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The Heat On Oxy In Ecuador


Occidental Petroleum CEO Ray R. Irani learned the oil business at the side of Armand Hammer, Oxy's legendary, globe-trotting founder. Since then he has dealt with bomb-planting guerrillas in Colombia, negotiated billion-dollar deals with Middle East potentates, and sipped tea in a desert tent with Libyan strongman Muammar Qaddafi. Now the 71-year-old Lebanese-born exec is facing one of the thorniest political battles of his career in an unlikely place: Ecuador.

The small country on the western coast of South America is the eighth-largest supplier of oil to the U.S. As in other nations awash in oil money, the sight of so much wealth flowing to foreign corporations has exacerbated the frustrations of many Ecuadoreans, who confront widespread poverty. That puts companies like Oxy, which generated 7% of its worldwide production from its Ecuador fields last year and is the country's top private producer, in the political crosshairs. In mid-March, years of simmering resentment among members of the country's poor indigenous population exploded over a proposed free-trade pact with the U.S., and many citizens took to the streets in protest, calling for Oxy's expulsion. President Alfredo Palacio sent riot police to quell the disturbances. Although tempers have cooled somewhat, Irani's troubles have not. On Mar. 29, Ecuador's Congress instituted a windfall profits tax of 60% on oil producers, triple the normal rate. Moreover, Oxy has become embroiled in a nasty legal dispute with the government. At best, Oxy will pay a hefty settlement; at worst, its oil fields could be taken back.

DEEP POCKETS

Oxy is not in any mortal danger. The Los Angeles company earned $5.2 billion last year on revenues of $15.2 billion. In the past three years its shares have tripled in value, helping it win the No. 6 spot on the BusinessWeek 50 list of top corporate performers. Irani himself pops up regularly at the top of exec pay lists: His compensation for 2005 was $50 million. Still, the Ecuadorean battle could stymie Irani's ambitious plans to raise Oxy's overall production from 596,000 barrels a day to nearly 1 million by 2010. The troubles in Ecuador, combined with Oxy's soaring stock, prompted Friedman, Billings, Ramsey Group Inc. (FBR) energy analyst Jacques Rousseau to downgrade Oxy's shares on Mar. 30. "Nobody really knows how this is going to go," he says.

Occidental's troubles began in 2001, when Ecuador decided to stop giving foreign oil companies tax rebates on local goods and services. That cost Oxy, which has invested $900 million in its Ecuador fields, $75 million. Irani appealed to international arbitrators, who ruled in Oxy's favor in July, 2004. Soon after, Ecuador's attorney general began an investigation into Oxy, accusing it of improperly transferring an interest in its fields to Canadian producer EnCana Corp. in 2000.

Now Oxy faces the possibility of losing its fields. Last August, Ecuador's state-owned oil company determined that Oxy had acted improperly and recommended taking the fields back. As anti-globalization protests boiled over in March, Irani offered to pay the government $1 billion, which would include back taxes, future oil revenues, and $100 million for social programs. In return, Oxy's contract would be extended. Local political analysts say that while Oxy is unlikely to lose the fields permanently, President Palacio will have to take substantial action to appease his electorate. "A few months ago heavy fines might have worked," says Gustavo Arteta, an economist at consulting firm LatinSource in Ecuador. "Now Palacio is backed into a corner."

Irani declined to speak to BusinessWeek, citing the sensitivity of the situation. Oxy's chief legal counsel in Ecuador, Daniel Almaguer, expects talk of expropriation to blow over and for a settlement to be reached. "This is an election year," he says.

The government is likely to move judiciously, given that Oxy is Ecuador's top private taxpayer. But there's another geopolitical twist: In February, EnCana sold its Ecuadorean assets -- including its share of Oxy's fields -- to a joint venture of Chinese companies for $1.2 billion. "If Oxy is forced out of Ecuador, I'm sure someone else will knock on the door to say they can develop the project," says Roger Tissot, director of country risk analysis at PFC Energy in Washington, D.C. Irani will need all his political skills to prevent that from happening.

By Christopher Palmeri and Geri Smith


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