Ecuador allows sale of Petrobras stake to Teikoku

Ecuadoran authorities, already mired in one major legal dispute over the sale of concession rights, have approved Petrobras's planned sale of a 40% stake in Block 18 to Inpex unit Teikoku Oil Ecuador.

Eric Watkins
Oil Diplomacy Editor

LOS ANGELES, Dec. 17 -- Ecuadoran authorities, already mired in one major legal dispute over the sale of concession rights, have approved Petrobras's planned sale of a 40% stake in Block 18 to Inpex unit Teikoku Oil Ecuador.

Following completion of the sale, block operator Petrobras will retain a 30% stake, Teikoku Oil 40%, Cayman International Exploration Co. SA 18%, and Petromanabi a 12% participating interest.

In 2005, Inpex's former unit, Teikoku Oil, said it would purchase a 40% stake in each of two blocks, 18 and 31, in Oriente. But Inpex this week said it had decided to buy a stake only in Block 18.

The block, located in the Oriente basin, is producing 30,000 b/d of oil, but there are expectations that the production level will rise in the future.

Petrobras action dropped
In November, Luis Jaramillio, president of Ecuador's state oil company Petroecuador, said the firm would not start proceedings to terminate the contracts of Petrobras for Block 18 and Palo Azul field.

The possibility had arisen in February when Ecuador's former attorney general Xavier Garaicoa sought termination of the contracts due to alleged breaches of the law, including the transfer of 40% of Petrobras' stake in the assets to Teikoku Oil without state authorization.

After reviewing the documents, Petroecuador found there was no justification for the proposed action, and in late October it requested energy and mines minister Derlis Palacios not to start any legal procedures against the sale.

That decision coincided with a Petrobras announcement that it had agreed with the Ecuadoran government for a year's extension to the company's concession contract for hydrocarbons production in Block 18.

At the time, Petrobras said it would decide with Ecuador over the coming year whether to sign a new contract or to return the block to the state in exchange of an indemnity for its investments.

Oxy's case
Petroecuador's decision not to pursue legal action against Petrobras contrasted sharply with its earlier handling of Occidental Petroleum Corp., a case that is continuing.

Concerning the case, Ecuador's procurator Diego Garcia and a group of lawyers were due in Washington DC last week to attend a hearing at the World Bank's International Center for Settlement of Investment Disputes (ICSID).

The hearing concerned the $3 billion claim presented by Oxy against the Ecuadorian government for the May 2006 cancellation of its contract for Block 15.

At the time, Energy Minister Ivan Rodriguez made the announcement after Oxy was found guilty of the "illegal" sale of its stock and after rejecting its attempt to avoid the sanction.

"We have decided to accept the suit and petition brought by Petroecuador and the prosecutor's office, and the joint venture contract has been declared void," Rodriguez said.

EnCana sale dilemma
Oxy's expulsion followed a protracted legal dispute over its move to sell a 40% share in its Ecuador operations to Encana Corp., without first consulting the Ecuadoran government.

Oxy reportedly offered the Ecuador government $20 million and a 50% share of increased profits from rising oil prices on world markets, but both the government and Petroecuador rejected the offer.

Ahead of the coming ICSID hearing, Garcia's office said there were "solid arguments" for Ecuador to obtain a favorable ruling against Oxy.

Ecuador is expected to present the same legal arguments it used for the initial annulment of Occidental's contract, in particular, the firm's alleged sale of part of the block without prior government authorization.

The hearing will take place between Dec. 13-20, and the ICSID's final verdict is expected in the coming months.

Contact Eric Watkins at hippalus@yahoo.com.

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