VZCZCXYZ0026
OO RUEHWEB

DE RUEHQT #1612/01 1812003
ZNR UUUUU ZZH
O 302003Z JUN 06
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4745
INFO RUEHBJ/AMEMBASSY BEIJING 0170
RUEHBO/AMEMBASSY BOGOTA 5756
RUEHCV/AMEMBASSY CARACAS 1845
RUEHKL/AMEMBASSY KUALA LUMPUR 0018
RUEHLP/AMEMBASSY LA PAZ JUN LIMA 0725
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. 
 
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