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C O N F I D E N T I A L QUITO 000996 
 
SIPDIS 
 
DEPT FOR WHA/EPSC FAITH CORNEILLE 
 
E.O. 12958: DECL: 10/22/2018 
TAGS: EPET ENRG PREL EINV ECON EC BR
SUBJECT: ODEBRECHT AND PETROBRAS - ECUADOR MOVES AGAINST 
BRAZILIAN COMPANIES 
 
REF: A. 07 QUITO 1678 
     ¶B. QUITO 345 
 
Classified By: DCM Andrew Chritton, Reasons 1.4 (b & d) 
 
¶1.  (C) Summary:  President Correa raised the rhetoric level 
against two big Brazilian companies, and went further with 
the construction firm Odebrecht, cancelling its projects in 
Ecuador and its employees' visas.  Correa also pressed 
Petrobras to quickly renegotiate its contract or face 
expulsion; on Oct. 18 he announced that Petrobras had agreed 
to a short-term transitional contract.  In response to the 
Odebrecht expulsion, Brazil cancelled a planned ministerial 
visit, but in a TV interview Ecuadorian Foreign Minister 
Salvador attempted to separate the two business-related 
events from the broader Ecuador-Brazil relationship. 
Odebrecht's standing in Ecuador has been tainted by 
allegations of corruption and shoddy construction, while the 
heavy-handed pressure for Petrobras to renegotiate its 
contract is comparable to that on other foreign oil 
companies.  End Summary. 
 
Odebrecht Forced to Leave Ecuador 
--------------------------------- 
 
¶2.  (C) On September 23, President Correa issued an emergency 
decree ordering the military to take over the San Francisco 
hydroelectric plant and four other Odebrecht projects (the 
Baba and Toachi Pilaton hydroelectric plants, an airport in 
the town of Tena, and an irrigation system in Manabi 
province).  The order initially stemmed from faulty 
construction of the San Francisco plant built by Odebrecht 
for the GOE.  The GOE and Odebrecht had been in discussions 
on repairing the plant and reached an agreement on September 
19, but the agreement fell apart.  In the following weeks, 
Odebrecht had reportedly agreed to all of the GOE's demands 
regarding the plant.  However, in early October Correa 
announced that Odebrecht would have to leave the country, due 
to "irregularities" in the projects (referring to 
corruption).  Another issue was loans from Brazil's national 
development bank BNDES to Odebrecht for the construction 
projects.  The GOE has said Odebrecht was responsible for the 
loans, although the loans have GOE state guarantees. 
 
¶3.  (C) On October 9, Correa issued another presidential 
decree revoking the visas of executives from Odebrecht and 
its partner in the San Francisco project, the Brazilian state 
utility company Furnas-Centrais Electricas.  The executives 
were given 48 hours to leave the country.  The decree 
directed GOE partners in Odebrecht projects to take legal 
steps to terminate their contracts, and ordered an 
investigation into the BNDES loan for the San Francisco 
project.  GOE officials have said that the projects will be 
taken over by local contractors. (Comment:  It appears that 
most of the local contractors do not have the capacity to 
manage large projects.) 
 
Allegations of Corruption 
------------------------- 
 
¶4.  (C) Alfredo Vera, head of Ecuador's anti-corruption 
secretariat, raised questions about the pricing and financing 
of the Odebrecht contracts.  Although we have no insights 
into the San Francisco project, Post has heard credible 
allegations of corruption involving Odebrecht's irrigation 
project in Manabi from a former Minister of Finance who 
refused to sign the project documents because of his concerns 
about corruption.  Post also heard concerns from a Central 
Bank official about unfavorable terms in the BNDES loan that 
supported the irrigation project.  Both of these officials 
approached us separately to report on developments that took 
place in 2006, the final year of the Palacio Administration. 
 
 
The Petrobras Situation 
----------------------- 
 
¶5.  (C) On several occasions in 2007 and 2008, Petrobras has 
been threatened with "caducity" (cancellation of its 
contract) for contract irregularities (refs A and B). 
Petrobras contacts and some petroleum industry contacts have 
 
claimed the threats were intended to put pressure on the 
company to reach agreement with the GOE on a new oil 
contract.  In early October 2008, the GOE threatened 
Petrobras with expulsion if the company did not agree to 
finalize quickly negotiations for a new oil contract. 
 
¶6.  (C) On October 17, the GOE and Petrobras quietly reached 
agreement on a transitory one-year production sharing 
contract.  During this transition period the company must 
negotiate a services contract.  Petrobras contact Patricio 
Vergara reported that the GOE has agreed to drop the caducity 
threat.  According to Vergara, one of the major obstacles 
towards reaching a new agreement was that Petrobras strongly 
resisted the GOE demand that the government receive 70 
percent of windfall revenue, since Petrobras's current 
agreement already has a 50 percent windfall revenue sharing 
mechanism.  Vergara did not provide any details on the final 
arrangement, but implied that the two sides agreed to split 
the difference. 
 
Relations with Brazil 
--------------------- 
 
¶7.  (C) The Correa Administration has tried to distinguish 
between its relations with Brazil and its actions toward the 
two companies.  Foreign Minister Salvador commented in a 
television interview October 16 that Ecuador would "advance 
positively" with Brazil, and noted that the Odebrecht case 
had been decided and the Petrobras case was being resolved in 
a manner that would be "absolutely positive" for bilateral 
relations.  In Correa's October 18 radio address, he 
emphasized that the Odebrecht case was an issue between 
Ecuador and a private company that did not comply with its 
contract, not an issue between states.  He added that he was 
sure Brazilian President Lula understood his position.  Lula, 
however, canceled an October 15 visit by the Brazilian 
Transportation Minister on the subject of the Manta-Manaus 
transportation link. 
 
Comment 
------- 
 
¶8.  (C) Two Brazilian firms have undergone unpleasant 
experiences brought on by Correa's practice of employing 
intemperate rhetoric (and, in some cases, actions) against 
those that have displeased him.  However, we believe these 
statements and actions were brought on by what the companies 
had done, rather than any sense of underlying problems with 
Brazil.  While we do not have the full story behind Correa's 
ire with Odebrecht, we suspect that corruption and poor 
construction by the company may largely explain his actions. 
In the case of Petrobras, it appears that he was frustrated 
with Petrobras's refusal to improve the government's share of 
windfall oil income and he therefore used threats of 
expelling Petrobras to improve his negotiating position. 
 
¶9.  (C) Regardless of the merits of the GOE's claims 
regarding the Brazilian companies, these were fundamentally 
contractual disputes, although one may have been colored by 
malfeasance.  Rather than deal with them as such, Correa 
instead addressed them through dramatic actions and threats, 
gestures that will continue to undermine investor confidence 
in Ecuador and that have complicated broader relations with 
Brazil. 
HODGES