Oil Dispute Seeps Down to Grass Roots

A decade ago, Serafino Pelassa converted his dairy farm to a giant greenhouse for roses, attracted by generous import breaks from the United States aimed at keeping farmers from growing lucrative coca crops.

Pelassa, a staid and tradition-minded Italian immigrant, was at little risk of joining a drug cartel. But he recognized the profit potential in exporting flowers duty-free to the States and took advantage.

Switching from bovines to blooms paid off: He ships $100,000 worth of roses a month to distributors in Miami and has become a player in the booming floral industry here.

Now, the 70-year-old Pelassa stands to lose a good part of his business in a bitter U.S.-Ecuador dispute over oil.

So do hundreds of thriving Ecuadorean exporters of tuna, broccoli, shrimp, artichokes and other products who also received favorable trade status in the 1990s as incentive to stay out of the drug trade.

Their businesses are in jeopardy because suspension of free-trade benefits is the punishment that the United States is likely to inflict on Ecuador as a result of the Andean nation’s confiscation of a lucrative oil field from Occidental Petroleum Corp. The property, taken over in May, is worth $1 billion and accounted for 7% of the Los Angeles-based company’s global oil production.

The government of Ecuador seized the Block 15 oil field after it said Oxy violated the terms of its contract by offering a 40% “economic interest” in the field to a Canadian firm, EnCana Corp., without obtaining approval. Oxy, which says it never completed any change of ownership, has pulled its people out of the country and has filed for arbitration before an international settlements panel.

While Oxy and the government prepare for a long fight, Pelassa’s business may wilt.

“These things should be fixed, but I’m afraid that relations are poisoned,” Pelassa said as he walked dejectedly among his rose bushes at his mountain farm about 30 miles northeast of Quito, the capital. He was worried about the repercussions for his 76 employees, most of them poor, indigenous women. “I’ll probably lose 40% of my market and have to lay off that percentage of workers.”

At stake for Ecuador are hundreds of millions of dollars in exports and thousands of jobs that its shaky economy can ill afford to lose. Manuel Chiriboga, who resigned this month as Ecuador’s chief free-trade negotiator, said in an interview that 250,000 jobs depended directly or indirectly on exemptions from U.S. import tariffs.

“What’s important is that the trade preferences have created a great percentage of jobs in the mountain areas, where there are few other options. It’s also injected some needed dynamism in the economy. The flower industry, for example, has grown an average 8% a year,” Chiriboga said.

In the meantime, the United States and Colombia, Ecuador’s neighbor and economic competitor, are completing the details of a free-trade agreement.

As for Ecuador, the United States has suspended indefinitely all talks on any permanent free-trade deal. The U.S. side declared a “pause” in March after Ecuador’s Congress passed a 50% windfall oil profits tax on foreign oil companies, and that hardened into a suspension after the Oxy seizure.

Agustin Jimenez, president of Empesec tuna packers in Guayaquil, a company that has seen sales of its packaged tuna double to $100 million since 2000, said the loss of trade privileges would create a negative chain reaction.

“We won’t disappear, but the damage it will cause will be enormous, not just for our 2,400 employees but the 970 fishermen and 15,000 local companies who supply us. I think it would really bleed the country,” Jimenez said.

Ecuadorean officials warn that the U.S. may alienate a steadfast ally in the drug war.

“Ecuador has been generous in this area of fighting drugs and that should be valued,” Deputy Foreign Minister Diego Ribadeneira said in an interview.

Officials here also hint that canceling free-trade privileges would, by default, push Ecuador into the arms of Venezuelan President Hugo Chavez, a U.S. nemesis. Chavez visited Ecuador on May 30 to sign two energy deals as part of an effort to strengthen economic ties between the two nations. He invited the nation to join his new Andean energy initiative and subsequently promoted Ecuador’s candidacy for OPEC membership at the cartel’s meeting in Venezuela on June 1.

Chavez, who has painted the takeover by Ecuador as part of a regional trend to “recover management of its natural resources,” offered help in managing Oxy’s seized field. “All that Venezuela can do to help, it will do,” Chavez said.

U.S. Embassy officials say that by taking over the oil field, Ecuador’s state-owned oil company violated the bilateral investment treaty between the two nations and thereby triggered suspension of free trade. Those officials and others downplay the Chavez threat, saying they are confident that Ecuador has no interest in forming alliances with the Venezuelan leader.

The trade incentives in question have been in effect since 1991 under what is now known as the Andean Trade Promotion and Drug Eradication Act, which also offers incentives to farmers in Colombia, Peru and Bolivia.

The act expires this year and was to have been replaced by bilateral free-trade agreements between the U.S. and the member countries. None of the countries have completed free-trade pacts, but the U.S. was expected to extend duty-free status until the bilateral deals were made.

Chances of such an extension for Ecuador are nil at this point, U.S. government officials say. Colombia and Peru are likely to receive extensions, they say.

“Ecuador will probably not be included in any extension of ATPDEA,” an official here said, adding that the decision was based on the Oxy seizure.

During his recent visit to Washington, Colombian President Alvaro Uribe personally pressed President Bush for an extension.

U.S. officials here readily acknowledge that Ecuador has been an important ally in the campaigns against narcotics and terrorism, seizing several tons of coca annually, shutting down camps run by the Revolutionary Armed Forces of Colombia and, since 1999, allowing the U.S. to run its surveillance flights from Manta air base on Ecuador’s Pacific coast.

Ecuador distances itself publicly from Plan Colombia, the U.S. campaign to fight drugs and guerrillas in its neighbor’s territory. Ecuador’s efforts are aimed at protecting its sovereignty, Defense Minister Oswaldo Jarrin said in a recent interview.

But the results have been good for U.S. anti-drug policy.

Last month, the Ecuadorean armed forces closed six of the armed rebels’ camps along the Colombian frontier. Working closely with the U.S. Drug Enforcement Administration, the Ecuadoreans have seized a record 60 tons of cocaine this year.

U.S. officials here are not in a sympathetic mood in the aftermath of the Oxy takeover.

Although pleased with the “level of cooperation” in the narcotics fight, the U.S. government says the “nationalization” of Oxy assets “will have consequences.”

Which side is right in the Ecuador-Oxy battle is difficult to sort out. “There are no angels in this fight,” one Western diplomat remarked recently.

Oxy’s protest that it had not actually sold the oil field interest to the Canadians is hard to accept in light of the fact that the Canadians in February resold their interest to a Chinese oil firm, said economist Maria de la Paz Vega of the Quito-based Multiplica consulting firm.

However, even Ecuadoreans who say Oxy erred agree that the government was imprudent in taking over the oil field and should have tried harder to negotiate a deal with the firm, which last year paid $145 million in taxes, more than any other company in Ecuador.

“It was an absurdity. They didn’t have to take that step so soon,” said political scientist Simon Pachano of the Quito think tank FLACSO. “But the issue was always studied under ideological, nationalistic criteria.”

Many question whether the Ecuadoreans will be able to operate the oil field, which was run with sophisticated software that Oxy employees took with them when they left.

Petroecuador, the state-owned oil company, has appealed to Colombia’s state oil company, Ecopetrol, and others for help.

What is certain is that the impasse could soon affect people such as Pelassa, and his workers, who have little understanding of the dispute. “We’ll have to survive somehow,” Rocio Quimbaiamba, 27, said while sorting and boxing roses at Pelassa’s farm.

“But in this valley there are only flowers.”