By Mercedes Alvaro

Of DOW JONES NEWSWIRES

QUITO -(Dow Jones)- Spanish-Argentine oil company Repsol YPF SA (REP) will end its arbitration process against Ecuador if the company reaches a favorable agreement about its contract in that country, Repsol's spokesman in Ecuador, Federico Cruz, said Thursday.

On Monday, Repsol filed an arbitration claim against Ecuador with the World Bank's Washington-based International Center for Settlement of Investment Disputes, or Icsid.

"We (Repsol) reiterate our desire to continue working in Ecuador and helping the Ecuadorian economy, but we have the obligation to protect our partners' interests. We hope to reach an agreement soon and to solve all the problems, in which case we will cancel the arbitration process," Cruz told Dow Jones Newswires.

Ecuadorian Attorney General Diego Garcia confirmed Thursday that the company started the arbitration process Monday, filing the claim at the Icsidand notifying the government about it.

In October, the administration of President Rafael Correa increased the state's take of extraordinary oil company profits to 99% from 50%.

In January, it began negotiations to convert all oil company participation contracts into service contracts.

The oil companies, including Repsol, have said the measures make operating in Ecuador unprofitable. Under the participation contracts, the state receives a percentage of profits from oil production. Under the new service provider contracts, companies would be paid a production fee and reimbursed for investment costs, although all of the recovered crude will belong to the state.

The new service contracts also prohibit foreign companies from seeking international arbitration awards, requiring them to rely instead on Ecuadorian courts to settle any disputes.

Sources at the Attorney General's office said that Repsol is accusing Ecuador of "not complying" with its contract.

Repsol filed for arbitration because of disagreements with the Ecuadorian government on several regulatory issues, a Repsol spokesperson in Madrid said.

In particular, the company is unhappy about the steep increase in the government's take of oil production and with the plan to convert its contracts into service provider contracts.

"But we're open for talks, and our commitment to stay in Ecuador remains the same," the spokesperson said.

The company said it filed the claim now as a deadline to do so was running out and it wanted to make sure it didn't lose the opportunity to make its voice heard in an international arbitration body.

A Repsol spokesman for the region in Buenos Aires wasn't immediately available for comment.

In January, the government started talks for renegotiating the contracts with oil companies.

In April, Mining and Oil Minister Galo Chiriboga said that the government and private oil companies had reached a deal that called for a two-year transition, but President Correa halted those talks.

Last month Chiriboga offered to reduce the 99% tax on windfall oil profits to 70%, among other measures.

The offer, however, is dependent on the private oil companies maintaining their current investment and output levels and withdrawing lawsuits filed against the state at the Icsid.

Repsol-YPF, France's Perenco, Brazil's Petroleo Brasileiro SA (PBR), U.S.-owned City Oriente, and the Chinese-owned Andes Petroleum are among the companies involved in the contract negotiations.

"We are optimistic about reaching a positive agreement," Cruz said.

In Ecuador, Repsol has oil block 16, Bogui-Capiron and Tibacuno, which it operates as part of a consortium.

Repsol is the sixth oil company to sue Ecuador in an international court.

U.S.-based oil company Occidental Petroleum Corp. (OXY) in September increased the damages it is seeking from the cancellation of its contract in Ecuador two years ago from to $3.2 billion from $1 billion.

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

(Drew Benson in Buenos Aires and Bernd Radowitz in Madrid contributed to this article.)

(END) Dow Jones Newswires

June 12, 2008 14:37 ET (18:37 GMT)