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### Viewing cable 07QUITO1091, ANOTHER U.S. OIL COMPANY PULLING OUT OF ECUADOR

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
07QUITO1091 | 2007-05-15 13:32 | 2011-05-02 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Quito

`

    VZCZCXYZ0655
    OO RUEHWEB

    DE RUEHQT #1091/01 1351332
    ZNR UUUUU ZZH
    O 151332Z MAY 07
    FM AMEMBASSY QUITO
    TO RUEHC/SECSTATE WASHDC IMMEDIATE 6972
    INFO RUEHBO/AMEMBASSY BOGOTA PRIORITY 6647
    RUEHCV/AMEMBASSY CARACAS PRIORITY 2546
    RUEHLP/AMEMBASSY LA PAZ MAY 0589
    RUEHPE/AMEMBASSY LIMA PRIORITY 1653
    RUEHGL/AMCONSUL GUAYAQUIL PRIORITY 2309
    RHMFIUU/DEPT OF ENERGY WASHINGTON DC PRIORITY
    RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

` `

    UNCLAS QUITO 001091

    SIPDIS

    SENSITIVE
    SIPDIS

    DEPT FOR WHA/EPSC FAITH CORNEILLE
    TREASURY FOR SGOOCH

    E.O. 12958: N/A
    TAGS: ECON EPET EINV EC
    SUBJECT: ANOTHER U.S. OIL COMPANY PULLING OUT OF ECUADOR

    Reftel:  06 QUITO 2147

    ¶1.  (SBU) Summary:  Conoco Philips has decided to sell its assets in
    Ecuador.  Conoco acquired several production and exploration blocks
    in Ecuador when it purchased Burlington Resources in 2006, and
    concluded that the Ecuadorian assets are not economically attractive
    compared to other holdings in its portfolio.  With Conoco's
    departure, City Oriente is the last U.S.-owned operating oil company
    in Ecuador (of the two other remaining U.S. companies, one produces
    natural gas and the other is a portfolio investor).  End Summary.

    ¶2.  (SBU) Herb Vickers, General Manager of Burlington Resources
    Ecuador (acquired by major oil company Conoco Phillips in May 2006)
    informed the Ambassador on May 10 that Conoco has decided to dispose
    of its assets in Ecuador.  Conoco had tried to privately arrange a
    purchase with some of its business partners in Ecuador, but those
    partners backed out.  Conoco will now open a data room so potential
    buyers can review its assets.  Conoco informed the GOE of its plans,
    and wanted to advise the Embassy as well.

    ¶3.  (SBU) Conoco has minority shares in two blocks in Ecuador
    currently producing oil (Blocks 7 and 21), which are operated by the
    French company Perenco.  Conoco also holds the rights to two
    exploration blocks (Block 24 is wholly owned and Block 23 is owned
    jointly with Argentine firm CGC).  Both exploration blocks have been
    in force majeure for years due to problems with indigenous and
    environmental groups opposed to petroleum operations.

    ¶4.  (SBU) Vickers explained that a large petroleum company like
    Conoco requires a high rate of return for its assets, and the
    holdings in Ecuador would be hard pressed to reach that threshold.
    Returns in Ecuador deteriorated with the revenue sharing
    requirements imposed by the 2006 amendment to the Hydrocarbon Reform
    Law.  Further complicating the equation is uncertainty regarding
    additional changes that might be imposed by the Correa
    administration, which, when incorporated into estimates of future
    returns, further reduce the financial attractiveness of the
    Ecuadorian holdings.

    ¶5.  (SBU) Conoco first attempted to sell its assets in Ecuador to
    Perenco, which was interested and close to finalizing a sale in
    December 2006.  Perenco said that it backed out of the purchase
    because it did not want to take on the exploration blocks that
    Conoco was trying to sell as port of the package.  However, Vickers
    speculates that Perenco withdrew due to uncertainty over the
    direction the new Correa government might take.  (Other sources
    ascribe Perenco's non-interest to the death of the French owner in a
    December 2006 French Alps skiing accident, and his heirs' desire to
    sell their Ecuadorian operation.)

    ¶6.  (SBU)   Vickers said Conoco tried to package the production and
    exploration blocks together, so that the buyer would take over a $1
    million guarantee that the company might have to pay if it abandons
    the exploration blocks.  However, when Conoco opens a data room for
    its assets, it will no longer try to sell all its blocks as a
    package, but would be willing to give away the exploration blocks to
    any interested company.  Vickers said that there is interest from
    Ecuadorian operators for the production blocks, but little interest
    in the exploration blocks due to the difficulties with indigenous
    and environmental interests.  Vickers speculated that the government
    might cancel its exploration rights, rather than see a different
    company attempt to explore the area, given Energy Minister Acosta's
    statements that he wants to limit new exploration.  If so, that
    would also cancel Conoco's guarantee.

    ¶7.  (SBU) Vickers said that Conoco is framing its departure as a
    financial decision following the consolidation of Conoco's and
    Burlington's assets.  Given Conoco's other holdings in the region,
    particularly Peru where indigenous groups also oppose its
    activities, Conoco does not want to give any public play to the
    political uncertainty that went into its calculations or the
    indigenous problems that also have hampered its operations.
    However, Vickers speculated that the international NGO community
    will paint Conoco's departure as a win for environmentalists.

    ¶8.  (SBU) Comment.  Ecuador's difficult and uncertain investment
    climate, particularly in the petroleum sector, was an important
    factor behind the Conoco decision to withdraw and explains its
    inability even to give its exploration rights gratis to another oil
    company.  This is the second time it has left (it also pulled out in
    the early 1990s), rejoining the list of U.S. companies that have
    left Ecuador (among those that have left in the last 15 years:
    ARCO, Exxon, Maxus, Occidental, Tenneco, Texaco, Unocal, and
    Vintage).  Vickers, who also worked in Indonesia, said that
    Indonesians kept pressing for more benefits from foreign oil
    companies, but knew not to push the foreign investors over a line
    that would force them to leave.  Ecuador, he said, does not know
    where that line is.

    ¶9.  (SBU) With Conoco/Burlington's withdrawal, U.S. participation in
    Ecuador's oil and gas sector is confined to City Oriente, EDC (Noble
    Energy), and Murphy Oil.  City Oriente, a small, family-operated
    company, is the sole U.S.-owned company producing oil in Ecuador.
    City, like Conoco, is worried about its ability to maintain its
    Ecuador operation and has filed for international arbitration over
    the conditions imposed unilaterally by the hydrocarbons law.  Noble
    Energy produces natural gas in offshore Block 3 to supply their
    electricity generator, Machala Power.  Noble Energy has filed for
    international arbitration to recover $60m owed by the GOE for
    electricity sold.  Murphy Oil, based in El Dorado, Arkansas, is a
    20% portfolio investor in Repsol YPF's Block 16.  Income from Murphy
    Oil's share of production fell from $7.7m in 2006 to $4.1m in 2007
    due to increased royalty payments mandated in a 2006 amendment to
    Ecuador's Hydrocarbons Law.

    JEWELL

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