VZCZCXYZ0008
RR RUEHWEB

DE RUEHQT #0332 1281246
ZNR UUUUU ZZH
R 081246Z MAY 09
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC 0347
INFO RUEHBO/AMEMBASSY BOGOTA 8132
RUEHCV/AMEMBASSY CARACAS 3536
RUEHLP/AMEMBASSY LA PAZ MAY LIMA 3189
RUEHGL/AMCONSUL GUAYAQUIL 4309
RHMFIUU/DEPT OF ENERGY WASHINGTON DC

UNCLAS QUITO 000332 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR WHA/EPSC FAITH CORNEILLE 
 
E.O. 12958: N/A 
TAGS: ECON EPET ENRG EINV EC
SUBJECT:  GOE PAYS U.S. ELECTRICITY FIRM MACHALA POWER, RESOLVES 
INVESTMENT DISPUTE 
 
REFTEL:  QUITO 22 
 
¶1.  (SBU) Summary:  The GOE paid $60 million in March and April 2009 
in settlement of an investment dispute with U.S. electricity company 
Machala Power, following an agreement between the two parties in 
December 2008.  Machala Power has withdrawn its international 
arbitration claim and continues to operate its electricity plant, 
but does not plan substantial additional investments in Ecuador at 
this time.  End Summary. 
 
¶2.  (U) In December 2008, the two parties signed an agreement that 
the GOE would pay arrears owed to Machala Power by state-owned 
electricity companies, and Machala Power would drop its arbitration 
case (reftel).  One of Noble Energy's two subsidiaries in Ecuador, 
Machala Power generates electricity using natural gas produced by 
its sister company EDC.  The company filed for international 
arbitration in March 2005, but continued to seek a negotiated 
settlement with the GOE. 
 
¶3.  (SBU) The GOE did not immediately make the payment as 
established in the December agreement because of its growing fiscal 
problems.  In early 2009, the GOE asked Machala Power if would still 
accept the agreement if the GOE paid on a short installment plan, 
and Machala Power agreed.  During March and April 2009, the GOE paid 
Machala Power $60 million in five $12 million installments.  This 
amount reflects the arrears accumulated through August 26, 2008, as 
agreed by Machala Power and the appropriate GOE agencies. 
 
¶4.  (SBU) The GOE still owes Machala Power approximately $20 million 
for arrears since August 2008, but Machala Power withdrew its 
arbitration case on April 22, 2009.  EDC and Machala Power General 
Manager John Tomich acknowledged that withdrawing the arbitration 
case could reduce leverage to obtain the remaining payment, but said 
that Machala Power was complying with the terms of its December 
agreement.  The GOE has not publicly acknowledged that it has made 
the payments or that Machala Power is withdrawing its arbitration. 
Tomich believes the GOE is hesitant to announce the payments at a 
time when the government is curtailing expenditures to conserve 
scarce reserves because of declining revenue. 
 
¶5.  (SBU) Tomich met with the Ambassador April 30 to report the 
resolution of the dispute and express his thanks for Embassy 
support.  He said that his company was pleased with the developments 
and the government's efforts to resolve the investment dispute. 
However, he was concerned that the GOE may have unrealistic 
expectations for EDC's natural gas development plans.  He claimed 
that the GOE was signing an agreement with a company that was to 
install a gas liquefaction plant next to Machala Power's electricity 
plant, to liquefy EDC's natural gas for shipping to the city of 
Cuenca.  However, Tomich cautioned that the proven reserves of the 
EDC field were only sufficient to run the power plant and not enough 
for additional projects.  Although there was the possibility that 
additional gas could be available with further investment, Tomich 
commented that Ecuador's current investment climate and low energy 
prices were not conducive to the substantial lump-sum additional 
investment necessary for expansion. 
 
¶6.  (SBU) Comment:  Tomich gave a somewhat different message than a 
year ago, when Noble Energy was exploring expanding natural gas 
production and possibly providing additional gas to another U.S. 
electricity company that would relocate to Machala.  That plan was 
contingent upon EDC obtaining certain approvals, but the GOE 
rejected EDC's development plan.  Since then, EDC has presented two 
new development plans, substantially scaling back its commitment 
each time.  Although Machala Power and EDC remain in Ecuador, 
another clash may be brewing with the GOE over differing 
expectations.  End Comment. 
 
HODGES