Petrobras Sues Ecuador for USD 830 Million

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Petrobras, the Brazilian company that is embroiled in corruption scandals, received big benefits in Ecuador: It exploited the Palo Azul oil field illegally for almost a decade; the law controlled by Rafael Correa pardoned the company for an embezzlement of USD 2 billion; the ex-minister Galo Chiriboga saved it from having its contract terminated. Finally, the Ecuadorian government and the Brazilian company agreed on a compensation of USD 217 million out of the USD 343.7 million demanded by the company. In 2010, Petrobras exited Ecuador and now launches a counter-attack with a law suit for USD 830 million, an enormous bill from the Sao Paulo Forum for the Ecuadorian people.

The Petrobras connection – Lula Da Silva

Just over a month ago, one of the people involved, the businessman Fernando Bahiano, testified before a judge that he paid the personal expenses of Fábio Luís Lula da Silva, the ex-president’s eldest son, to the tune of almost BRL 2 million (USD 530,000) with money that came from a web of corruption.

Bahiano, who has accepted an agreement to cooperate with the law, is accused of being an intermediary in the payment of bribes between the companies that provided services to Petrobras and the politicians who hid the corruption.

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Focus Ecuador

According to the newspaper O Globo, Lula was summoned for examination as a witness because the Federal Police believe that the ex-president “could have benefited” from the web of corruption in which Petrobras diverted close to USD 2 billion. Among those convicted is João Vaccari, ex-treasurer of the Workers Party (PT), the party of the Brazilian president, Dilma Rousseff, and of Lula. Vaccari will have to serve 15 years and 4 months in prison.

The investigations have been extended to include around twenty large private companies which, according to the authorities, had rigged contracts with the oil company, inflating their value and then sharing the difference between the oil company’s ex-directors and the politicians who allowed the fraud to take place.

The Brazilian authorities suspect that part of the money obtained from the web of corruption operated in Petrobras could have been used in the campaign that led to the re-election of Rousseff, an aspect of the case that is under judicial investigation.

Petrobras: Fraud, power and corruption in Ecuador

In January of 2005, Petrobras and the Japanese company Teikoku signed an “Agreement for Sale and Association” to transfer 40% of the shares in the contracts in Ecuador, without ministerial authorization, and without Petrobras having contractual rights at that time.

Two years after the disputed agreement between Petrobras and Teikoku was signed and only a few days before the expiration of Alfredo Palacio’s term in office (January of 2007), his minister, Iván Rodríguez, signed a magic Ministerial Agreement “authorizing” the transfer of Petrobras’s 40% interest to Teikoku, which had been used years before in the Securities Commission in Buenos Aires. However, in May of 2007, during Rafael Correa’s administration, the Ministerial Agreement was suspended, as ordered by minister Alberto Acosta, and also because of the request for termination, which was brought in February of 2008 by the then State Attorney General, Xavier Garaicoa.

In June of 2007, a Special Commission of the Ministry of Energy and Mines, a product of the nascent Correísmo, established the existence of a technical fraud in the rating of the unified Palo Azul field, which was carried out by Gustavo Noboa’s government in 2000. The Commission also requested the termination of the contracts with Petrobras for Block 18 and Palo Azul.

In February of 2008, the Attorney General, Xavier Garaicoa, requested the then minister of Energy and Mines, Galo Chiriboga, to proceed with Petrobras’s contractual termination, because of the aforementioned fraud and for having transferred shares to the Japanese company Teikoku without State authorization (the same illegal process carried out in the Oxy case).

At the same time as Attorney General Garaicoa requested the termination of the contracts, the District Attorney, Washington Pesántez, brought criminal proceeding for technical fraud and embezzlement against 27 ex-public officials, including the ex-president Gustavo Noboa, for a loss of USD 2 billion for the country in the exploitation of Blocks 18 and Palo Azul. The then minister of Mines and Petroleum, Galo Chiriboga, opposed the termination, an opinion which was shared by the president Rafael Correa.

From President of Petroecuador to Minister of Energy and then to Attorney General

Despite being linked to the Palo Azul case, having decided on the suitability of Teikoku in 2006 when he was president of Petroecuador, in June of 2011, Galo Chiriboga was appointed State Attorney General. One of the first things he did was to ask Judge Lucy Blacio to annul the criminal proceedings brought by his predecessor, Washington Pesántez. Blacio, who is no longer in the National Court and now works in the District Attorney’s Office, under Chiriboga, fulfilled the request from the Attorney General to the letter and the case was closed.

