Council On Hemispheric Affairs
MONITORING POLITICAL, ECONOMIC AND DIPLOMATIC ISSUES AFFECTING THE WESTERN HEMISPHERE
Friday, May 19, 2006
COHA MEMORANDUM TO THE PRESS
Ecuador Breaks with Washington over Occidental Petroleum
Ecuador’s decision to cancel the oil operation contract of U.S.-based Occidental will prove to be profoundly damaging
to Washington’s already faltering Andean policy
Following Quito’s cancellation of Oxy’s contract, Washington immediately killed further discussions on the stalled free
trade agreement it had been diligently pursuing with Quito, though U.S. negotiators have denied that talks are
irrevocably over
Coming on the heels of Bolivia’s gas nationalization, the Ecuadorian move suggests a hard driving regional trend
towards greater state control over basic resources
President Alfredo Palacio, who took over after Lucio Gutierrez was ousted in 2002 by public protests, has had a
checkered tenure involving political battles with entrenched congressional interests, and has often lacked clear
direction in his executive agenda
The Oxy decision has serious implications for Ecuador’s political, let alone economic, future and could mark the
adherence of that nation to the growing spread of “pink tide” left-leaning South American countries.
After Ecuador revoked the contract of the U.S. oil giant Occidental Petroleum, on Monday, May 15, it was hard to avoid
comparisons with Bolivia’s gas nationalization step two weeks earlier. The Ecuadorian government’s decision to move on
Oxy consolidates the regional trend towards increased state control over natural resources, which was marked not only by
Bolivia’s nationalization but also by the recent Venezuelan decision to up the royalties paid by companies operating in
the Orinoco tar belt. Yet the significance of Quito’s action surpasses that of simple copycatting. On an international
level, the Oxy cancellation – and the predictable subsequent scuttling of the long-sought bilateral free trade agreement
between Ecuador and the U.S. – reflects the increasingly fumbling foreign policy that Washington has adopted towards the
region. Domestically, the move marks the denouement of an ongoing popular struggle against Oxy’s operations which had
caused considerable headaches for Palacio’s government, and will likely have implications for October’s presidential
elections, which are already being discussed in the context of the regional leftist trend away from automatic compliance
with State Department desiderata.
A Policy in Tatters
Washington, which may have been privately jolted, but appeared outwardly relatively unfazed by Bolivia’s display of
economic nationalism, received Ecuador’s announcement with considerably less patience, tact and diplomacy. On Tuesday,
U.S. government officials expressed their extreme “disappointment” (a Financial Times headline remarked that the U.S.
“deplore[d]” the cancellation) and officials from the U.S. Trade Representative (USTR) office suggested that Quito’s
action was tantamount to an expropriation.
In reality, Washington’s irritation was undisguised, as it quickly and snippily announced an indefinite suspension of
the controversial – but long running – negotiations for a bilateral free trade agreement with Ecuador, with USTR
spokesperson Neena Moorjani letting it be known that she was not amused when she snapped that good trading partners
“obey the rule of law with respect to foreign investors.” Economic interests, in contrast with the Bolivian situation
where U.S. investments in gas are negligible, right now loom large in relations between Washington and Quito, and the
unlikely loss of Oxy’s approximately $1 billion in investment in Ecuador led senior State Department official Charles
Shapiro to comment that the company could take legal recourse against the measure, an action that certainly would be
supported by the State Department.
The repercussions of the breakdown in trade talks are weighty. The Bush administration’s relentless pursuit of bilateral
arrangements in the aftermath of the collapse of the proposed hemisphere-wide Free Trade Area of the Americas (FTAA),
seemed to be moving forward in the past year, with Colombia and Peru successfully negotiating and then signing – though
not yet enacting – agreements, and Ecuador seemingly close to doing the same. Yet those FTA’s were met with vocal
protests from civil society in every country involved, and clearly were backed by only a minority of the citizenry,
which helped stall their finalization. Relations with the region cooled noticeably as Washington proved unwilling to put
forward proposals that adequately addressed regional concerns over the agreements, particularly the ongoing
subsidization of U.S. agriculture.
