VZCZCXYZ0002
OO RUEHWEB

DE RUEHQT #0440/01 0571736
ZNR UUUUU ZZH
O 261736Z FEB 07
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6400
INFO RUEHBO/AMEMBASSY BOGOTA PRIORITY 6458
RUEHCV/AMEMBASSY CARACAS PRIORITY 2385
RUEHLP/AMEMBASSY LA PAZ FEB 0433
RUEHPE/AMEMBASSY LIMA PRIORITY 1430
RUEHGL/AMCONSUL GUAYAQUIL PRIORITY 1939

UNCLAS QUITO 000440 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR S. GOOCH 
DEPT FOR WHA/EPSC FAITH CORNEILLE 
 
E.O. 12958: N/A 
TAGS: EINV ENRG ECON EC
 
SUBJECT:  NEW LEGAL ADVISOR A PRACTICAL ADDITION TO ENERGY MINISTRY 
 
REF: A. 06 QUITO 1735 
 
     ¶B. 06 QUITO 2465 
     ¶C. QUITO 321 
 
¶1.  (SBU) Summary:  In a meeting between EconCouns and new Ministry 
of Energy Legal Advisor Raul Moscoso February 22, Moscoso confirmed 
that the GOE is assembling a legal team to defend its interests in 
the Oxy arbitration, and stressed the administration's interest in 
foreign investment in the energy sector and in solving investment 
disputes with U.S. companies.  He also noted possible changes in the 
mining sector.  End Summary. 
 
Ecuador to Participate in Oxy Arbitration 
----------------------------------------- 
 
¶2.  (SBU) Moscoso confirmed reports from the press and from other 
sources that the GOE is assembling a legal team to defend its 
interests in the international arbitration case under the ICSID 
brought by Occidental Petroleum (Oxy).  While the Correa 
administration has previously made statements to the effect that the 
arbitration is invalid, it appears they will now participate in the 
process to defend Ecuador's actions.  Moscoso emphasized that the 
GOE needs to respect agreements such as the Bilteral Investment 
Treaty (BIT) with the United States. 
 
¶3.  (SBU) The GOE has created a commission to define its strategy 
for the arbitration, consisting of legal representatives from the 
Procurador's office, the Foreign Ministry, state oil company 
Petroecuador, the Energy Ministry (to be represented by Moscoso), 
and the operator of Oxy's former fields.  Moscoso confirmed that the 
GOE has contracted a "prestigious" U.S. law firm for the 
arbitration.  From an outside source, post has learned that the U.S. 
lawyer would be Paul Reichler (of DC law firm Foley Hoag); in 
December the then-Procurador General (Solicitor General) told the 
Embassy that he intended to hire Reichler to represent the GOE in 
the Oxy case.  Moscoso also confirmed that the GOE's initial defense 
will be that ICSID does not have jurisdiction to hear the case.  Oxy 
reports that the ICSID tribunal held an initial meeting the week of 
February 12 to organize, and will likely start formal hearings the 
first week in May. 
 
Administration Favors Investment; Seeks Solutions 
--------------------------------------------- ---- 
 
¶4.  (SBU) Moscoso stressed that the administration wants to promote 
investment in the energy sector, and mentioned that efforts to solve 
GOE disputes with U.S. firms Machala Power and City Oriente are "in 
process." 
 
¶5.  (SBU) U.S. electricity company Machala Power has brought an 
international arbitration case against the GOE for underpayment (see 
Ref A for a discussion of electricity sector underpayment problems 
in Ecuador), but is attempting to work out a resolution with the GOE 
outside of the arbitral process.  Machala Power had planned a second 
and third phase of investment that would provide 180 additional 
megawatts of low cost electricity to Ecuador, but the investment is 
currently on hold pending resolution of the payment dispute. 
Moscoso stressed the importance of Machala continuing with its 
investment and noted the faster the dispute can be resolved, the 
better.  However, Moscoso also noted that the GOE does not currently 
have the funds to pay Machala and suggested they might offer payment 
in government bonds instead.  (Note:  The prior government had also 
suggested payment in bonds.  At that time, Machala Power 
representatives told the Embassy the company's interest in the 
proposal would depend largely on whether it could resell the bonds 
and whether it received a premium for accepting the bonds in lieu of 
cash.) 
 
¶6.  (SBU) EconCouns asked if the GOE would also develop a plan to 
ensure that Machala Power would be fully paid in the future. 
Moscoso did not provide a clear response, and instead characterized 
the meetings with Machala as being in a "climate of transaction" and 
stressed that the GOE wants to come to an agreement with Machala and 
end the arbitration proceedings.  Machala Power reports the first 
ICSID hearing on jurisdiction will be held Monday February 26, and 
they will meet again with the GOE following the hearing. 
 
¶7.  (SBU) Regarding the dispute with petroleum company City Oriente 
(Ref B), Moscoso noted that since City is a small firm, the GOE 
might negotiate a change to City's contract that would exempt them 
from the hydrocarbons reform law.  Noting that the revisions to the 
hydrocarbons law apply to large, production-sharing contracts, 
Moscoso suggested that City might be able to migrate to an 
oil-service contract or make some other change to acknowledge that 
it is essentially a marginal producer.  Moscoso noted contractual 
changes would be a time-consuming process but can be done, and the 
GOE will be holding meetings with City Oriente on the issue. 
 
¶8. (SBU) Moscoso was unclear about what might happen with contract 
renegotiations with non-U.S. companies in the petroleum sector.  He 
made no indication of how the contracts might change, saying only 
that the process still needed to be defined.  He noted that contract 
renegotiation with petroleum companies will definitely take place, 
but stressed it will be a "negotiation" with the companies, implying 
that the GOE will not simply impose new requirements. 
 
Possible Changes in the Mining Sector 
------------------------------------- 
 
¶9.  (SBU) Moscoso stressed the need for a clear policy on mining and 
mentioned the possibility of a separate mining ministry to handle 
issues in the sector.  He stated that the current mining law is a 
"disaster for the state" and favors mining companies inordinately. 
In addition, he believes the law does not impose strict enough 
environmental rules on mining operations.  (Comment:  Implicit in 
Moscoso's comments is that the GOE would seek reforms to the mining 
sector to greatly increase the state's share of mining revenue and 
to tighten environmental requirements.) 
 
Comment: 
-------- 
 
¶10.  (SBU) Paralleling the tone of Energy Minister Acosta (Ref c), 
Moscoso appeared to be relatively practical about addressing 
problems in the energy sector, noting the importance of foreign 
investment and of working with U.S. firms to solve outstanding 
investment disputes.  The decision to participate in the Oxy 
arbitration is a welcome indication that the government will work 
with established international procedures and is willing to make 
correct but politically difficult decisions.  In addition, his 
comments regarding contract renegotiation with petroleum companies 
suggest the GOE might approach this in an even-handed manner that 
will take the concerns of both sides into account.  Moscoso appears 
to recognize the importance of foreign investment to the energy 
sector in Ecuador, and that to encourage this investment the GOE 
must abide by its international legal obligations and work 
cooperatively with foreign investors.  An old government hand (he 
was previously a Petroecuador attorney), he commented wryly that 
many new administration members are from academia and had espoused 
impractical policies, but that "they are learning."  Moscoso's 
practical approach and government experience may be a positive 
influence in the Energy Ministry, but it remains to be seen if his 
comments will translate into positive actions. 
 
JEWELL