts after a year. End Summary.

2. (U) Thursday evening, June 12, Petroleum and Mines Minister Galo
Chiriboga, under instructions from President Correa, offered to
restart contract renegotiations with petroleum companies which the
GOE froze in April 2008 (ref A). The GOE would drop the
government's share of "extraordinary revenues" from the current 99%
to 70%, and continue participation contracts for one year before
companies would have to switch to service contracts (where they
would only be paid for services provided). In exchange, companies
would need to withdraw their arbitration demands and agree to a new
forum for future arbitrations (other than the World Bank's center
for investment disputes), and commit to increase investment.

The Players
-----------

3. (U) Five companies operating in Ecuador have filed for
international arbitration against the GOE, asserting that the
requirement that companies share at least 50% of "extraordinary
income" with the state (upped to 99% in October 2007, ref B) changes
the terms of their contracts and makes operations unviable. They
include the U.S. firm City Oriente, French company Perenco and its
U.S. minority partner Burlington (part of ConocoPhilips), and
Spanish company Repsol and one of its minority partners, U.S. Murphy
Oil. Repsol was the most recent company to file for arbitration, in
June 2008.

4. (U) Brazilian Petrobras and Chinese Andes Petroleum are the two
remaining major petroleum companies affected by the law that have
not yet filed for arbitration.

5. (SBU) After Correa suspended contract negotiations, the GOE
floated a model services contact in early June. The oil companies
we talked to rejected the draft as incomplete. For example, it
failed to explain how the GOE would compensate the oil companies for
either the investments they have made to date, or would undertake
under a services contract.

New Proposal "A Step Forward"
-----------------------------

6. (SBU) Repsol is one of the largest foreign petroleum companies
operating in Ecuador. The head of Ecuador's Hydrocarbons
Association believes that with Repsol's arbitration filing, the GOE
finally realized its previous proposals were unacceptable and is
taking the situation seriously. He says companies consider the
current proposal "not good, but a step forward." A 70% share could
be acceptable to companies depending on the base for calculating
extraordinary revenues, and was a key element in the contract
negotiations that were aborted in April. (Note: the comprehensive
tax package passed at the end of 2007 established that new contracts
would be subject to a 70% extraordinary revenue sharing requirement
- ref C) However, he considers a one year contract extension too
short for companies to invest and recoup their money before they
must face an unknown services contract proposal (in the aborted
contract negotiations, at least Repsol and its partners considered a
longer term contract extension to be an important factor in their
willingness to accede to additional revenue sharing). He reports
that petroleum companies will meet with GOE negotiating teams to
discuss contracts beginning the week of June 16.

Comment:
--------

7. (SBU) The GOE move to restart contract renegotiations with
petroleum companies appears to be a positive step forward, possibly
brought on by the GOE need for additional petroleum revenue as
foreign companies have halted investment this year. However, the
many conditions required make it unlikely that firms would agree in
full to the current proposal - dropping arbitration and promising to
migrate in a year to an as-yet undefined services contract appear
particularly problematic. Given the many twists and turns of

petroleum renegotiations to date, it is unclear if the current
proposal signals a serious new start by the GOE.

JEWELL

© Scoop Media

 
 
 
 
 
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