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Ecuador to oppose arbitration claim filed by Occidental Petroleum

MarketWatch | May 23, 2006

Ecuador to oppose arbitration claim filed by Occidental Petroleum

QUITO (MarketWatch) — Ecuador will oppose an arbitration suit filed last week by Occidental Petroleum Corp. (OXY) with the World Bank’s International Center for Investment Disputes in Washington, D.C., said Ecuadorean Attorney General Jose Maria Borja.

"When they summon us with the (lawsuit) proposed by Occidental, we will oppose arbitration," Borja said in a press release published late Monday.

Occidental filed the arbitration claim after the government canceled its operating contract, alleging, among other issues, that the U.S. oil firm had transferred a 40% stake in Block 15 to Canada’s EnCana Corp. (ECA) without proper authorization.

Borja said he the country’s opposition to arbitration will be based on the Bilateral Investment Treaty signed by the U.S. and Ecuador.

According to the attorney general, the treaty states that "the laws, regulations, practices, administrative procedures and administrative and judicial rulings of any of the parties will not be discredited."

Energy and Mines Minister Ivan Rodriguez, meanwhile, Tuesday said that the contract signed between Occidental and the government did not foresee the possibility of international arbitration.

"When they signed the contract, they knew the law and they accepted it, in the case that a contract is canceled there is no arbitration. We have not seized or confiscated the goods of the company; we have only fulfilled the law," said Rodriguez.

Rodriguez canceled the contract with the U.S. oil company on May 15 and began to take possession of its infrastructure in Ecuador the following day, including the Block 15, Limoncocha and Eden-Yuturi oil fields.

But the government has not taken any concrete decision on how to operate them, and so far, the finance ministry has not transferred the $30 million needed to guarantee supplies of equipment and parts.

An executive decree to declare an emergency for the fields, and create a special inter-ministerial commission to oversee operations, has run into legal obstacles. The Hydrocarbons Law states that the state’s oil operations should be managed through the state oil company, Petroecuador (PCD.YY).

Adding to the pressure, around 70 companies that provided services to Occidental have said they are concerned about whether Petroecuador will fulfill its financial obligations. The Oil Services Chamber, which groups together more than 400 oil services firms, claims Petroecuador owes its members more than $200 million - including some inherited from Occidental’s operations - and has given it until June 15 to pay.

"We are in limbo. If Petroecuador has not been able to meet its own obligations and has let the debt continue to increase, what can we expect now it has to assume the obligations of block 15 and the fields," Federico Perez, president of the Chamber, said Tuesday.

The service providers say that they will walk off their jobs on June 15, which will affect at least 300,000 barrels of state production, including 100,000 barrels that were from Occidental, if the government fails to pay its debt.

Petroecuador President Fernando Gonzalez has said that $40 million debt related to Occidental’s operations should be paid by the U.S. firm itself. He did not say when the state company will settle its own debts or what action it will take to ensure that production does not fall as a result of a strike by service providers.

Meanwhile, Petroecuador is still analyzing whether the cancellation of the contract affects the 14.5% stake that Occidental has in the private-sector heavy-crude pipeline, OCP Ecuador.

In a statement, the consortium running the pipeline said that Occidental still holds its stake in OCP and that the government’s decision to cancel its contract has "no effect on the share structure between Occidental and the OCP."

 source: MarketWatch