Yep, here we go again. Ecuador’s energy minister has threatened Occidental Petroleum Corp., saying the California firm must prove it has not breached a government contract or risk losing its Amazon oil field license.
Ivan Rodriguez said, “A deadline of 60 days is set, starting from the time of this notification, for the company Occidental to fulfill its obligations or to dispel the charges formulated against it.”
It’s an old soft-shoe routine.
Solicitor General Jose Maria Borja has pushed since August 2004 to revoke Oxy’s contract, saying the company violated the agreement by transferring 40% of its interest in the license to EnCana Corp. without authorization from the Energy Ministry.
But Rodriguez’s ultimatum has more to do with boosting his country’s cash flow than any concern over the niceties of a legal document.
Cash-rich
Just last month, Oxy agreed to acquire Vintage Petroleum Inc. for about $3.8 billion to expand in Latin America.
That deal will enable Oxy to develop its Latin American production base by adding Vintage’s assets in Argentina to its portfolio. Oxy said it hoped to double Vintage’s production in Argentina within 5 years.
The deal did not go unnoticed.
Jon Cartwright, an analyst at investment firm BOSC Inc., took note of the sale, saying it probably represented the beginning or continuation of a “wave” of acquisitions in the exploration and production industry.
“The bottom line is the high energy prices have created a huge cash position at many of these energy companies,” said Cartwright, who added that companies are “flush with cash and have record highs on their stock values, which puts them in an excellent position to acquire additional reserves.”
Also, of course, it puts them in an excellent position to receive the covetous looks of governments intent on adding to their own coffers. In some cases, those governments will not be too choosy about the methods they adopt to achieve their aims, either.
Able defense
Oxy has not shrunk from the job of defending its interests and has even-to its immense credit-spoken of the illegality of Ecuador’s implied threat to take over the lucrative fields.
In October, Daniel Almaguer, Oxy’s vice-president for legal affairs, said that cancellation of its contract would amount to “an illegal confiscation.” He also said that turning over 100% of Oxy’s Ecuador assets to the state would represent a loss to the company of more than $1.5 billion.
Ecuador’s energy minister is perfectly aware of the value of Oxy’s assets in his country, where production nearly tripled during 2002-04 to yield around 20% of Ecuador’s total oil output, or some 100,000 b/d.
Rodriguez is no less aware of Oxy’s cash-rich position, as represented by its acquisition of Vintage. His aim is simply to acquire some of that cash by publicly threatening Oxy’s higher-value investment in his country.
In most places around the world, that’s called extortion. ✦