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### Viewing cable 07QUITO906, ECUADOR'S ITT FIELDS UNDER CONSIDERATION ONCE AGAIN

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
07QUITO906 | 2007-04-20 18:54 | 2011-06-26 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Quito
Appears in these articles: http://m.elcomercio.com/wikileaks/cable.php?c=f457c54 http://m.elcomercio.com/wikileaks/cable.php?c=c0c7c76

`

    VZCZCXYZ0001
    OO RUEHWEB

    DE RUEHQT #0906/01 1101854
    ZNR UUUUU ZZH
    O 201854Z APR 07
    FM AMEMBASSY QUITO
    TO RUEHC/SECSTATE WASHDC IMMEDIATE 6818
    INFO RUEHBO/AMEMBASSY BOGOTA PRIORITY 6593
    RUEHCV/AMEMBASSY CARACAS PRIORITY 2504
    RUEHLP/AMEMBASSY LA PAZ APR 0547
    RUEHPE/AMEMBASSY LIMA PRIORITY 1591
    RUEHBR/AMEMBASSY BRASILIA PRIORITY 3735
    RUEHBJ/AMEMBASSY BEIJING PRIORITY 0183
    RUEHSG/AMEMBASSY SANTIAGO PRIORITY 3049
    RUEHGL/AMCONSUL GUAYAQUIL PRIORITY 2208
    RUEHSO/AMCONSUL SAO PAULO PRIORITY 0190
    RUEHRI/AMCONSUL RIO DE JANEIRO PRIORITY 0042
    RHMFIUU/DEPT OF ENERGY WASHINGTON DC PRIORITY
    RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

` `

    UNCLAS QUITO 000906

    SIPDIS

    SENSITIVE
    SIPDIS

    DEPT FOR WHA/EPSC FAITH CORNEILLE
    TREASURY FOR SGOOCH

    E.O. 12958: N/A
    TAGS: ECON EPET EINV EC
    SUBJECT: ECUADOR'S ITT FIELDS UNDER CONSIDERATION ONCE AGAIN

    REF A: Quito 394
    REF B: 06 Quito 2386
    REF C: 06 Quito 1920

    ¶1.  (SBU) Summary:  Development of Ecuador's heavy crude ITT fields
    has been under discussion for over 10 years.  Situated in the
    environmentally sensitive Yasuni National Park, the three fields
    contain an estimated billion barrels of reserves and could
    potentially produce 190,000 barrels of crude oil per day, with a
    project price tag of between 3 and 4 billion dollars.  If realized,
    the project could boost Ecuador's petroleum production (now falling
    due to lack of investment, Ref A), the government's revenues, and
    Ecuador's balance of trade.  However, environmental and legal
    concerns, the substantial investment costs required for a project of
    this magnitude, and unclear and seemingly divergent administration
    views on how to develop the fields could delay the project.  The
    administration is clearly looking to move forward with ITT, but its
    message on how to do so is confused.  Nevertheless, the fact that
    the project is moving at all could signal a change in policy for
    Ecuador's stagnant petroleum sector.  End Summary.

    ¶2.  (SBU) The size of the Ishpingo-Tambococha-Tiputini (ITT) fields
    means its development is of interest to oil majors, but to date the
    GOE has not presented a specific invitation for bids.  In late 2006,
    Government of Ecuador (GOE) representatives in the Palacio
    administration told us they planned to put the project out for
    international bid before the end of the year (Ref B).  In the end
    the GOE decided it was an issue "for the next government to decide,"
    and took no action.  In the early days of the Correa administration,
    development seemed unlikely under new Energy Minister Alberto
    Acosta, who favored a moratorium on new petroleum projects in the
    southern Oriente region and did not appear concerned about Ecuador's
    falling petroleum production.  However, talk of possible ITT
    development surfaced again recently, spurred by Petroecuador
    President Carlos Pareja's efforts to coordinate a development
    proposal with a number of state oil companies.

    Controversy Over GOE Options
    ----------------------------

    ¶3.  (SBU) Tension between Acosta and Pareja over possible
    development of ITT has been widely reported in the press.  Acosta
    announced a proposal that the international environmental NGO
    community compensate the GOE $700 million for not developing the
    fields, to avoid the environmental damage such a large project could
    cause.  Pareja had meanwhile been working with foreign state oil
    companies Petrobras (Brazil), SIPC-Sinopec (China), and ENAP (Chile)
    on the possibility of a joint consortium proposal to develop the
    fields (these firms had all previously expressed interest in the
    project).  Acosta asserted to the press that only fully state-owned
    companies should be considered for ITT development and that it
    remained to be seen "whether Petrobras is considered a state
    company" (note: Petrobras is a "hybrid" company with significant
    private ownership).  He later retracted his statement.

    ¶4.  (SBU) Amidst the controversy, President Correa intervened to
    clarify the GOE position.  Correa announced he was faced with a
    "dilemma of conscience" regarding the project.  His first choice
    would be to leave the oil in the ground and receive compensation not
    to develop the fields (although he cut Acosta's compensation figure
    in half).  Failing that, he would want Petroecuador to develop ITT
    using its own resources (industry experts, including from within
    Petroecuador, believe this is unrealistic given Petroecuador's poor
    financial situation (Ref C)).  Development by a consortium of state
    oil companies would be a third option, followed by putting the
    project out for international bid.

    ¶5.  (SBU) Petroecuador's Planning Director noted he believes that
    the consortium option is the favored "realistic" GOE option, but did
    not rule out a possible international tender.  He commented that
    state companies don't always finalize contracts, and implied that
    their investment plans are influenced by their country's political
    objectives, which can easily change.  Pareja has pushed the
    consortium idea, signing a preliminary MOU with the companies
    involved, but most recently announced that due to "unusual interest"
    the ITT project would be put out for international bid in May.  With
    so many divergent public announcements on the issue, it is unclear
    how, or even whether, the ITT project will be awarded in the end.

