Petroecuador Rejects Oxy Proposal to End Legal Dispute

Ecuador's state oil company Petroecuador has rejected US oil company Occidental's (NYSE: OXY) offer to pay US$1bn to end a legal dispute between the two, a Petroecuador spokesperson told BNamericas.

Petroecuador informed the energy and mines ministry of its decision late on Monday, the spokesperson said, adding "Petroecuador responded [to the ministry] that the lawsuit process will continue."

Petroecuador rejected the offer because Oxy requested an extension on its block 15 contract from 2012 to 2019, but "it is not in Petroecuador's power to extend a concession contract," the spokesperson said.

At the heart of the dispute are allegations that Oxy transferred a 40% stake in block 15 to Canadian oil firm EnCana (NYSE: ENC) in 2000 without government permission in addition to overproducing on some wells and not complying with its investment plan in the block.

Oxy's offer included giving the government US$600mn in extra revenues from the block, US$100mn for health and social development projects, US$110mn toward new development projects with Petroecuador, US$13mn to aid the energy and mines ministry in modernizing its tax system and a US$50mn charge for renegotiating contracts, according to media reports.

The offer came at a key time for the government, which is in the midst of free trade talks with the US and is facing widespread anti-US protests at home as protesters, led by indigenous groups, have blocked major roads and highways calling for a referendum on the trade deal.

The protesters say a deal with the US would harm their economy and culture, and would only benefit the wealthy.

Oil contract workers have also occupied oil facilities in the countries' Amazonian provinces in recent weeks, calling on the government to kick Oxy out and invest more oil revenues in local health, social and infrastructure projects.

"Oxy has just been striving to reach an amicable resolution to this dispute and the recent proposal represents a continuation of that effort," an Oxy spokesperson told BNamericas.

"I think we would view a settlement as constructive," Steven Wood, an Oxy analyst at ratings agency Moody's told BNamericas. "They've been litigating this issue for quite a while and it would continue to drag on and cast a cloud over Oxy's operations."

"But ultimately, when you look at Oxy as a whole, although Ecuador is a fairly significant part of their business, I don't think we'd view it as large enough to have a material impact on the company as a whole," Wood added.

A British court recently ruled in favor of Oxy in a US$75mn tax dispute with Ecuador's government. Oxy won the tax rebate from Ecuador last year in an international arbitration court ruling, but the government appealed the decision, claiming that the company was wrongly excluded from a tax revision process.

Occidental's Ecuadorian oil production was 42,000 barrels a day (b/d) in 2005, down from 46,000b/d in 2004.

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