Sherritt's Cuban oil operation in limbo

Sherritt's Cuban oil operation in limbo
Partner Pulls Out; Country has never abused me as a partner: CEO
Peter Koven, Financial Post Published: Thursday, January 29, 2009

Raul Castro, right, and Ian Delaney, chief executive of Sherritt
International. "I'm not exactly sure how we'll work out this problem,
but we'll do as we usually do. We'll muddle through," Delaney says.AFP,
Getty Images FilesRaul Castro, right, and Ian Delaney, chief executive
of Sherritt International. "I'm not exactly sure how we'll work out this
problem, but we'll do as we usually do. We'll muddle through," Delaney ...

For 18 years, Ian Delaney proved the doubters wrong and ran a highly
successful business in Cuba.

But today, the chief executive of Sherritt International Corp. is facing
perhaps his most serious crisis yet in the communist country. And as he
prepares for serious negotiations with the Cuban government, he knows
that he has a lot of work to do.

"I'm not exactly sure how we'll work out this problem, but we'll do as
we usually do. We'll muddle through," Mr. Delaney told investors on a
conference call.

The problem for Sherritt, which produces nickel and oil in Cuba,
involves both the government and former joint venture partner Pebercan Inc.

Sherritt and Pebercan produce oil in Cuba that was bought by the
government and used domestically. But in the middle of last year, Cuba
simply stopped paying for the oil, and the receivables on both
companies' balance sheets got bigger and bigger.

Sherritt alone had about $144-million at the end of the third quarter
tied to the Pebercan venture.

It is not clear if Raul Castro's government could not afford to buy the
oil, or chose not to. But it does appear the country is having trouble
sourcing U. S. dollars.

That is always a problem in Cuba because of its huge social spending
commitments, and the global financial crisis might be making the
situation worse.

"Every time [Pebercan] tried to negotiate to get payments started, there
were excuses," said one source familiar with the talks.

It appears that the jump in oil prices to US$140 a barrel last summer
was a factor as well. "It was driven more by the price of oil than a
conscious effort by the Cuban government not to pay," said John Hughes,
an analyst at Desjardins Securities.

Pebercan found its own solution to the problem: Take the money and run.

In a surprise announcement on Friday, the company said it struck a deal
with a state-run oil company in which it agreed to terminate its
production sharing contract and receive a one-time payment of
US$140-million.

It will pay US$60-million to Sherritt, while the oil wells go to the
government.

Sherritt was completely surprised by the settlement. It loses 4,500
barrels of production a day from its failed Pebercan venture, and it has
to sort out the status of the rest of its Cuban oil production, most of
which is not tied to Pebercan.

Sherritt's receivables are growing on those wells as well, and investors
are worried about the company's entire status in Cuba.

Mr. Delaney said he will work hard to resolve the entire situation.

"I don't know what the resolution is. [The Cuban government] has never
abused me as a partner to date, and I don't think they're about to
start," he said.

He added that he spoke on the phone with some political leaders in Cuba,
and it sounds like the settlement with Pebercan was done by a "much
lower level" of government officials than he deals with. The
consequences of the settlement came as a surprise to many of them, he said.

Mr. Delaney also reclaimed the CEO job this week when Jowdat Waheed took
a leave of absence to deal with a family health issue.

pkoven@nationalpost.com

http://www.financialpost.com/reports/bestmanaged/story.html?id=1230694