Petrobras demands USD 343 million, accepts USD 217 and exits Ecuador

Minister Wilson Pastor Morris offered Petrobras an agreement for the early termination of the contracts for Block 18 and the Palo Azul field in exchange for compensation of USD 217 million. The company agreed and left the country.

According to a letter that Petrobras sent in December of 2010 to the Ministry of Natural Resources, the unrecovered investment at the date of termination of the aforementioned contracts (November of 2010) was USD 167.8 million, and at an annual rate of 18% at that time, the figure increased to USD 343.7 million. This amount included USD 11.3 million which corresponded to warehouse inventory.

Petrobras’s unexpected claim for USD 830 million

Although the agreement provided for the waiver of all international claims, surprisingly, four years later, in August of 2015, the Attorney General, Diego García, announced that Petrobras had filed a claim against the Ecuadorian State in the Hague court pursuant to the UNCITRAL rules, claiming an exorbitant compensation of USD 830 million, despite the fact that the request for compensation brought by the oil Company in 2010 was for USD 343.7 million, as mentioned earlier.

“We are denouncing and will keep denouncing these bilateral investment protection treaties, which have been extremely prejudicial for our country” assured President Correa. Ecuador has spent more than USD 155 million in the last 9 years on lawyers and trials, and has not won even one major case in the ICSID and the UNCITRAL.

Petrobras, a decade of irregularities, arbitrariness and benefits

Petrobras’s international law suit against Ecuador raises many questions and creates suspicions because the Brazilian Company breached its contracts, acted arbitrarily and negotiated illegally with third parties, and despite this, received endless benefits from successive governments, including the current government. Petrobras’s unchecked operation in Ecuador for almost a decade was facilitated by some high-level civil servants.

The current Attorney General, Galo Chiriboga, has always been connected to the case, first as president of Petroecuador at the end of Alfredo Palacio’s administration and then as Minister of Energy and Mines.

The conflict between Occidental and Petrobras

Petrobras’s approach to its expansion strategy in Ecuador is evidenced by the transnational’s attempts to control the oil reserves in the Yasuní National Park, where the biggest crude oil project, Ishpingo, Tambococha, Tiputini ITT, is found. Petrobras signed an agreement for this project with Petroecuador in 2007, together with Sinopec (China) and Enap (Chile).

Even before the contract termination (2006), Occidental (Oxy) had huge advantages over any other company which aspired to exploit the ITT Project. The fact that it had the only oil pipeline to evacuate oil from ITT and from Block 31, access routes, power generation, crude oil storage and other production facilities, put the company in a privileged position. It was difficult for any company to compete economically with Oxy. In Petroecuador, the oil company conducted advanced negotiations and operation projects in ITT since 2002.

Why and who decided that Occidental’s contract would be the first to be terminated, if other companies were involved in similar contractual termination cases? Let us remind you that the main reason for terminating the contract with the North American Company, the partial transfer of rights to EnCana (these rights now belong to Andes Petroleum) in Block 15 without ministerial authorization, took place in 2000 and the ministerial decision to terminate the contract was taken 6 years later, when the company had exploited and over-exploited the deposits without any control. The legal situation of YPF-Repsol, City, Andes Petroleum, EDC and Petrobras was the same or even more serious than that of Occidental.

Returning Block 31 and an extra USD 242 million for Petrobras

Regarding Block 31 in the Yasuní National Park, in 2008, the government affirmed that Petrobras would exit the area, without compensation from the State. However, it hid the fact that an agreement was signed in which Petroecuador was obliged to transport its oil using the private OCP oil pipeline, in which Petrobras has a quota of 70,000 barrels a day, with a fee of 1.51 USD per barrel, when the cost of transport in the State oil pipeline SOTE is 0.40 USD per barrel.

During the 10 years of the agreement (from 2008 to 2018), Ecuador will have paid Petrobras USD 242 million. In other words, in a disguised form, Ecuador will end up paying the Block 31 investment, which reaches USD 268 million, despite the fact that this Block never entered the development phase.

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