In Ecuador’s case, it appears as though the United States’ unwillingness to budge on certain issues – primarily
concerning agriculture – led to a standstill, which ultimately cost Washington the trust and cooperation of Quito. The
cancellation of Oxy’s contract was a clear signal by the Ecuadorian government that it was no longer interested in
pursuing a FTA, as the State Department’s prickly response was only too predictable. In effect, stubborn trade policies
and arrogant behavior lost the Bush administration yet another regional ally.
The End of the Road
The termination of Oxy’s contract for its Ecuadorian operations came after protracted and conflictive negotiations with
the government, which involved disputes over taxes and led to an eventual investigation of the company’s financial
dealings. The break was precipitated by Oxy’s decision to sell 40% of its shares in its Ecuadorian operations to the
Canadian company EnCana without disclosing the sale to the government as it was required to do, leading an already
irritated government to assert that Oxy had breached its operating contract (Since then, EnCana has transferred its
shares to a Chinese company). The government’s recent hike in taxes on the oil industry – implementing a windfall tax of
50% – compounded tensions between multinationals and the Palacio government, and stalled trade negotiations with
Washington. More noticably, Oxy’s operations had long been a lightning rod for public discontent, inciting particularly
sharpened attention from the indigenous CONAIE movement, which in recent months has staged numerous demonstrations and
roadblocks that paralyzed the country. A Financial Times article observed that “…Occidental has become a cause célèbre
for radical trade unions and indigenous organizations that have attached almost as much weight to their campaign against
[the company] as to their opposition to…a trade agreement with the U.S.”
Popular protests in Ecuador’s oil producing regions have characteristically caused difficulties for the government.
Palacio’s predecessor, the discredited Lucio Gutierrez, was brought down by a wave of protests, and Palacio himself, in
order to survive, has had to negotiate gingerly with the demonstrators, such as those who occupied airports in Orellana
and Nueva Loja in August of 2005. By brusquely ending the discussions with Occidental – and carrying out a Morales-esque
dispatching of troops – the Ecuadorian authorities achieved something like a socially palatable resolution to the
situation. Officials stressed, however, that the government’s move did not signify a nationalization of the industry,
and that discussions were already underway with other potential investors – primarily other countries’ state-owned
companies, including Venezuela’s PDVSA, Brazil’s Petrobras and Mexico’s PEMEX.
Implications for an Uncertain Future
What the decision to void Oxy’s contract ultimately reveals was that Palacio – like Bolivia’s Morales – had become aware
of the power of the street, and now was feeling substantial pressure about trying to accommodate Washington. The
political leverage of widespread popular discontent clearly overrode the strident complaints of powerful Ecuadorian
domestic business groups who opposed the Oxy decision, which suggests that Ecuadorian politicians are sensing a need to
be responsive to a body politic which is now looking leftwards. The newly released political force of such leftist
sentiment could weigh heavy in the upcoming presidential campaign, as 43-year-old former economy minister and likely
future presidential candidate Rafael Correa is being seen as a potential member of the “pink tide” movement, and was
widely popular before resigning his position last August. While Correa trails in recent polls, how the Oxy situation
plays out could greatly impact his candidacy: he could potentially build on the sentiment which forced the cancellation
of the oil-drilling contract, but could also see his campaign hurt if spooked investors lead to capital flight and an
economic downturn.
For Palacio, whose time in office has been unspectacularly spent trying to maintain stability and achieve political
consensus, the voiding of the Oxy deal marks a pronounced about-face. Many observers had questioned his initial decision
to pursue a FTA, which all along was highly unpopular. By tossing Oxy out, he acceded to the wishes of a broad social
group. While Palacio was never thought of as a likely candidate for “pink tide” membership, in ending the contract and
accepting the obvious consequences on his relationship with Washington, he may effectively have set his country on a
path towards membership in that growing club.
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This analysis was prepared by COHA Research Fellow Michael Lettieri
May 19, 2006
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