VZCZCXYZ0000
OO RUEHWEB

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
RUEHLP/AMEMBASSY LA PAZ JUL 0659
RUEHPE/AMEMBASSY LIMA PRIORITY 1790
RUEHBR/AMEMBASSY BRASILIA PRIORITY 3767
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