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Ecuador: Government gears up for Oxy fallout

IPS | 25 May 2006

Government Gears Up for Oxy Fallout

Milagros Aguirre

QUITO, May 25 (IPS) - Showing the door to Occidental Petroleum (Oxy) and scuttling U.S. free trade negotiations have long been agenda priorities for Ecuadorian social movements and political sectors. But following government steps that have all but made these goals a reality, the atmosphere seems more anxious than celebratory.

In what some deem a case of the cure being worse than the disease, the state-owned Petroecuador oil company was ordered to take control of Oxy’s Ecuadorian installations, after the government revoked the U.S. multinational oil company’s concession.

The move by the government of President Alfredo Palacio has also kick-started the campaign for the October general elections.

While centre-left presidential candidates such as León Roldós and Rafael Correa call the measure a victory over "multinational petroleum company abuses," right-wing candidates and business leaders are "indignant" at the "barbaric actions" that scare away foreign capital by "undermining legal certainty."

The powerful Confederation of Indigenous Nationalities of Ecuador (CONAIE) wants to delve even deeper into the economic-sovereignty struggle. CONAIE president Luis Macas recognised the measure as a positive step for Ecuadorians, but went on to note that "we still have to resolve the question of the free trade agreement and stop prostrating ourselves to the United States."

The conflict has been long and drawn-out. In 2000, Oxy sold 40 percent of its Ecuador-operation shares to the Canadian company EnCana (now AndesPetroleum). Four years later the atttorney general asked the Ministry of Mines and Energy to initiate the contract termination process, as the company conducted the transaction without the required government authorisation.

On top of this, several complaints have been filed against Oxy for failing to meet its minimum investment commitments and for multiple repeat offences, such as being fined six times for not respecting production caps set by the National Hydrocarbon Department and failing to notify the Department when starting to drill new wells.

The legal process came to a head on May 15 with the official cancellation of Oxy’s concession. Oxy’s operations in Ecuador’s Block 15 represent almost seven percent of its worldwide production, and almost three percent of its proven consolidated reserves.

The company responded with a one billion-dollar lawsuit against the government of Ecuador, citing a breach of the bilateral investment treaty signed between this country and the United States in August 2003.

Washington has reacted by suspending free trade negotiations with Ecuador. The talks were aimed at establishing an agreement similar to the ones signed with Colombia and Peru that precipitated Venezuela’s threat to pull out of the Andean Community, which comprises these four countries and Bolivia.

Although Cinthia Viteri, presidential candidate for the rightist Social Christian Party, has been cautious in her response, congressman Alfonso Harb from that party came out strongly against the move on local television, calling the cancellation the work of "the country’s new owners," a reference to 20 indigenous leaders, socialists, far leftists and "three or four journalists."

In the rest of the political spectrum, IPS found that most members of Congress are more or less behind the decision. Leftist congressman Ricardo Ulcuango, of the indigenous Pachakutik movement, said "this should signal the beginning of nationalisation of our energy resources."

Luis Villacís, a Popular Democratic Movement lawmaker, commented that "this is how we can prevent a repeat of what we lost to Oxy — more than eight billion dollars."

In light of these developments, the Democratic Left and Pachakutik parties have withdrawn their attempts to get Energy Minister Iván Rodríguez removed from his post.

The Palacio administration — installed by Congress in April 2005 to replace Lucio Gutiérrez, who was brought down by a wave of protests — is unfazed by Oxy’s countersuit requesting international arbitration.

"Our best defence against this action is the transparent and orderly manner in which this step was taken, in political terms," Interior Minister Felipe Vega told IPS.

Foreign Minister Francisco Carrión said he was convinced Washington would have to "respect Ecuador’s legislation and laws, just as we respect the U.S. legal system."

However, Palacio immediately sent Rodríguez and Economy Minister Diego Borja to Venezuela to attract oil industry investors, while Foreign Trade Minister Jorge Illingworth contacted members of the business community to explore ways of mitigating the repercussions of failing to sign a free trade agreement with the United States.

Ecuador’s oil revenues amount to four billion dollars a year, accounting for between 35 and 40 percent of the state budget. Other foreign oil companies operating in the country include EnCana, Chile’s Sipec, the British-French Perenco firm, Argentina’s Petrosud and Brazil’s Petrobras.

Rodríguez explained that the goal is to negotiate a deal in which Ecuador’s crude oil is processed in one of the refineries of the state-owned Petróleos de Venezuela (PDVSA), which would represent ’’major savings."

A ministry statement announced that it is also looking to "define the terms of cooperation between the two countries’ state-owned petroleum companies, which could eventually encompass the purchase of derivatives."

Venezuela and Mexico are among Ecuador’s possible strategic allies, in its search to find an operator for the fields vacated by Oxy. Other possibilities include Chile’s ENAP company, Ecopetrol of Colombia and Petrobras.

Ecuador and Venezuela rekindled their oil industry relations last August, when PDVSA sent 660,000 barrels of crude to help defuse a crisis sparked by strikes and protests against foreign oil companies in the Amazon region.

In the wake of the fallout caused by the cancellation of Oxy’s concession, Foreign Minister Carrión announced that the Andean Community trade bloc would meet in Quito to discuss possibilities for a trade agreement with the European Union.

This has widely been interpreted as a move by Bolivia to support Ecuador in its oil struggles with the United States and thereby counterbalance Washington allies Peru and Colombia, which have already signed bilateral trade agreements with the U.S.

According to Carrión, "the agreement with the United States is not dead until there is an actual death certificate." But he added that the government’s current diplomatic initiatives are exploring trade possibilities with other countries.

He also dismissed comments by analysts who say Ecuador is working on establishing a regional anti-U.S. alliance with Venezuela, Bolivia and Cuba.

Meanwhile, the attorney general’s office is busy building their defence to Oxy’s lawsuit, running up a tab of 250,000 dollars per month in a process that will drag out for at least a year.

The government’s legal arsenal includes not only the legal arguments pertaining to the termination of the contract, but also the lawsuit brought by Petroecuador engineers against Oxy, alleging that three of the company’s wells in Edén Yuturi, in the southeast of the country, were drilled on land that does not belong to Oxy.

Indigenous leaders say that the previous charges accusing the company of major environmental damage in the Amazon region should also be added to the defence.

Meanwhile, operations at Oxy have not been running smoothly: dozens of workers have left the Edén-Yuturi field, 300 have abandoned their posts in the Limoncocha field and several others were suspended or transferred.

Petroecuador needs to drum up 30 million dollars to pay off Oxy’s debts to service providers, as well as the money to keep up production of 100,000 barrels a day — approximately 20 percent of the country’s total — in Block 15.

Oxy representatives Gerald Ellis and Daniel Almaguer met earlier this month with Petroecuador president Fernando González, Ecuadorian officials and a notary public.

Ellis, Oxy’s general manager in Ecuador, requested stability and good treatment of his technical staff. He said the company is willing to work with Petroecuador, at the same time making it clear that he disagreed with the decision to cancel the contract.

 source: IPS