Indigenous demonstrators from Ecuador?s highlands and Amazon region converged on Quito to call for the expulsion of a US oil company and an end to trade talks with Washington.

Alfredo Palacio?s administration appears to be moving towards a $1.7bn settlement with Occidental Petroleum. In a 19-month legal dispute, Petroecuador, the state oil company, had sought to revoke Occidental?s operating contract for improperly transferring a 40 per cent interest in its fields to EnCana of Canada in 2000.

Foreign investors in the region, already jittery in the face of tax hikes in Venezuela, nationalisation in Bolivia, possible contract revisions in Peru and a 50 per cent tax on ?extraordinary profits? of foreign oil companies in Ecuador, are watching the case closely. ?The Occidental case has become caught up in the general wave of nationalist sentiment in the Andean region,? said Walter Spurrier of the Universidad Casa Grande in Guayaquil.

Mr Palacio, an unpopular president who took over after Lucio Guti?rrez was forced out of power in April 2005, faces a dilemma, even though he is not running in October?s general election. Occidental, the largest private foreign oil company operating in Ecuador, has invested $900m in the Andean country and produces 100,000 b/d. Its assets will be taken over by the state if its contract is revoked, but Ecuador?s oil sector desperately needs foreign investment and Petroecuador, which is heavily indebted, is in no condition to invest.

Ecuador also hopes an agreement with Occidental could give impetus to trade negotiations with the US. ?It would be hard to see the trade agreement going forward without a satisfactory solution in the Oxy case,? said Lisa Schineller of Standard and Poor?s in New York.

However, the Occidental case has become a totemic issue ? yesterday?s protests were as big as those that brought down Mr Guti?rrez. And twice in the past eight months, opposition to Occidental has fuelled violent protests in the Amazon region that forced the government to call a state of emergency and halt exports.

Gustavo Pinto, one of the protest leaders, said his supporters would take ?the necessary actions to prevent the country being betrayed? in the event of an agreement with Occidental. Leftwingers in Congress are preparing to attempt to have Mr Palacio tried for treason should he do a deal with Occidental.

Mr Palacio may well opt for inaction, leaving the next administration to make the difficult decision when it takes office in January 2007.

By then, current trade preferences with the US will have expired, which could have a damaging effect on agricultural sectors such as flowers and bananas. It is also likely that by next year Washington will have either sealed or rejected trade deals with Peru and Colombia, potentially dimming the prospects for getting an agreement with Ecuador through the US Congress.

Negotiations were said to be close to completion last month, when they collapsed over the introduction of Ecuador?s hydrocarbons law.

There is a sense that the Bush administration might be prepared to give Quito one more chance to secure a deal, however. Last week, Condoleezza Rice, the US secretary of state, said ?we hope to conclude an agreement with Ecuador?.

Meanwhile, Occidental is prepared to pay handsomely to stay in Ecuador. In March, the government rebuffed its offer to settle for a package worth more than $1bn in back taxes, social programmes, investments and extra revenues in return for a seven-year extension in its operating contract. Occidental is now thought to have upped the offer to $1.7bn. On Monday, the energy ministry gave Petroecuador until May 22 to negotiate an agreement.

Much will depend on whether Mr Palacio has the stomach to take on radicals in the street and in Congress. ?I think there will be a deal,? said Mr Spurrier. ?The hydro-carbons law won the government some credibility with the left and that could help them to settle with Oxy.?

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