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Ecuador Breaks with D.C. over Occidental Petroleum


Council On Hemispheric Affairs
MONITORING POLITICAL, ECONOMIC AND DIPLOMATIC ISSUES AFFECTING THE WESTERN HEMISPHERE
Friday, May 19, 2006
COHA MEMORANDUM TO THE PRESS

Ecuador Breaks with Washington over Occidental Petroleum

  • Ecuador’s decision to cancel the oil operation contract of U.S.-based Occidental will prove to be profoundly damaging to Washington’s already faltering Andean policy
  • Following Quito’s cancellation of Oxy’s contract, Washington immediately killed further discussions on the stalled free trade agreement it had been diligently pursuing with Quito, though U.S. negotiators have denied that talks are irrevocably over
  • Coming on the heels of Bolivia’s gas nationalization, the Ecuadorian move suggests a hard driving regional trend towards greater state control over basic resources
  • President Alfredo Palacio, who took over after Lucio Gutierrez was ousted in 2002 by public protests, has had a checkered tenure involving political battles with entrenched congressional interests, and has often lacked clear direction in his executive agenda
  • The Oxy decision has serious implications for Ecuador’s political, let alone economic, future and could mark the adherence of that nation to the growing spread of “pink tide” left-leaning South American countries.
  • After Ecuador revoked the contract of the U.S. oil giant Occidental Petroleum, on Monday, May 15, it was hard to avoid comparisons with Bolivia’s gas nationalization step two weeks earlier. The Ecuadorian government’s decision to move on Oxy consolidates the regional trend towards increased state control over natural resources, which was marked not only by Bolivia’s nationalization but also by the recent Venezuelan decision to up the royalties paid by companies operating in the Orinoco tar belt. Yet the significance of Quito’s action surpasses that of simple copycatting. On an international level, the Oxy cancellation – and the predictable subsequent scuttling of the long-sought bilateral free trade agreement between Ecuador and the U.S. – reflects the increasingly fumbling foreign policy that Washington has adopted towards the region. Domestically, the move marks the denouement of an ongoing popular struggle against Oxy’s operations which had caused considerable headaches for Palacio’s government, and will likely have implications for October’s presidential elections, which are already being discussed in the context of the regional leftist trend away from automatic compliance with State Department desiderata.

    A Policy in Tatters
    Washington, which may have been privately jolted, but appeared outwardly relatively unfazed by Bolivia’s display of economic nationalism, received Ecuador’s announcement with considerably less patience, tact and diplomacy. On Tuesday, U.S. government officials expressed their extreme “disappointment” (a Financial Times headline remarked that the U.S. “deplore[d]” the cancellation) and officials from the U.S. Trade Representative (USTR) office suggested that Quito’s action was tantamount to an expropriation.

    In reality, Washington’s irritation was undisguised, as it quickly and snippily announced an indefinite suspension of the controversial – but long running – negotiations for a bilateral free trade agreement with Ecuador, with USTR spokesperson Neena Moorjani letting it be known that she was not amused when she snapped that good trading partners “obey the rule of law with respect to foreign investors.” Economic interests, in contrast with the Bolivian situation where U.S. investments in gas are negligible, right now loom large in relations between Washington and Quito, and the unlikely loss of Oxy’s approximately $1 billion in investment in Ecuador led senior State Department official Charles Shapiro to comment that the company could take legal recourse against the measure, an action that certainly would be supported by the State Department.

    The repercussions of the breakdown in trade talks are weighty. The Bush administration’s relentless pursuit of bilateral arrangements in the aftermath of the collapse of the proposed hemisphere-wide Free Trade Area of the Americas (FTAA), seemed to be moving forward in the past year, with Colombia and Peru successfully negotiating and then signing – though not yet enacting – agreements, and Ecuador seemingly close to doing the same. Yet those FTA’s were met with vocal protests from civil society in every country involved, and clearly were backed by only a minority of the citizenry, which helped stall their finalization. Relations with the region cooled noticeably as Washington proved unwilling to put forward proposals that adequately addressed regional concerns over the agreements, particularly the ongoing subsidization of U.S. agriculture.

