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### Viewing cable 09QUITO820, ECUADOR SELLS FUTURE OIL PRODUCTION TO PETROCHINA TO

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
09QUITO820 | 2009-09-04 21:42 | 2011-05-02 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Quito

`

    VZCZCXYZ0011
    RR RUEHWEB

    DE RUEHQT #0820 2511056
    ZNR UUUUU ZZH
    R 042142Z SEP 09
    FM AMEMBASSY QUITO
    TO RUEHC/SECSTATE WASHDC0000
    INFO RHEBAAA/DEPT OF ENERGY WASHINGTON DC
    RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
    RUEATRS/DEPT OF TREASURY WASHINGTON DC
    RUEHBJ/AMEMBASSY BEIJING
    RUEHBO/AMEMBASSY BOGOTA
    RUEHCV/AMEMBASSY CARACAS
    RUEHGL/AMCONSUL GUAYAQUIL
    RUEHLP/AMEMBASSY LA PAZ
    RUEHPE/AMEMBASSY LIMA
    RUEHQT/AMEMBASSY QUITO

` `

    UNCLAS QUITO 000820

    SENSITIVE
    SIPDIS

    E.O. 12958: N/A
    TAGS: ECON EPET EINV EFIN ENRG EC
    SUBJECT: ECUADOR SELLS FUTURE OIL PRODUCTION TO PETROCHINA TO
    STRENGTHEN FISCAL ACCOUNTS

    REF: 09 QUITO 351

    -------

    SUMMARY

    -------

    ¶1. (SBU) The Government of Ecuador (GoE) is increasingly looking to
    China as a source of financing to help alleviate fiscal pressures.
    The prime example of this is Ecuadorian state-run oil firm
    PetroEcuador's recent agreement to sell future oil production to
    China's state-owned oil company PetroChina, under which the GoE
    received an advance payment of US$1 billion.  The GoE entered into
    this arrangement to ease liquidity constraints resulting from the
    fall in oil prices and a major expansion in government
    expenditures.  The GoE is negotiating for an additional US$ 1
    billion credit from China, and private sector sources tell Post the
    full advance payment could total US$ 3 billion.  Private analysts
    worry that this non-transparent and seemingly expensive deal,
    comprising 34% of Ecuador's oil production through July 2010,
    prioritizes current expenditures at the expense of future revenues
    and fiscal solvency.  End Summary.

    --------------------------------------------- -------

    PetroChina US$ 1bn Advance Payment for Ecuadoran Oil

    --------------------------------------------- -------

    ¶2. (SBU) According to the agreement signed July 27, 2009 between
    PetroChina and PetroEcuador, PetroChina will purchase 69 million
    barrels over two years at a rate of approximately 95,000 barrels
    per day (bpd).  The price for each shipment of crude will be
    determined by the prevailing market price.  Under the agreement,
    the GoE received an advance payment of $1 billion from PetroChina
    in early August.  The annual interest rate on the $1 billion
    advance will be 7.25%.

    ¶3. (SBU) PetroEcuador announced at the time of the signing that
    PetroChina will discount approximately 28% of the cost of each
    barrel exported as payment on the advance, in effect leaving
    PetroEcuador and the GoE 72% of the value of exports to PetroChina.
    PetroEcuador officials explained to the Embassy that this
    calculation is based on an average oil/barrel price of $60 over the
    next two years, and that this percentage breakdown will adjust to
    account for changes to the price of Ecuadoran oil.  According to
    the contract, China will be the final consumer of the oil and will
    not be able to resell it to other countries.

    ¶4. (SBU) This deal compromises roughly 20% of Ecuador's oil
    production over the next couple of years, and China will leap ahead
    of other export markets to become Ecuador's second largest market
    after the U.S (based on 2008 statistics).  According to Central
    Bank data, from January to June 2009 Ecuador exported 59.73 million
    barrels of oil, down from 66.21 million barrels during the same
    period in 2008.  In 2008, almost 62% of Ecuador's total oil exports
    were to the U.S., almost 16% to Peru, and about 15% to Chile.  Oil
    exports to China in 2008 comprised only 2.24% of the total, ranking
    China as Ecuador's fifth largest buyer or crude oil.  (Total oil
    production reached approximately 185 million barrels in 2008 and is
    projected at about 176 million barrels for 2009.)

