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Drilling for oil in Cuban waters

 

Jaime Suchlicki, Cuba TransitionProject

 

Cuba is moving ahead with its off-shore oil drilling program, creating a new dynamic situation in the Gulf, with potentially serious ramifications for the United States. Cuba’s off-shore oil reserves represent a significant opportunity for the island and its foreign investors, but the potential of Cuban deepwater offshore reserves will materialize in the next 3-5 years only if the country manages to forge successful financial and technical partnerships with foreign companies. Cuba has significant oil and gas reserves in its off-shore waters, particularly in its north coast facing the Gulf of Mexico that could rank it with other key hemispheric producers. The U.S. Geological Survey in its 2004 “Assessment of Undiscovered Oil and Gas Resources, North Cuba Basin” estimated reserves of 4.6 billion barrels of oil and 9.8 trillion cubic feet of natural gas. If this assessment is correct, Cuba would rank alongside Latin American producers of petroleum such as Ecuador and Colombia-- although not at the levels of either Mexico or Venezuela.

 

Reducing Cuban Dependency on Foreign Oil

 

Cuba is currently highly dependent on foreign oil, but recent finds have piqued hopes that the country could one day be a net exporter. Until 1989, the Soviet Union provided Cuba with all of its petroleum needs and even allowed Cuba to resell Russian oil. Since the rise of Hugo Chavez to the presidency of Venezuela, Chavez has been providing Cuba with 100,000 barrels per day at very advantageous terms. In 2010, Cuba produced about 21 million barrels of oil from its land wells, approximately the same volume as it extracted the previous year, representing a little more than a third of its annual energy needs. However, in April of this year, the Cuban government announced plans to drill five deep water oil wells in the Gulf as soon as this summer, expressing confidence in plans to expand national production. Manuel Marrero, a Cuban government official, said the wells were to be drilled between 2011 and 2013. (1)

 

Aside from potentially turning Cuba’s semi-bankrupt economy into an oil exporter, off-shore production could solidify the current regime and extend the military dictatorship for the foreseeable future. Given the reluctance of the Castro brothers to open the economy, oil wealth is not likely to transform Cuba into a modern economy. As it has happened in the past, economic bonanzas have slowed down economic openings. Inefficiency, corruption, and fear of innovation all plague the island’s old fashioned Soviet style economy.

 

Turning Abroad for Technical Assistance on Exploration, Drilling and Refining

 

Cuba does not have the technology for deep water exploration and has had to turn to foreign partners to exploit its reserves. Partnership with foreign companies means that Cuba will receive only a portion of the revenues from the extracted oil. Foreign partners have already jumped in. Initially, Spanish Repsol explored close to Cuba’s coast with very little to show for it. More recently, Cuba’s oil producing company, CUPET, signed agreements with Russia, China, India, Vietnam, Malaysia, Canada, Venezuela and Brazil. A Cuban official claimed that Cuba has signed 16 contracts with foreign companies, but without disclosing their identities. In Cuba, the oil arm of the Russian oil giant, Gazprom, Gazprom Neft, has bought a 30 percent share of four exploration blocks from the Malaysia state-owned company Petronas. (2)

 

Two specific areas where Cuba will continue to need to turn abroad are for deep water rigs and refining, including prospectively to American companies. The rigs are increasingly expensive to use (over $200,000 per day), and companies in these cases must pool resources, which has proved tricky given the wide array of foreign partners. Older technologies will make exploration and production more expensive. There is talk in Washington of banning foreign companies operating in Cuban waters from using some U.S. cutting-edge technology.

 

On refining, Cuba almost entirely lacks heavy oil refining capacity. The Russians built a refinery in Cienfuegos, in central Cuba, but mothballed it in 1991 after the collapse of the Soviet Union. Venezuela, which became Cuba’s largest benefactor, renovated the refinery at a cost of more than $170 million. The plant has the capacity to refine 65,000-100,000 barrels of heavy oil a day, which will allow Cuba to refine part of the oil from off-shore production. (3) In late 2010, China announced an investment of US$6 billion to expand the Cienfuegos refinery. The project will be funded primarily by China’s Eximbank and will more than double the refinery’s capacity to 150,000 barrels per day. (4) Cuba is going to need continued support in these areas, and while many foreign companies will rush in to fill the void, the specter of American companies providing rigs and refining support hangs over this entire process.

