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