    ----------------------------------------

    Rumors of Additional PetroChina Advances

    ----------------------------------------

    ¶5. (SBU) In addition to the $1 billion advance on oil supplies
    received in early August, Foreign Minister Falconi stated August 16
    that the GoE is negotiating a second $1 billion credit with China.
    At the time of the announcement, Falconi did not clarify whether
    this would be an unsecured loan or also an advance on future oil
    sales.  However, GoE Coordinating Minister for Economic Policy,
    Diego Borja, commented recently to the press that the GoE's Chinese
    counterparts have tried to condition this credit to oil sales.  He
    said that this demand was unacceptable to the GoE and that GoE
    authorities are waiting for the Chinese response to their
    counterproposal.  (Comment: Post's financial sector contacts say
    that GoE officials expect up to a total of US$ 3 billion from
    PetroChina, likely as an advance on the two-year oil sales
    agreement.)

    ------------------------------------------

    Conflicting Statements over Usage of Funds

    ------------------------------------------

    ¶6. (SBU) GoE statements regarding the use of this advance (and any
    additional advances) have varied widely.  The Head of PetroEcuador
    stated publicly that the payment will fund PetroEcuador's
    investment program for 2009.  However, Minister Diego Borja has
    stated that the advance will support the creation of a Contingency
    Fund to assure investment in the productive sector in 2010.  Both
    statements conflict with President Correa's public assertion that
    the advance will bolster GoE fiscal accounts and alleviate the
    current liquidity shortage.

    ¶7. (SBU) Private analysts argue that the GoE's fragile fiscal
    situation is largely the result of high growth in spending,
    exacerbated by the GoE's global bonds repurchase in May 2009
    (reftel) following its sovereign default in December 2008.  The GoE
    has no access to private capital markets as a result of the default
    and the global financial crisis.  It recently received credits from
    the Latin American Reserve Fund (FLAR) and the Andean Development
    Corporation (CAF) amounting to about US$ 1 billion and is hoping to
    receive new loans from the Inter-American Development Bank (IDB).
    Private analysts tell the Embassy that the official credits from
    multilateral lenders and the PetroChina advance will not be
    sufficient to close the GoE's financing gap through the end of the
    year.

    --------------------------------------------- --

    Critics Note High Cost and Lack of Transparency

    --------------------------------------------- --

    ¶8. (SBU) This deal has been roundly criticized by the Ecuadoran
    private sector and in the local press.  Numerous critics have cited
    the high cost of the arrangement as the main drawback: the interest
    paid of 7.25% on the prepayment is significantly higher than that
    charged by CAF, FLAR, or the IDB.  Rene Ortiz, a former president
    of the Association of Hydrocarbon Industries, said that a loan
    advance of this type is always more costly than lending available
    from multilaterals.

    ¶9. (SBU) Critics have also highlighted the lack of transparency in
    the deal.  For example, Luis Calero, a recognized oil sector
    analyst, points out that the transaction was made without an
    international tender, making it impossible to determine whether
    Ecuador obtained the most favorable terms.  Numerous other private
    sector critics have also noted that the payment advance means that
    oil revenues will be reduced over the next two years, and there is
    no sign that the mounting fiscal pressures will subside during this
    period.  Augusto Tandazo, an oil industry lawyer, comments that the
    GoE's interest in the deal is the direct result of Ecuador's fiscal
    crisis and isolation from international credit markets.

    --------------------------------------------- -

    Comment: Short-Term Fix to GoE Fiscal Problems

    --------------------------------------------- -

    ¶10. (SBU) The PetroChina loan to the GoE, along with FLAR and CAF
    funding and the GoE's decree forcing private banks to repatriate a
    portion of capital held overseas, may be sufficient or close to
    sufficient to cover the 2009 fiscal gap caused by the fall in oil
    prices.  These new revenues and higher oil prices also seem to have
    staved off immediate concerns about the sustainability of
    dollarization.  However, they may also encourage the GOE to
    continue in the short term with its current pattern of government
    expenditures.  With this deal, the GOE is clearly prioritizing
    today's expenditures at the expense of future fiscal stability, and
    serious questions remain about how the GoE will meet its financing
    needs in 2010 and later years.
    HODGES

`