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Ecuador sends military to seized oil facilities

Globe and Mail (Canada) | 17 May 2006

Ecuador sends military to seized oil facilities

Globe and Mail Update and Associated Press

Ecuadorean President Alfredo Palacio sent troops to guard oil facilities seized from Occidental Petroleum Corp. as they are transferred to state control, officials said Tuesday.

But officials said the cancellation of Occidental’s operating contracts and the seizure of its assets did not mean the Andean nation is nationalizing its oil industry.

Defence Minister Oswaldo Jarrin told reporters late Tuesday that Mr. Palacio issued a decree directing the soldiers, who started arriving to the oil fields earlier in the day, “to provide protection and safekeeping” for up to 60 days “of all hydrocarbon complexes” formerly held by the U.S.-based oil company.

Ecuador unilaterally cancelled Occidental’s operating contracts on Monday over a dispute that stretched back several years, claiming that the oil company had broken the terms of its contract.

Occidental produces about 100,000 barrels of crude daily in Ecuador, about 20 per cent of the country’s total output, and has invested about $1-billion (U.S.) since 1999 in its operations.

“The state awarded Occidental the development of a resource, but now it must leave the country for having failed to meet its contract and violated the laws,” Fernando Gonzalez, president of state-run PetroEcuador, told reporters early Tuesday.

Ecuador’s fight with Occidental began when the U.S. company sold a portion of an oil field concession called Block 15 to Calgary-based EnCana Corp. in 2000. The government has maintained that Occidental did not have the proper authorization to make that transfer.

Until recently, EnCana owned a 40-per-cent economic interest in the block, but that was sold earlier this year, along with all EnCana’s other Ecuadorean assets, to a joint venture of Chinese oil companies. EnCana collected $1.42-billion for the Ecuadorean assets when the deal closed at the end of February.

EnCana spokesman Alan Boras said yesterday the company is carefully reviewing the Occidental dispute to see if it will be hit by any fallout. The concern is over an indemnification clause in its sales contract with the Chinese group that says EnCana could be responsible for certain losses.

According to EnCana’s latest quarterly financial report, it “has agreed to indemnify the purchaser of its Ecuador interests against losses that may arise in certain circumstances which are defined in the share sale agreements.”

Mr. Boras would not say in what circumstances EnCana would be on the hook, or for how much, because the sales contract is confidential. In any event, “it’s too early to know if there is any real impact,” he said. “Our lawyers are looking at the [Ecuadorean government’s] decision, trying to understand it.”

The United States responded to the measure by breaking off negotiations on a free-trade agreement with Ecuador.

“We are very disappointed at the decision of Ecuador, which appears to constitute a seizure of assets of a U.S. company,” Neena Moorjani, a spokeswoman for the Office of the U.S. Trade Representative, said in a statement. “At this time no further [free trade agreement] discussions are scheduled.”

Ecuador’s top government spokesman, Enrique Proano, told the Associated Press that his country “laments deeply the declaration by the United States ... that a sovereign decision by Ecuador should have influenced the continuity of trade relations and especially negotiation” of the pact.

The trade talks were already on shaky ground after Ecuador’s Congress last month passed a hydrocarbons reform law to give the government 50 per cent of oil companies’ profits whenever the international crude market exceeds the prices established in existing contracts.

Most of those deals were pegged to 1990s prices when oil was worth a fraction of its current price.

A U.S. Embassy spokeswoman said the bill appeared to violate a bilateral investment treaty between the two nations.

Larry Meriage, a spokesman for Los Angeles-based Occidental, said Tuesday the Ecuadorean government had not taken over the company’s operations yet. Employees were still running the facilities.

Mr. Meriage said the parties were working on a timetable for when Occidental’s employees will leave.

“The government has appealed to us for co-operation and for an orderly transition, which is an interesting development in itself,” Mr. Meriage said. “They’re telling you they’re throwing you out, but they want you to help them. We’re going to try to be co-operative, up to a point.”

“We’re just trying to feel [our way] through this. We’re in uncharted waters. This is the largest expropriation of assets in this hemisphere in the last 30 years,” he said. “When they take over your assets without remuneration it is tantamount to an expropriation.”

“From today, PetroEcuador is taking effective possession of the fields,” Mr. Gonzalez said Tuesday from the steps of Occidental’s local offices, where he arrived with a team of auditors to begin work on the government takeover.

The ruling comes two weeks after Bolivia nationalized its oil and gas industry, alarming officials in countries whose companies operate there.

On Friday, Venezuelan President Hugo Chavez indicated his government may seek a larger ownership stake in key heavy oil projects run by foreign companies in the Orinoco River basin. Other oil fields previously run by private oil companies under contract have been transferred to new “mixed companies” in which Venezuela holds a majority share.

But Ecuadorean Interior Minister Felipe Vega dismissed suggestions that Ecuador was lining up with Bolivia and Venezuela. He told Universal Radio Tuesday that the “only factor in common” with those countries is “the conduct of the oil companies - conduct which is absolutely unfair.”

 source: Globe and Mail