August 19, 2005

Ecuador defense minister quits, oil loan sought

By Carlos Andrade and Alexandra Valencia

QUITO, Ecuador (Reuters) - Ecuador's defense minister
resigned on Friday during protests which have crippled oil
production and forced the country to ask Venezuela for a loan
of crude oil so it can keep up exports, officials said.

Ecuador will seek a $400 million emergency loan from the
Latin American Reserve Fund to avoid balance of payments
problems resulting from the protest in two provinces and import
$140 million worth of fuel, Economy Minister Magdalena Barreiro

The protests pushed U.S. crude oil futures up $2 above $65
a barrel in New York on Friday. Ecuador is South America's
fifth largest producer of crude oil and, after Venezuela, is
the second-largest South American supplier of oil to the United

Defense Minister Solon Espinoza resigned at the request of
President Alfredo Palacio for his handling of the worst crisis
since Palacio took office in April, officials at the
president's office said.

Palacio blamed Espinoza for allowing protests to get out of
hand and named a popular retired army general, Osvaldo Jarrin,
in his place, they said.

The government declared a state of emergency on Wednesday
and ordered troops to restore order in Sucumbios and Orellana
provinces where protesters began to invade oil camps, sabotage
equipment and block highways on Monday.

The protesters are demanding foreign oil companies
operating in the region provide financing for infrastructure
projects and more job opportunities.

Demonstrators also want the government to renegotiate
contracts with Occidental Petroleum Corp., Petrobras and EnCana
Corp., to raise state participation.

Troops fired tear gas at protesters who tried to free the
mayor of the jungle city of Lago Agrio from a police station on
Friday, local radio reported.

Army Gen. Gonzalo Mesa told Reuters the situation in Lago
Agrio was "manageable."

Troops have retaken control of local airports and are
clearing obstacles left on the runways, he said.


Oil output at state-owned Petroecuador, which has fallen to
zero from its usual 201,000 barrels per day, will only return
to normal in November, Economy Minister Magdalena Barreiro told

Most of Petroecuador's exports go the United States. The
company suspended its exports on Thursday, declaring force
majeure - a contractual clause invoked in case of events beyond
the company's control.

Ecuador will ask Venezuela to lend it crude oil so it can
meet export commitments, Barreiro said.

"We need the crude loan for us to be able to export and
partly normalize our exports," Barreiro said.

She did not say how much oil Ecuador wanted but said
Foreign Minister Antonio Parra would present the request to
Venezuelan President Hugo Chavez at a meeting in Cuba on

Ecuador will meet its debt liabilities despite the protest,
Barreiro said.

Ecuador defaulted on foreign bonds in 1999 but has since
grown strongly with low inflation, partly thanks to the
introduction of the U.S. dollar as currency in 2000.

The government has accused former President Lucio
Gutierrez, who was sacked by Congress in April and is now in
Peru, of being behind the demonstrations.

But Palacio himself might have helped trigger the protests
by inflaming popular expectations with moves including
diverting money from a fund previously destined for debt
payments to pay for social programs, according to Alberto
Ramos, an economist at Goldman Sachs in New York.

These moves have been harshly criticized by foreign bond

The government is "extremely vulnerable to social activism
and other rent-seeking pressures," Ramos said in a research

Three Ecuadorean presidents have been toppled amid popular
unrest since 1997.