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Cablegate: City Oriente Requesting Arbitration

VZCZCXYZ0000
OO RUEHWEB

DE RUEHQT #2465 2831915
ZNR UUUUU ZZH
O 101915Z OCT 06
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5427
INFO RUEHBO/AMEMBASSY BOGOTA PRIORITY 6052
RUEHCV/AMEMBASSY CARACAS PRIORITY 2077
RUEHLP/AMEMBASSY LA PAZ OCT 0135
RUEHPE/AMEMBASSY LIMA PRIORITY 1027
RUEHGL/AMCONSUL GUAYAQUIL PRIORITY 1251
RHMFIUU/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS QUITO 002465

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR WHA/AND
TREASURY FOR SGOOCH
USTR FOR BENNETT HARMAN

E.O. 12958: N/A
TAGS: EINV EPET ENRG EC
SUBJECT: City Oriente Requesting Arbitration

Ref. a) Quito 2147, b) Quito 889, c) Quito 809

1. (SBU) Summary. City Oriente is presenting on October 10 its
request for international arbitration, asserting that its contract
has been violated by the revised hydrocarbons law. The company
asserts that it is still focused on a negotiated solution, but
believes that it should file for arbitration as a defensive measure.
It is driven in large part by concerns that either the current or
future government may try to cancel its contract since it has not
yet made the additional payments to the GOE that are required under
the revised hydrocarbons law. End summary.

2. (SBU) On October 5, City Oriente officials Kyle Ford and Jose
Paez informed the Ambassador that City Oriente is planning to
request international arbitration to challenge the hyrocarbons law
reform that requires them to share 50 percent of extraordinary
revenue with the GOE (reftels). They said that would request the
arbitration under the terms of their contract, not under the
Bilateral Investment Treaty. The arbitration would be under ICSID
rules but they expect the venue would be Quito, as stipulated in
their contract. Ford said that they believe that filing for
arbitration under their contract rather than the BIT would be seen
as less confrontational by Ecuadorian authorities. Ford said that
City Oriente would inform GOE officials of the arbitration request
right after they file, in an effort to defuse any possible tension
and stress City Oriente's desire for a mutually agreeable
settlement. (On October 10, Ford confirmed that its attorney (Baker
and Botts) was filing the arbitration request the same day.)

3. (SBU) Ford said that City Oriente would prefer a negotiated
solution, and intends to continue negotiations with the GOE to
rework its contract under the hydrocarbons law, but City Oriente
officials are skeptical that they would be able to reach an
acceptable agreement with the current administration. Meanwhile,
they expect to receive a letter from the GOE asking City Oriente to
explain why it has not made any payments as required under the
revised hydrocarbons law. (City Oriente has been depositing the
required payments in an offshore account.) Ford said that by filing
for arbitration now City Oriente believes it will be establishing a
degree of protection against the current or future administration
declaring caducity (i.e., canceling the contract) because City
Oriente has refused to make payments under the revised hydrocarbons
law.

4. (SBU) The Ambassador suggested that City Oriente carefully
develop its public relations strategy prior to filing the
arbitration request, given the risk that the request could be given
a negative spin in Ecuador following the Oxy saga. Ford said that
City Oriente had discussed their public relations approach
internally, and believe that they have good story to tell, focusing
on their small size, investments in Ecuador, desire for a negotiated
solution, and that the arbitration request was taken for defensive
purposes. However, he did say that City Oriente would consider
hiring a professional public relations firm to help it manage the
issue.

5. (SBU) Comment: If City Oriente does file for arbitration, it
would join seven other arbitration cases that are ongoing against
the GOE or its parastatals. It is unfortunate, but not surprising,
that City Oriente believes that its discussions with the GOE
probably will not bring an acceptable solution to contractual
changes required by the hydrocarbons law. It remains to be seen
whether filing for arbitration will spur the GOE toward finding a
resolution, or whether arbitration would protect City Oriente from
caducity.

Jewell

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