    Petroecuador's Consortium MOU
    -----------------------------

    ¶6.  (SBU) On April 4, Pareja accompanied President Correa on his
    trip to Brazil and signed a non-binding memorandum of understanding
    (MOU) between Petroecuador and Petrobras, ENAP, and SIPC-Sinopec on
    possible future development of the ITT fields.  The consortium
    reportedly has a period of 90 days starting from March 26 to
    complete a technical evaluation of the fields and submit a joint
    proposal for development.  The proposal would include a plan for
    confirming reserves, and a preliminary development plan and early
    production plan.  It would also include a proposal, if feasible, for
    building a plant to upgrade the oil produced and an electricity
    plant that would use the upgrade plant's residues as fuel.
    Petrobras has told us they would be interested in leading the
    potential project, based on their experience in Ecuador and the fact
    that their Block 31 (not currently operational due to environmental
    issues) adjoins the ITT fields.

    ¶7.  (SBU) A team of experts from the consortium are working together
    to analyze Petroecuador's existing data on the fields.  A 2005
    analysis by French engineers serves as the basis for the work, but
    lacks the hard technical data needed to develop a substantive
    proposal.  GOE requirements include strict compliance with
    environmental laws, and a minimum 50 percent share of revenues
    (based on reforms to Ecuador's hydrocarbons law in 2006).  Referring
    to the consortium, Petroecuador's Planning Director remarked that
    Petroecuador will review proposals in June or July and then make a
    decision on the project.  He predicts that it will take 12-18 months
    to be ready for production, and an additional 12-18 months for the
    plants to be operational.  He noted that Petroecuador could decide
    to start petroleum production before a potential plant-building
    phase.

    Will Venezuela Join In?
    -----------------------

    ¶8.  (SBU) Another key player that might be involved in ITT is
    Venezuela state oil company PDVSA.  Pareja had not included PDVSA in
    his initial plans for ITT (some local analysts believe it is because
    he does not consider PDVSA to be a viable player).  However, Acosta
    reportedly supports PDVSA for the project, and when Pareja
    accompanied Acosta to a regional energy summit in Venezuela on April
    16 and 17, he extended an offer to PDVSA to join the existing
    consortium or present a separate bid.  Press from the summit
    reported that PDVSA Vice President Luis Vierma said PDVSA "is
    negotiating, and there is a large possibility" of participation.
    Whether PDVSA would join the consortium or choose to submit a
    separate proposal on its own remains to be seen (Petroecuador's
    Planning Director commented that PDVSA might be interested in
    submitting a joint proposal with Turkish Petroleum).  Petrobras
    representatives noted that PDVSA involvement might increase the
    political viability of the project within Ecuador.

    Other Countries Interested
    --------------------------

    ¶9.  (SBU) Other countries reportedly interested in the project
    include state companies from Japan, Malaysia, India, Argentina,
    Colombia, and Peru, and private French company Total.  Post is not
    aware of any U.S. companies that are interested in investing in ITT.

    Environmental and Legal Issues
    ------------------------------

    ¶10.  (SBU) In the environment arena, a number of issues will likely
    challenge ITT development.  First, the project is located in an
    environmentally sensitive national park that could contain
    uncontacted indigenous tribes.  The park would be disturbed not only
    by the wells, but by the transportation links needed to build the
    project and the pipelines needed to get the oil out.  Environmental
    and indigenous-rights NGOs will likely protest the development
    project.  Petroleum projects must also receive approval of
    environmental impact studies from the Ministry of Environment before
    any activities can take place.  This approval could be contentious
    if environmental activists and indigenous community members actively
    protest.  Another consideration is that half of the Ishpingo field
    in the south part of the ITT block is partially located in an area
    the Environment Minister declared as "untouchable" in 2006, meaning
    that that part of the field will likely not be available for
    development.

    ¶11.  (SBU) There are also differing legal opinions regarding whether
    an alliance or consortium of companies would be permitted to develop
    the fields, and whether private or only state companies could
    participate.  Some experts also point to an existing Ecuadorian law
    which requires heavy crude fields to be developed through integrated
    projects that include both upstream and downstream operations.  They
    believe that only a development project that includes
    industrialization would be permitted under Ecuadorian law.  In the
    complex legal framework surrounding the petroleum sector, concerns
    of a legal challenge to a development project are very real.

    COMMENT:
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    ¶12.  (SBU) It is notable that the GOE is focusing on this project at
    the beginning of the administration, when there is potential for
    real progress.  Based on initial GOE comments that oil contracts
    would be renegotiated and that there could be a moratorium on
    exploration in certain areas of the country, we believed the
    petroleum sector in Ecuador would stagnate.  However, there appears
    to be an effort, at least by the state oil company, to move forward,
    and Pareja appears (for now) to have the political clout to bring
    the Energy Ministry along with him.  In fact, although messages to
    the press on how to develop ITT have been confused, they indicate
    that Acosta's idea of receiving compensation to "leave the oil in
    the ground" no longer appears to be in contention.

    ¶13.   (SBU) The GOE is groping for a solution on how to deal with
    ITT, but how it will play out is very unclear.  The power struggle
    between Acosta and Pareja may resurface, should PDVSA (who Acosta
    reportedly supports) submit its own proposal for development.
    Although Pareja reportedly favors the consortium option, it is not
    necessarily the best way to develop the fields.  State companies may
    not have the most advanced technologies and environmental expertise,
    and foregoing a competitive bid process could reduce transparency
    and competition for best price and proposals.  END COMMENT.

    JEWELL

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