Oil law may hit Ecuador-US deal

Financial Times | London | April 16 2006

Oil law may hit Ecuador-US deal

By Richard Lapper in Quito

New legislation designed to increase the state’s share of windfall oil revenues by some $600m a year is set to derail Ecuador’s plans to negotiate a trade deal with the US, according to government officials.

Manuel Chiriboga, Ecuador’s chief trade negotiator, is seeking to renew the talks that have, in effect, been suspended since late last month and aims to persuade the US that the changes do not affect Ecuador’s commitment to investment protection clauses, which are fundamental to such pacts.

However, he accepts that he faces an uphill struggle to complete negotiations before a May 15 deadline. “US negotiators are enormously worried about the [oil] legislation. The trade deal could become a sitting duck,” he told the Financial Times.

Ecuador began free trade talks with the US two years ago along with Colombia and Peru. Both its neighbours have now agreed pacts with Washington but Ecuador’s negotiations were more protracted and have become even more complicated after the announcement of the new oil plans.

The legislation - designed by Diego Borja, the economy minister - raises the government share of windfall revenues to 50 per cent, compared with an average of 30 per cent today, and would generate additional income of about $600m a year.

But oil companies - including Los Angeles-based Occidental - plan to challenge the new laws, arguing that the new rules would violate production sharing contracts signed between 1992 and 2002. If unsuccessful they will almost certainly take the case to international arbitration.

Ecuador is one of a number of Latin American countries eyeing a bigger share of revenues generated by rises in the prices of oil, gas and other natural resources. Its oil contracts were negotiated when oil was trading at less than $20 a barrel. Mr Chiriboga criticised the timing of the government’s announcement, which he says reflected “poor co-ordination” between ministers.

Negotiations are especially complicated because Ecuadorian legislators - who are seeking an even tougher version of the law with a 60 per cent state share of windfall revenues - have still to approve the law.

In addition, Ecuador’s mainly indigenous maize, rice and grain farmers are opposed to the trade agreement, which they say will expose them to a flood of cheap US imports. They are threatening to resume protests that brought the country to a halt in March.

The indigenous groups are also demanding that the Ecuadorian government cancel a contract with Occidental following a separate legal dispute. Ecuadorian officials have alleged that Occidental broke the law six years ago when it failed to report the transfer of a 40 per cent share in its operating concession to EnCana of Canada.

Occidental’s contract could be voided if the allegations hold. Ecuador’s energy minister has been expected to rule on the matter for the past month.

source : FT

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