VZCZCXYZ0058
OO RUEHWEB

DE RUEHQT #0533/01 1691457
ZNR UUUUU ZZH
O 171457Z JUN 08
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9028
INFO RUEHBO/AMEMBASSY BOGOTA PRIORITY 7609
RUEHCV/AMEMBASSY CARACAS PRIORITY 3073
RUEHLP/AMEMBASSY LA PAZ JUN 1100
RUEHPE/AMEMBASSY LIMA PRIORITY 2656
RUEHGL/AMCONSUL GUAYAQUIL PRIORITY 3623
RHMFIUU/DEPT OF ENERGY WASHINGTON DC PRIORITY

UNCLAS QUITO 000533 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR WHA/EPSC FAITH CORNEILLE 
 
E.O. 12958: N/A 
TAGS: ECON EPET ENRG EINV EC
SUBJECT: ECUADOR TO OFFER MORE FLEXIBILITY IN PETROLEUM 
NEGOTIATIONS 
 
REFTEL A:  QUITO 351 
  B:  07 QUITO 2277 
   C:  QUITO 55 
 
¶1.  (U) Summary.  The GOE has offered to restart contract 
renegotiations with petroleum companies that it froze in April 2008, 
with additional flexibilities for firms such as a lower state share 
of extra revenues and a one-year extension of participation 
contracts.  In exchange, companies would need to drop arbitration 
demands and commit to increase investments, and switch to services 
contracts after a year.  End Summary. 
 
¶2.  (U) Thursday evening, June 12, Petroleum and Mines Minister Galo 
Chiriboga, under instructions from President Correa, offered to 
restart contract renegotiations with petroleum companies which the 
GOE froze in April 2008 (ref A).  The GOE would drop the 
government's share of  "extraordinary revenues" from the current 99% 
to 70%, and continue participation contracts for one year before 
companies would have to switch to service contracts (where they 
would only be paid for services provided).  In exchange, companies 
would need to withdraw their arbitration demands and agree to a new 
forum for future arbitrations (other than the World Bank's center 
for investment disputes), and commit to increase investment. 
 
The Players 
----------- 
 
¶3.  (U) Five companies operating in Ecuador have filed for 
international arbitration against the GOE, asserting that the 
requirement that companies share at least 50% of "extraordinary 
income" with the state (upped to 99% in October 2007, ref B) changes 
the terms of their contracts and makes operations unviable.  They 
include the U.S. firm City Oriente, French company Perenco and its 
U.S. minority partner Burlington (part of ConocoPhilips), and 
Spanish company Repsol and one of its minority partners, U.S. Murphy 
Oil.  Repsol was the most recent company to file for arbitration, in 
June 2008. 
 
¶4.  (U) Brazilian Petrobras and Chinese Andes Petroleum are the two 
remaining major petroleum companies affected by the law that have 
not yet filed for arbitration. 
 
¶5.  (SBU) After Correa suspended contract negotiations, the GOE 
floated a model services contact in early June.  The oil companies 
we talked to rejected the draft as incomplete.  For example, it 
failed to explain how the GOE would compensate the oil companies for 
either the investments they have made to date, or would undertake 
under a services contract. 
 
New Proposal "A Step Forward" 
----------------------------- 
 
¶6.  (SBU) Repsol is one of the largest foreign petroleum companies 
operating in Ecuador.  The head of Ecuador's Hydrocarbons 
Association believes that with Repsol's arbitration filing, the GOE 
finally realized its previous proposals were unacceptable and is 
taking the situation seriously.  He says companies consider the 
current proposal "not good, but a step forward."  A 70% share could 
be acceptable to companies depending on the base for calculating 
extraordinary revenues, and was a key element in the contract 
negotiations that were aborted in April.  (Note:  the comprehensive 
tax package passed at the end of 2007 established that new contracts 
would be subject to a 70% extraordinary revenue sharing requirement 
- ref C)  However, he considers a one year contract extension too 
short for companies to invest and recoup their money before they 
must face an unknown services contract proposal (in the aborted 
contract negotiations, at least Repsol and its partners considered a 
longer term contract extension to be an important factor in their 
willingness to accede to additional revenue sharing).  He reports 
that petroleum companies will meet with GOE negotiating teams to 
discuss contracts beginning the week of June 16. 
 
Comment: 
-------- 
 
¶7.  (SBU)  The GOE move to restart contract renegotiations with 
petroleum companies appears to be a positive step forward, possibly 
brought on by the GOE need for additional petroleum revenue as 
foreign companies have halted investment this year.  However, the 
many conditions required make it unlikely that firms would agree in 
full to the current proposal - dropping arbitration and promising to 
migrate in a year to an as-yet undefined services contract appear 
particularly problematic.  Given the many twists and turns of 
 
petroleum renegotiations to date, it is unclear if the current 
proposal signals a serious new start by the GOE. 
 
JEWELL