 

The prospect of foreign companies exploring for petroleum in the waters of Cuba and close to Florida is driving debate about possible involvement of U.S. companies, many of whom are eager to join their European and Asian counterparts. American firms have privately suggested that if foreign companies are exploring so close to American shores, American companies should also be allowed to explore in Cuban waters. This raises concerns, however, among Florida’s Congressional delegation, resolutely opposed to drilling off the coast of Florida and in the Gulf. Florida Democratic Senator Bill Nelson wrote to U.S. Secretary of State Hillary Clinton asking her “to use diplomatic channels to temporarily keep Repsol (Spain) and others from supporting drilling for oil off Cuba”. This is an uphill battle, however, given the variety of countries involved, their commercial interests, and the difficulty in negotiating with Spain’s Socialist government.

 

Questions over Jurisdiction and Liability Driving U.S. Reactions

 

Cuban drilling plans have raised concerns in the United States around jurisdiction rights and about what will happen if something goes wrong. Cuba’s most promising reserves are in the deep off-shore waters of the Gulf of Mexico, west of Florida and east of Mexico’s Yucatan peninsula. Cuba’s Exclusive Economic Zone (EEZ) is a thin sliver of 112,000 square kilometers in the Gulf, divided into 59 exploration blocks at an average depth of 2,000 meters with some blocks at even greater depths. The EEZ lines of demarcation between Mexico and the U.S. was agreed in December 1977, during President Jimmy Carter’s administration, but still govern the disputed areas in the Gulf. Sen. Nelson, D-FL, an opponent of Gulf drilling in the US and Cuba, has called for the United States to renegotiate the terms of the 1977 treaty that defines the U.S.-Cuban maritime boundary.

 

Source: ESRI; Global Exchange

 

A key factor driving opposition to Cuban drilling in the U.S., especially from politicians representing Gulf Coast states, is concern about what happens if something goes wrong with Cuban drilling. The Gulf oil spill in 2010 increased apprehension about liability close to the Florida Coast and the Bahamas. Given Cuba’s economic conditions, liability for an oil spill will rest with the European and Asian companies involved in drilling. The U.S. embargo would prevent U.S. companies, in most cases, from helping with cleanup efforts in the event of a major accident. Yet in the event of a spill, the U.S. would be under pressure to grant an exception to the embargo allowing U.S. companies to help so that the spill would not negatively impact US territory. During the Gulf spill, the U.S. shared information with Cuba about the spill. The Administration publicly declared its willingness to provide limited licenses for U.S. firms to respond to a catastrophe that threatened Cuba. Meanwhile, Cuba permitted a vessel from the National Oceanic and Atmospheric Administration to look for damage in Cuban waters. But, ongoing concerns about the US underwriting the costs of spill cleanup has increased political pressure to halt Cuban drilling before it even begins.

 

A Fight Brewing Between Mexico and Cuba?

 

The United States is not the only Cuban neighbor with questions regarding its drilling program; in fact, of all the factors curbing enthusiasm over Cuban reserves, the key wildcard may be Mexico’s concerns over Cuba siphoning off their oil. The jurisdictional questions raised by Cuban oil reserves extend not only to the United States, but to Mexico as well. Mario Budebo, an undersecretary at Mexico's Ministry of Energy, recently argued that his country had an offshore boundary dispute with Cuba. He said the three countries must "get together and have discussions" about Cuba's offshore drilling activities. "That is still something that we have to deal with and put Cuba together (at) the table," said Budebo. (5) Given the new technologies for horizontal exploration, and the proximity of the claims, there is a fear that wells drilled vertically could also be used horizontally to penetrate Mexican or U.S. territory and siphon petroleum from these countries’ reserves. Mexico is quite concerned that Cuba will “steal” reserves from their zone. These considerations may, in the short run, increase the U.S. willingness to do its own off-shore drilling. Notwithstanding the political opposition to drilling, as well as the abundance of foreign rigs off the Florida coast, the U.S. is likely to continue to move in the direction of more, rather than less, drilling.

 

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Notes

 

(1) “Cuba to Drill Five Oil Wells by 2013.” Energy Daily. April 5, 2011.

(2) Gazprom of Russia to Drill for Oil in Cuban Waters.” The New York Times. November 15, 2010.

(3) The New York Times. December 22, 2007.

(4) The China Post. November 26, 2010.

(5) "U.S. fears Cuba oil drilling, Mexico suggests talks." Reuters. April 14, 2011.