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DE RUEHQT #0820 2511056
ZNR UUUUU ZZH
R 042142Z SEP 09
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC0000
INFO RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHBJ/AMEMBASSY BEIJING
RUEHBO/AMEMBASSY BOGOTA
RUEHCV/AMEMBASSY CARACAS
RUEHGL/AMCONSUL GUAYAQUIL
RUEHLP/AMEMBASSY LA PAZ
RUEHPE/AMEMBASSY LIMA
RUEHQT/AMEMBASSY QUITO

UNCLAS QUITO 000820 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EPET EINV EFIN ENRG EC
SUBJECT: ECUADOR SELLS FUTURE OIL PRODUCTION TO PETROCHINA TO 
STRENGTHEN FISCAL ACCOUNTS 
 
REF: 09 QUITO 351 
 
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SUMMARY 
 
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¶1. (SBU) The Government of Ecuador (GoE) is increasingly looking to 
China as a source of financing to help alleviate fiscal pressures. 
The prime example of this is Ecuadorian state-run oil firm 
PetroEcuador's recent agreement to sell future oil production to 
China's state-owned oil company PetroChina, under which the GoE 
received an advance payment of US$1 billion.  The GoE entered into 
this arrangement to ease liquidity constraints resulting from the 
fall in oil prices and a major expansion in government 
expenditures.  The GoE is negotiating for an additional US$ 1 
billion credit from China, and private sector sources tell Post the 
full advance payment could total US$ 3 billion.  Private analysts 
worry that this non-transparent and seemingly expensive deal, 
comprising 34% of Ecuador's oil production through July 2010, 
prioritizes current expenditures at the expense of future revenues 
and fiscal solvency.  End Summary. 
 
 
 
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PetroChina US$ 1bn Advance Payment for Ecuadoran Oil 
 
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¶2. (SBU) According to the agreement signed July 27, 2009 between 
PetroChina and PetroEcuador, PetroChina will purchase 69 million 
barrels over two years at a rate of approximately 95,000 barrels 
per day (bpd).  The price for each shipment of crude will be 
determined by the prevailing market price.  Under the agreement, 
the GoE received an advance payment of $1 billion from PetroChina 
in early August.  The annual interest rate on the $1 billion 
advance will be 7.25%. 
 
 
 
¶3. (SBU) PetroEcuador announced at the time of the signing that 
PetroChina will discount approximately 28% of the cost of each 
barrel exported as payment on the advance, in effect leaving 
PetroEcuador and the GoE 72% of the value of exports to PetroChina. 
PetroEcuador officials explained to the Embassy that this 
calculation is based on an average oil/barrel price of $60 over the 
next two years, and that this percentage breakdown will adjust to 
account for changes to the price of Ecuadoran oil.  According to 
the contract, China will be the final consumer of the oil and will 
not be able to resell it to other countries. 
 
 
 
¶4. (SBU) This deal compromises roughly 20% of Ecuador's oil 
production over the next couple of years, and China will leap ahead 
of other export markets to become Ecuador's second largest market 
after the U.S (based on 2008 statistics).  According to Central 
Bank data, from January to June 2009 Ecuador exported 59.73 million 
barrels of oil, down from 66.21 million barrels during the same 
period in 2008.  In 2008, almost 62% of Ecuador's total oil exports 
were to the U.S., almost 16% to Peru, and about 15% to Chile.  Oil 
exports to China in 2008 comprised only 2.24% of the total, ranking 
China as Ecuador's fifth largest buyer or crude oil.  (Total oil 
production reached approximately 185 million barrels in 2008 and is 
projected at about 176 million barrels for 2009.) 
 
 
 
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Rumors of Additional PetroChina Advances 
 
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¶5. (SBU) In addition to the $1 billion advance on oil supplies 
received in early August, Foreign Minister Falconi stated August 16 
that the GoE is negotiating a second $1 billion credit with China. 
At the time of the announcement, Falconi did not clarify whether 
this would be an unsecured loan or also an advance on future oil 
sales.  However, GoE Coordinating Minister for Economic Policy, 
Diego Borja, commented recently to the press that the GoE's Chinese 
counterparts have tried to condition this credit to oil sales.  He 
said that this demand was unacceptable to the GoE and that GoE 
authorities are waiting for the Chinese response to their 
counterproposal.  (Comment: Post's financial sector contacts say 
that GoE officials expect up to a total of US$ 3 billion from 
PetroChina, likely as an advance on the two-year oil sales 
agreement.) 
 
 
 
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Conflicting Statements over Usage of Funds 
 
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¶6. (SBU) GoE statements regarding the use of this advance (and any 
additional advances) have varied widely.  The Head of PetroEcuador 
stated publicly that the payment will fund PetroEcuador's 
investment program for 2009.  However, Minister Diego Borja has 
stated that the advance will support the creation of a Contingency 
Fund to assure investment in the productive sector in 2010.  Both 
statements conflict with President Correa's public assertion that 
the advance will bolster GoE fiscal accounts and alleviate the 
current liquidity shortage. 
 
 
 
¶7. (SBU) Private analysts argue that the GoE's fragile fiscal 
situation is largely the result of high growth in spending, 
exacerbated by the GoE's global bonds repurchase in May 2009 
(reftel) following its sovereign default in December 2008.  The GoE 
has no access to private capital markets as a result of the default 
and the global financial crisis.  It recently received credits from 
the Latin American Reserve Fund (FLAR) and the Andean Development 
Corporation (CAF) amounting to about US$ 1 billion and is hoping to 
receive new loans from the Inter-American Development Bank (IDB). 
Private analysts tell the Embassy that the official credits from 
multilateral lenders and the PetroChina advance will not be 
sufficient to close the GoE's financing gap through the end of the 
year. 
 
 
 
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Critics Note High Cost and Lack of Transparency 
 
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¶8. (SBU) This deal has been roundly criticized by the Ecuadoran 
private sector and in the local press.  Numerous critics have cited 
the high cost of the arrangement as the main drawback: the interest 
paid of 7.25% on the prepayment is significantly higher than that 
charged by CAF, FLAR, or the IDB.  Rene Ortiz, a former president 
of the Association of Hydrocarbon Industries, said that a loan 
advance of this type is always more costly than lending available 
from multilaterals. 
 
 
 
¶9. (SBU) Critics have also highlighted the lack of transparency in 
the deal.  For example, Luis Calero, a recognized oil sector 
analyst, points out that the transaction was made without an 
international tender, making it impossible to determine whether 
Ecuador obtained the most favorable terms.  Numerous other private 
sector critics have also noted that the payment advance means that 
oil revenues will be reduced over the next two years, and there is 
no sign that the mounting fiscal pressures will subside during this 
period.  Augusto Tandazo, an oil industry lawyer, comments that the 
GoE's interest in the deal is the direct result of Ecuador's fiscal 
crisis and isolation from international credit markets. 
 
 
 
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Comment: Short-Term Fix to GoE Fiscal Problems 
 
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¶10. (SBU) The PetroChina loan to the GoE, along with FLAR and CAF 
funding and the GoE's decree forcing private banks to repatriate a 
portion of capital held overseas, may be sufficient or close to 
sufficient to cover the 2009 fiscal gap caused by the fall in oil 
prices.  These new revenues and higher oil prices also seem to have 
staved off immediate concerns about the sustainability of 
dollarization.  However, they may also encourage the GOE to 
continue in the short term with its current pattern of government 
expenditures.  With this deal, the GOE is clearly prioritizing 
today's expenditures at the expense of future fiscal stability, and 
serious questions remain about how the GoE will meet its financing 
needs in 2010 and later years. 
HODGES