President Alfredo Palacio of Ecuador is not a natural ally of radical Andean leaders such as Venezuela’s Hugo Chávez or Bolivia’s Evo Morales. In his year in office he has proved cautious, usually preferring to put off difficult decisions. By his own admission, the US-educated cardiologist is an unlikely politician.

Mr Palacio, who was doctor to a succession of Ecuadorean leaders and enjoyed a spell as health minister before agreeing to become deputy president in 2002, took over only last April after Lucio Gutierréz was forced out of office by popular protests.

Nevertheless, by endorsing the confiscation of the assets of Occidental, the biggest producer of hydrocarbons in the country, he is pushing Ecuador closer to the nationalist trend among regional leaders, opting for short-term stability over longer-term development and risking greater political fragmentation at home. That places Mr Palacio firmly within an Ecuadorean political tradition of populism.

In some ways Occidental’s problems are unique. Six years ago the company failed to register the transfer of some of a 40 per cent stake to EnCana, the Canadian company that this year sold out to a consortium of Chinese companies. Ecuador claims that was illegal, and after a lengthy investigation and the failure of protracted negotiations the energy minister ruled that the US company had to sacrifice its assets as a result.

But Ecuador will also have been spurred on by the ever more aggressive nationalist mood running through Latin America. The consequences of its actions could be every bit as serious for the region as the May 1 nationalisation of Bolivia’s gas industry.

Several factors appear to have influenced the Ecuadorean authorities to take a hard line. First, Occidental has become a cause célèbre for radical trade unions and indigenous organisations that have attached almost as much weight to their campaign against Occidental as to their opposition to the country’s pursuit of a trade agreement with the US.

Violent protests against Occidental have forced the government to send in troops to the Amazon and halt oil exports twice in the past eight months.

Second, Occidental’s presence has become a controversial issue in the run-up to October’s presidential elections, and Ecuadorean politicians are more than willing to pursue their opponents through the courts.

Ecuadorean politics are notoriously fragmented, split between parties based in the Andean region around Quito and the more economically dynamic coastal area around Guayaquil, the country’s biggest city.

Even within these two regions, few politicians are able to command the majority of votes. Matters are further complicated by the willingness of Ecuadorean politicians to pursue their opponents through the courts. Congressmen have taken legal action against all four previous presidents, only one of whom has finished his legally mandated term.

Colleagues of Mr Palacio say he and other ministers feared they would have been prosecuted had they not acted against Occidental. “The probability that this would happen has become greater in recent weeks because the legal issue has become a threat to different people,” said one Ecu­adorean diplomat yesterday.

In any event, the consequences of the decision are likely to be extremely grave. The trade agreement with the US now appears to be ruled out. Negotiations between Ecuador and the US were suspended at the end of March, when the government announced a 50 per cent windfall tax on foreign oil companies.

Yesterday an official at the office of the US trade representative in Washington said the Occidental decision appeared “to constitute a seizure of the assets of a US company”. She said the US could seek clarification as to whether Ecuador intends “to fully compensate the company as required under [an existing] bilateral investment treaty”.

Negotiatiors were already facing a tight deadline to resume talks in order to complete negotiations before US mid-term congressional elections later this year. The deadline to resume talks passed on Monday and no further talks are scheduled.

All of this is unlikely to encourage investment in the oil sector. Petroecuador, the state-owned company, will immediately take over Occidental’s assets. But it is ill-equipped to operate the company’s operations: this month it asked the government for $279m (€219m, £148m) to help it pay for supplies and fuel imports.

The state will need a foreign partner in a sector that has attracted very little international interest in the past decade. Andean Petroleum Company, a consortium of two Chinese state-owned companies that bought EnCana’s assets last year, is almost certain to be a strong candidate.

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