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Friday, July 13, 2007

Ecuador Attorney General Says Government May Cancel Petrobras Contract

QUITO -(Dow Jones via CNN)
July 9, 2007- The Ecuadorian government's top lawyer said on Monday that the country may consider canceling the operating contracts of Argentine oil company Petrobras Energia (PZE) because it broke the terms of the agreements.

"Probably we will have to think about canceling the contract with Petrobras," said Attorney General Xavier Garaicoa in an interview on Ecuador's Channel 4 television.

Asked whether Petrobras Energia, a unit of Brazil's state oil company Petroleo Brasileiro (PBR), had been operating illegally in Ecuador, Garaicoa said, "That is the obvious conclusion that appears after a simple analysis from a legal point of view."

Garaicoa, however, said that a decision to proceed with canceling the contracts would have to be taken by the Energy Ministry.

On June 13, former Energy Minister Alberto Acosta sent a letter to President Rafael CorreaPetrobras' operating contracts. The report said Petrobras broke a number of terms, including the unauthorized transfer of a 40% stake in its Ecuadorian operations to Japan's Teikoku Oil Co. Ltd. indicating that there may be grounds for canceling

A spokesman for the Brazilian parent company said the Ecuadorian government authorized the sale earlier this year, and the transaction was completed shortly after that.

In a statement published Friday, Petrobras denied any wrongdoing and said it was never informed of or contacted by any ministerial commission, and it hopes the government will reject the accusations.

Petrobras Energia's local assets include the Block 18 and 31 oil fields and an 11.42% stake in the Ecuadorean heavy crude pipeline, or OCP. The firm has operated in Ecuador since 1996 and has invested about $430 million. It produces around 35,000 barrels per day of oil, of which just over half is handed over to the government as royalties.

Acosta resigned one day after sending the letter to run for a seat in a Constituent Assembly. He was succeeded by interim Energy Minister Jorge Alban, who said a special commission would study the report but wouldn't say when that would be completed. Petrobras Energia signed the deal with Teikoku in January 2005 and said then that the transaction required the approval of Ecuador's Energy Ministry to proceed.

In May 2006, the administration of former President Alfredo Palacio revoked the contract of Occidental Petroleum Corp (OXY) for transferring a 40% stake in its fields to Canada's Encana Corporation (ECA) without proper authorization.

A number of union workers at Ecuador's state oil company, Petroecuador, as well as other social groups, have also called for Petrobras Energia's contracts to be canceled. Among other issues, they have questioned the legality of a supposed transfer of assets when Brazil's Petrobras in 2002 and 2003. The firm, renamed Petrobras Energia, held assets in Ecuador, as well as across Latin America. bought Argentina's Perez Companc

-By Mercedes Alvaro, Dow Jones Newswires; 5939-9728-653; mercedes.alvaro@

(Matthew Cowley in New York and Bernd Radowtiz in Rio de Janeiro contributed to this report)

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