    In Ecuador’s case, it appears as though the United States’ unwillingness to budge on certain issues – primarily concerning agriculture – led to a standstill, which ultimately cost Washington the trust and cooperation of Quito. The cancellation of Oxy’s contract was a clear signal by the Ecuadorian government that it was no longer interested in pursuing a FTA, as the State Department’s prickly response was only too predictable. In effect, stubborn trade policies and arrogant behavior lost the Bush administration yet another regional ally.

    The End of the Road
    The termination of Oxy’s contract for its Ecuadorian operations came after protracted and conflictive negotiations with the government, which involved disputes over taxes and led to an eventual investigation of the company’s financial dealings. The break was precipitated by Oxy’s decision to sell 40% of its shares in its Ecuadorian operations to the Canadian company EnCana without disclosing the sale to the government as it was required to do, leading an already irritated government to assert that Oxy had breached its operating contract (Since then, EnCana has transferred its shares to a Chinese company). The government’s recent hike in taxes on the oil industry – implementing a windfall tax of 50% – compounded tensions between multinationals and the Palacio government, and stalled trade negotiations with Washington. More noticably, Oxy’s operations had long been a lightning rod for public discontent, inciting particularly sharpened attention from the indigenous CONAIE movement, which in recent months has staged numerous demonstrations and roadblocks that paralyzed the country. A Financial Times article observed that “…Occidental has become a cause célèbre for radical trade unions and indigenous organizations that have attached almost as much weight to their campaign against [the company] as to their opposition to…a trade agreement with the U.S.”

    Popular protests in Ecuador’s oil producing regions have characteristically caused difficulties for the government. Palacio’s predecessor, the discredited Lucio Gutierrez, was brought down by a wave of protests, and Palacio himself, in order to survive, has had to negotiate gingerly with the demonstrators, such as those who occupied airports in Orellana and Nueva Loja in August of 2005. By brusquely ending the discussions with Occidental – and carrying out a Morales-esque dispatching of troops – the Ecuadorian authorities achieved something like a socially palatable resolution to the situation. Officials stressed, however, that the government’s move did not signify a nationalization of the industry, and that discussions were already underway with other potential investors – primarily other countries’ state-owned companies, including Venezuela’s PDVSA, Brazil’s Petrobras and Mexico’s PEMEX.

    Implications for an Uncertain Future
    What the decision to void Oxy’s contract ultimately reveals was that Palacio – like Bolivia’s Morales – had become aware of the power of the street, and now was feeling substantial pressure about trying to accommodate Washington. The political leverage of widespread popular discontent clearly overrode the strident complaints of powerful Ecuadorian domestic business groups who opposed the Oxy decision, which suggests that Ecuadorian politicians are sensing a need to be responsive to a body politic which is now looking leftwards. The newly released political force of such leftist sentiment could weigh heavy in the upcoming presidential campaign, as 43-year-old former economy minister and likely future presidential candidate Rafael Correa is being seen as a potential member of the “pink tide” movement, and was widely popular before resigning his position last August. While Correa trails in recent polls, how the Oxy situation plays out could greatly impact his candidacy: he could potentially build on the sentiment which forced the cancellation of the oil-drilling contract, but could also see his campaign hurt if spooked investors lead to capital flight and an economic downturn.

    For Palacio, whose time in office has been unspectacularly spent trying to maintain stability and achieve political consensus, the voiding of the Oxy deal marks a pronounced about-face. Many observers had questioned his initial decision to pursue a FTA, which all along was highly unpopular. By tossing Oxy out, he acceded to the wishes of a broad social group. While Palacio was never thought of as a likely candidate for “pink tide” membership, in ending the contract and accepting the obvious consequences on his relationship with Washington, he may effectively have set his country on a path towards membership in that growing club.

    *************

    This analysis was prepared by COHA Research Fellow Michael Lettieri

    May 19, 2006

    The Council on Hemispheric Affairs, founded in 1975, is an independent, non-profit, non-partisan, tax-exempt research and information organization. It has been described on the Senate floor as being “one of the nation’s most respected bodies of scholars and policy makers.” For more information, please see our web page at www.coha.org; or contact our Washington offices by phone (202) 223-4975, fax (202) 223-4979, or email coha@coha.org.

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    Memorandum to the Press 06.30

    Word Count: 1350

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