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See you in court: Ecuador cancels Oxy contract

THE GOVERNMENT of Ecuador has torn up its block-15 contract with US energy firm Occidental Petroleum (Oxy) over alleged violations of its concession agreement. In a decision that may have consequences for other investors, the row revolves around the sale by Oxy of part of its Ecuadorian oilfields to a third party, Canada's EnCana, in 2000, without the express consent of the authorities.

Officials from PetroEcuador have taken over Oxy's various offices and installations – technicians from the state-owned energy group are to replace Oxy staff in running the oilfields in the Amazon region.

Within days, the US firm had filed a claim against the government in the international courts seeking redress. Oxy filed its claim with the International Centre for the Settlement of Investment Disputes in Washington, invoking the protections of the US-Ecuador Bilateral Investment Treaty. It wants its rights to the field restored and Ecuador prevented from replacing it with another operator at least until the case is resolved. Ecuadorean officials have hinted that the fields could be jointly operated alongside an undisclosed South American company.

The dispute sends out negative signals to foreign investors, already on the rack in certain other Latin American states. Bolivia recently declared it was nationalising foreign energy companies' assets (see p4), although Ecuador says other foreign firms have nothing to fear. Venezuela has also moved to increase its revenues from foreign energy companies operating within its borders.

Oxy was Ecuador's largest foreign oil investor, pumping more than 100,000 barrels a day from the block-15 fields, around a fifth of the country's production. It will clearly hurt the company. Ecuador accounted for about 7% of Oxy's worldwide production during the first quarter of 2006.

Oxy had previously offered the government up to $1bn in disputed taxes, investments and extra revenues to end the dispute, while denying any wrongdoing. "This dispute results from a transparent attempt [by Ecuador] to eviscerate and ultimately repudiate an investment agreement worth well in excess of $1bn in retaliation" for Oxy's July 2004 victory over Ecuador in a $75m tax arbitration, the company said in its mediation request. The EnCana assets have since been on-sold to a consortium of Chinese investors.

Oxy has also accused the government of bowing to nationalist pressures. The take over has been welcomed by indigenous groups that had previously campaigned for the company to be expelled. However, US officials have been outraged by the action, threatening to abandon free-trade talks. The cancellation of Oxy's contract could boost Ecuadorean government revenues this year, as additional oil money floods into the treasury, but the longer-term effects could be disastrous, scaring off potential investors.

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