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Cablegate: Ecuador Signs More Energy Agreements with Venezuela

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FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4745
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RUEHME/AMEMBASSY MEXICO 1499
RUEHSG/AMEMBASSY SANTIAGO 2983
RUEHGL/AMCONSUL GUAYAQUIL 0767
RUEATRS/DEPT OF TREASURY WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RHMFISS/CDR USSOUTHCOM MIAMI FL
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS QUITO 001612

SIPDIS

SENSITIVE
SIPDIS

PASS TO USTR FOR BENNETT HARMON

E.O. 12958: N/A
TAGS: ECON EC ECON EPET ETRD PREL VZ EINV
SUBJECT: ECUADOR SIGNS MORE ENERGY AGREEMENTS WITH VENEZUELA

REF: A. QUITO 1315

B. QUITO 1438

1. (U) Summary. Ecuador's and Venezuela's state energy
companies PetroEcuador and PDVSA yesterday signed a pair of
energy agreements, following a series of technical meetings
this month. Venezuela's Energy Minister Rafael Ramirez and
acting PetroEcuador President Walter Lopez were joined by
Ecuadorian Energy Minister Ivan Rodriguez last night to forge
two agreements, a strategic alliance and an agreement to
exchange Ecuador's crude from Block 15 for PDVSA refined
products, implementing those signed on May 30 (reftel A).
Early analysis by industry experts suggests Ecuador gains
nothing and may lose money on the deal. End summary.

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Strategic Alliance
------------------

2. (U) The strategic alliance spans the entire energy
production chain, including hydrocarbons exploration,
production and refining, as well as transportation, storage,
petroleum services, and training. The alliance is for five
years, can be renewed anytime, and permits direct
collaboration between PetroEcuador and PDVSA.

Oil Exchange Agreement
----------------------

3. (U) In contrast to the agreement signed last month,
(reftel A) PetroEcuador will exchange its oil for refined
products from PDVSA's own crude. PetroEcuador will provide
PDVSA up to 100,000 barrels a day of crude from Block 15's
Napo field (Oxy's former field) in exchange for an equivalent
amount of PDVSA's refined products. The agreement is valid
for one year and is automatically renewed unless a 90 day
written notification is provided by either party. Volumes
will fluctuate monthly based on market prices for the various
products. Although lacking specifics, press reports suggest
the first shipment could include 65,000 barrels of crude in
exchange for 23,000 barrels of diesel, 17,000 barrels of high
octane gasoline, and 3,000 barrels of butane.

4. (U) The agreement contains no details on the transaction
and requires two subsequent contracts that outline the
shipment of crude and the provision of refined products,
which Ecuadorian Energy Minister Rodriguez announced will be
signed next week. Venezuela previously said it would charge
$5 a barrel in refinement costs (reftel B), however press
reports say the agreement signed yesterday requires Venezuela
to incur transport and insurance costs, and to pick up and
deliver the oil and refined products at Ecuador's Port
Esmeraldas. Venezuela announced it is already prepared to
accept the first shipment of Ecuadorian crude, however press
reports indicated the first shipment would not occur until
after August 1.

5. (SBU) Initial private analysis by two independent Embassy
contacts suggests that the GOE will gain little, and may
lose, on this deal. Necessarily limited by the sketchy
information so far available, both analyses predict financial
losses from the deal. While one local economist tells us
that losses are likely but will not be great, the other, more
grounded in the industry, believes multimillion dollar losses
are more likely.


Committees
----------

6. (U) Venezuelan Energy Minister Ivan Rodriguez also
announced PDVSA has opened an office in Quito. The
agreements create two committees, which will meet monthly in
Caracas or Quito, to identify and recommend projects of
mutual interest and to coordinate the oil and refined
products exchanges. Each country will have three
representatives.

Comment
-------

7. (U) Clearly this is a political move on the part of the
GOE, intended to demonstrate how the country is capitalizing
on its takeover of Block 15 from Oxy and how the government
is benefiting the citizenry. The press has bought much of
the argument, so far, and today's reports state that Ecuador
postponed the signing ceremony from last week until it had
secured an agreement that provided maximum benefits to the
country. The economics of the agreement suggest, however,
that the GOE will more likely lose than gain from the deal.
Press reports say the GOE expects to save $3-11 million a
month, but the GOE will be lucky to break even. Based on
current Ecuadorian crude and refined products prices, Ecuador
would need to secure a deal at least as good as the 65,000
barrels of crude in exchange for 43,000 barrels of refined
products if it hopes to get even a few million in profits.
More likely, though, is that the GOE will get the short end
of the stick on the oil exchange, with perhaps a select few
Ecuadorians behind the scenes profiting on the deal.
JEWELL

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