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Cablegate: Ecuador Sells Future Oil Production to Petrochina To

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UNCLAS QUITO 000820

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EPET EINV EFIN ENRG EC
SUBJECT: ECUADOR SELLS FUTURE OIL PRODUCTION TO PETROCHINA TO
STRENGTHEN FISCAL ACCOUNTS

REF: 09 QUITO 351

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SUMMARY

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id: 223899
date: 9/4/2009 21:42
refid: 09QUITO820
origin: Embassy Quito
classification: UNCLASSIFIED//FOR OFFICIAL USE ONLY
destination: 09QUITO351
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UNCLAS QUITO 000820

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EPET EINV EFIN ENRG EC
SUBJECT: ECUADOR SELLS FUTURE OIL PRODUCTION TO PETROCHINA TO
STRENGTHEN FISCAL ACCOUNTS

REF: 09 QUITO 351

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SUMMARY

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1. (SBU) The Government of Ecuador (GoE) is increasingly looking to
China as a source of financing to help alleviate fiscal pressures.
The prime example of this is Ecuadorian state-run oil firm
PetroEcuador's recent agreement to sell future oil production to
China's state-owned oil company PetroChina, under which the GoE
received an advance payment of US$1 billion. The GoE entered into
this arrangement to ease liquidity constraints resulting from the
fall in oil prices and a major expansion in government
expenditures. The GoE is negotiating for an additional US$ 1
billion credit from China, and private sector sources tell Post the
full advance payment could total US$ 3 billion. Private analysts
worry that this non-transparent and seemingly expensive deal,
comprising 34% of Ecuador's oil production through July 2010,
prioritizes current expenditures at the expense of future revenues
and fiscal solvency. End Summary.

--------------------------------------------- -------

PetroChina US$ 1bn Advance Payment for Ecuadoran Oil

--------------------------------------------- -------

2. (SBU) According to the agreement signed July 27, 2009 between
PetroChina and PetroEcuador, PetroChina will purchase 69 million
barrels over two years at a rate of approximately 95,000 barrels
per day (bpd). The price for each shipment of crude will be
determined by the prevailing market price. Under the agreement,
the GoE received an advance payment of $1 billion from PetroChina
in early August. The annual interest rate on the $1 billion
advance will be 7.25%.

3. (SBU) PetroEcuador announced at the time of the signing that
PetroChina will discount approximately 28% of the cost of each
barrel exported as payment on the advance, in effect leaving
PetroEcuador and the GoE 72% of the value of exports to PetroChina.
PetroEcuador officials explained to the Embassy that this
calculation is based on an average oil/barrel price of $60 over the
next two years, and that this percentage breakdown will adjust to
account for changes to the price of Ecuadoran oil. According to
the contract, China will be the final consumer of the oil and will
not be able to resell it to other countries.

4. (SBU) This deal compromises roughly 20% of Ecuador's oil
production over the next couple of years, and China will leap ahead
of other export markets to become Ecuador's second largest market
after the U.S (based on 2008 statistics). According to Central
Bank data, from January to June 2009 Ecuador exported 59.73 million
barrels of oil, down from 66.21 million barrels during the same
period in 2008. In 2008, almost 62% of Ecuador's total oil exports
were to the U.S., almost 16% to Peru, and about 15% to Chile. Oil
exports to China in 2008 comprised only 2.24% of the total, ranking
China as Ecuador's fifth largest buyer or crude oil. (Total oil
production reached approximately 185 million barrels in 2008 and is
projected at about 176 million barrels for 2009.)

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Rumors of Additional PetroChina Advances

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5. (SBU) In addition to the $1 billion advance on oil supplies
received in early August, Foreign Minister Falconi stated August 16
that the GoE is negotiating a second $1 billion credit with China.
At the time of the announcement, Falconi did not clarify whether
this would be an unsecured loan or also an advance on future oil
sales. However, GoE Coordinating Minister for Economic Policy,
Diego Borja, commented recently to the press that the GoE's Chinese
counterparts have tried to condition this credit to oil sales. He
said that this demand was unacceptable to the GoE and that GoE
authorities are waiting for the Chinese response to their
counterproposal. (Comment: Post's financial sector contacts say
that GoE officials expect up to a total of US$ 3 billion from
PetroChina, likely as an advance on the two-year oil sales
agreement.)

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Conflicting Statements over Usage of Funds

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6. (SBU) GoE statements regarding the use of this advance (and any
additional advances) have varied widely. The Head of PetroEcuador
stated publicly that the payment will fund PetroEcuador's
investment program for 2009. However, Minister Diego Borja has
stated that the advance will support the creation of a Contingency
Fund to assure investment in the productive sector in 2010. Both
statements conflict with President Correa's public assertion that
the advance will bolster GoE fiscal accounts and alleviate the
current liquidity shortage.

7. (SBU) Private analysts argue that the GoE's fragile fiscal
situation is largely the result of high growth in spending,
exacerbated by the GoE's global bonds repurchase in May 2009
(reftel) following its sovereign default in December 2008. The GoE
has no access to private capital markets as a result of the default
and the global financial crisis. It recently received credits from
the Latin American Reserve Fund (FLAR) and the Andean Development
Corporation (CAF) amounting to about US$ 1 billion and is hoping to
receive new loans from the Inter-American Development Bank (IDB).
Private analysts tell the Embassy that the official credits from
multilateral lenders and the PetroChina advance will not be
sufficient to close the GoE's financing gap through the end of the
year.

--------------------------------------------- --

Critics Note High Cost and Lack of Transparency

--------------------------------------------- --

8. (SBU) This deal has been roundly criticized by the Ecuadoran
private sector and in the local press. Numerous critics have cited
the high cost of the arrangement as the main drawback: the interest
paid of 7.25% on the prepayment is significantly higher than that
charged by CAF, FLAR, or the IDB. Rene Ortiz, a former president
of the Association of Hydrocarbon Industries, said that a loan
advance of this type is always more costly than lending available
from multilaterals.

9. (SBU) Critics have also highlighted the lack of transparency in
the deal. For example, Luis Calero, a recognized oil sector
analyst, points out that the transaction was made without an
international tender, making it impossible to determine whether
Ecuador obtained the most favorable terms. Numerous other private
sector critics have also noted that the payment advance means that
oil revenues will be reduced over the next two years, and there is
no sign that the mounting fiscal pressures will subside during this
period. Augusto Tandazo, an oil industry lawyer, comments that the
GoE's interest in the deal is the direct result of Ecuador's fiscal
crisis and isolation from international credit markets.

--------------------------------------------- -

Comment: Short-Term Fix to GoE Fiscal Problems

--------------------------------------------- -

10. (SBU) The PetroChina loan to the GoE, along with FLAR and CAF
funding and the GoE's decree forcing private banks to repatriate a
portion of capital held overseas, may be sufficient or close to
sufficient to cover the 2009 fiscal gap caused by the fall in oil
prices. These new revenues and higher oil prices also seem to have
staved off immediate concerns about the sustainability of
dollarization. However, they may also encourage the GOE to
continue in the short term with its current pattern of government
expenditures. With this deal, the GOE is clearly prioritizing
today's expenditures at the expense of future fiscal stability, and
serious questions remain about how the GoE will meet its financing
needs in 2010 and later years.
HODGES

=======================CABLE ENDS============================

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