Cablegate: Petrobras Investigation Could Lead to Contract

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DE RUEHQT #1678/01 2071847
ZNR UUUUU ZZH
O 261847Z JUL 07
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7451
INFO RUEHBO/AMEMBASSY BOGOTA PRIORITY 6773
RUEHCV/AMEMBASSY CARACAS PRIORITY 2615
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RUEHGL/AMCONSUL GUAYAQUIL PRIORITY 2576
RUEHSO/AMCONSUL SAO PAULO PRIORITY 0194
RUEHRI/AMCONSUL RIO DE JANEIRO PRIORITY 0046
RHMFIUU/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS QUITO 001678

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR WHA/EPSC FAITH CORNEILLE
TREASURY FOR MMALLOY AND MEWENS

E.O. 12958: N/A
TAGS: ECON EPET EINV PREL EC
SUBJECT: PETROBRAS INVESTIGATION COULD LEAD TO CONTRACT
CANCELLATION

REFTEL: 06 Quito 1216

1. (SBU) Summary: Brazilian state petroleum company Petrobras is
being investigated for possible contract violations that could lead
to the cancellation of its contract. The allegations echo those
leveled at U.S. firm Occidental Petroleum, whose contract was
subsequently cancelled and assets seized in 2006. Ecuador's
Prosecutor General initially came out strongly against Petrobras but
then softened his tone, while the Minister of Petroleum and Mining
has said further technical investigation is necessary. Petrobras
has not been formally notified of potential irregularities and
denies any wrongdoing. End Summary.

GOE INVESTIGATES IRREGULARITIES
-------------------------------

2. (SBU) Before Energy Minister Alberto Acosta left office in June,
he reportedly wrote a number of letters requesting investigations
into foreign oil company petroleum contracts, including one to the
President mentioning possible contract violations by Brazilian state
oil company Petrobras. Petrobras produces close to 35 thousand
barrels of petroleum per day and has operated in Ecuador since 1996.
On July 3, a government report was submitted to acting Energy
Minister Jorge Alban (later acting Petroleum and Mining Minister
when the Ministry split July 10), alleging Petrobras's contract may
be cancelled ("caducity") for violations. The report allegedly
suggests suspension of Petrobras's contract and seizure of its
assets for the irregularities.

3. (SBU) Press coverage of GOE statements indicate the report
(which is not publicly available; even Petrobras has not been able
to obtain a copy) alleges two distinct violations. The first is
that Petrobras sold a 40% stake in its operations to Japanese firm
Teikoku without Ministry of Energy consent in 2005. This is the
more serious accusation, and some have said the action warrants
caducity because it is the same violation U.S. firm Occidental
Petroleum allegedly committed (Occidental's contract was cancelled
in 2006 for unapproved transfers and its substantial assets seized,
reftel). The second is related to the operation of Petrobras's Palo
Azul 1 and 2 fields. In 2000, the Energy Ministry declared that the
two fields were linked, permitting Petrobras to operate Palo Azul 2
which had belonged to state firm Petroecuador. However, the report
alleges the fields are not connected and therefore Petrobras's
operation of Palo Azul 2 is illegal because it still belongs to
Petroecuador.

OFFICIALS ARGUE BACK AND FORTH
------------------------------

4. (SBU) Petrobras issued a statement denying irregularities in its
operations in Ecuador. Several days later, Ecuador's Prosecutor
General announced that the issue was being investigated by his
office, and that the GOE would probably have to consider cancelling
Petrobras's contract (suggesting such cancellation was imminent).
On July 10, acting Minister of Petroleum and Mining Jorge Alban
countered by announcing that the issue was under analysis by the
Anticorruption Secretariat, and that following the analysis,
Petroecuador would investigate and produce a technical, legal, and
economic report. The Prosecutor General then backpedaled slightly
and issued another statement noting that there was a large
difference between the Petrobras situation and the Occidental
situation - that Occidental had never notified the Ministry about
the sale of its assets, but Petrobras had (although he noted that
other irregularities would be looked into). He also emphasized that
"the final word is with the Petroleum Ministry." On July 18, Alban
reported that a new technical and legal commission had been created
to investigate the irregularities and ensure an unbiased analysis.

PETROBRAS DENIES WRONGDOING
---------------------------

5. (SBU) To date, Petrobras has not received public notification of
an investigation. The company's press release on the issue states
that it has done nothing wrong and would be happy to provide all
documentation if requested by the GOE. Petrobras representative
Fernando Enmanuel notes that the firm cannot even get a copy of the
report alleging misconduct. He claims the transfer to Teikoku was
approved by former Energy Minister Ivan Rodriguez, and that the

issue of the Palo Azul fields being linked was approved by
government technicians in 2001. He hopes that the tapering off of
strong government messages on caducity means the issue might fade
away.

COMMENT:
--------

6. (SBU) The back and forth nature of the statements by the
Prosecutor General and the Petroleum Minister offer a glimpse of the
contradictory government assertions often seen in the press, and the
lack of clear guidance in the sector. This is likely compounded by
frequent changes in the Ministry. Spanish firm Repsol is also being
investigated for a possible contractual irregularity, although the
potential violation is much less significant than Petrobras's.
Petrobras representative Enmanuel commented that some insiders
consider the investigations a way for Petroecuador to gain leverage
and a better negotiating position before initiating contract
renegotiations with foreign oil companies. Head of Ecuador's
hydrocarbons association Rene Ortiz blames the lack of investment in
the petroleum sector on lack of judicial security, as evidenced by
the uncertainty surrounding these allegations. While the
allegations linked to Occidental became much more politicized and
public, these events show that the U.S. and its companies are not
alone in dealing with the difficulty of operating in the energy
sector in Ecuador.

JEWELL

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