Cuba leases to bring deepwater drilling within 50 miles of Key West

OIL & ENVIRONMENT

Cuba leases to bring deepwater drilling within 50 miles of Key West
Many firms ready to deal with Cuba on oil exploration
By David Goodhue
dgoodhue@keysreporter.com
Posted - Friday, September 10, 2010 11:00 AM EDT

A diagram shows equipment involved in deepwater oil exploration off the
coast of Cuba and refining facilities in the country. (Graphic courtesy
of Jorge Piñon)

By next summer, a huge semi-submersible oil rig is expected to be
stationed about 40 to 50 miles from Key West for deepwater drilling to
explore for oil in the Straits of Florida.

The rig is part of a vast international business operation. The vessel
was made in China, it's owned by the Italian oil company Eni SpA, and it
will be operated by Repsol, Spain's oil and natural gas firm, which is
also leasing the area known as the Jaguey from Cuba to look for oil.

The Scarabeo 9 rig, with a crew of about 220 people, will be drilling
about 6,500 feet below the surface, more than a thousand feet deeper
than the Macondo Prospect well — more commonly known as the DeepWater
Horizon, for the drilling rig stationed in the Gulf of Mexico before it
exploded and sank in April. Over the spring and summer, the Macondo well
became the site of the largest oil spill in U.S. history.

Great Britain, home of the company in charge of the Macondo well,
British Petroleum, enjoys good diplomatic relations with the United
States. Cuba, in contrast, has had a 50-year trade embargo imposed by
the United States.

In the DeepWater Horizon disaster, bureaucratic red tape is at least
partially to blame for the delay in cleaning up the nearly 5 million
barrels of crude oil that gushed from the well before it was capped in July.

The U.S. trade embargo against Cuba would prevent U.S. companies, in
most cases, from helping with cleanup efforts in the event of an
accident on the Scarabeo 9 rig. Even if exceptions were granted, there
would at least be significant delays in aide coming from the United
States, according to Lee Hunt, president of the International
Association of Drilling Contractors, a Texas-based trade group. He said
help would have to come from countries farther away.

U.S. parts banned

The trade embargo also prevents Cuba from using technologies made in the
United States, used here and in other countries, that are designed to
stop or minimize blowouts like the DeepWater Horizon disaster, Hunt said.

"If there was a blowout in the Jagüey, there would be significant delays
in getting a rig shipped in here from Asia or Europe, under the current
embargo situation," Hunt said. "One impact of the embargo is it prevents
companies from buying publicly available parts and supplies that are
critical to the operation of equipment like blowout preventers."

The Scarabeo 9 rig has some parts made in the United States, but because
they make up less than 10 percent, the rig can circumvent at least three
pieces of federal legislation dealing with the embargo, said Jorge
Piñon, a visiting research fellow at the Cuban Research Institute at
Florida International University.

Hunt recently returned from a visit to Cuba, where he invited the
country's state-run oil company, Cubapetroleo, or CUPET, to join the
IADC. He is hopeful the State Department will give the organization an
exception to the law that bans countries under U.S. sanctions from
joining U.S. trade groups. The National Iranian Oil Company received an
exception to join the drilling association, Hunt said.

Hunt is also hopeful that the inevitability of Cuba's offshore drilling
program will ease some restrictive aspects of the U.S. embargo. He said
that the more the U.S. government and oil industry cooperate with Cuba
on its drilling and exploration aspirations, the safer environmentally
the Gulf of Mexico will be.

"Our goal is for all countries to operate safely in one Gulf. We don't
want to see the Jagüey become another Macondo or Ixtoc," Hunt said,
referring to the two worst environmental disasters to affect the Gulf of
Mexico. The Ixtoc spill in 1979 gushed 3 million barrels of oil that
fouled the lower Texas coast.

Piñon said that ultimately, U.S. company Cameron Products will make the
blowout preventers for the Scarabeo 9. Manufacturers in other counties
make the same equipment, but Cameron's location and prices for goods and
services make it more appealing than international competitors. The
Department of Treasury's Office of Foreign Asset Control would have to
approve the agreement because of the embargo, Piñon said.

"Folks are looking at blowout preventers made in the U.S. but with
foreign steel [and other materials], but again when the time comes we
believe the U.S. will allow the sale," Piñon said.

The amount of oil in the Jagüey and 17 additional blocks Cuba plans to
lease for exploration depends on who you ask. The Cuban government and
Repsol officials think there are 20 billion barrels of oil within the
country's offshore economic zone. But the U.S. Geological Survey puts
the number at a much lower 4 billion barrels.

"I'll leave that to those guys to argue over. That's not my area of
expertise," Hunt said.

Repsol found non-commercial crude off the Cuban coast in 2004, which was
enough for the company to continue its business relationship with the
Cuban government.

Changing drill debate

In the United States, drilling off the coasts has been a contentious
issue for decades, and it became even more hairier politically since the
DeepWater Horizon disaster.

The Obama administration placed a moratorium on all deepwater drilling
in U.S. waters in the spill's aftermath. Some want the ban to continue,
while others, including the oil industry and several Gulf state
politicians, are urging President Obama to lift the suspension, saying
it's hurting employment in their states.

But Hunt and Piñon said much of the debate over whether the United
States should open more of its coastline for oil and natural-gas
exploration will change once drilling operations begin in nearby Cuba,
especially if those explorations bear significant finds.

"Cuba is a sovereign country whether we like it or not, and can conduct
oil exploration within its exclusive economic zone," Piñon said.

Cuba, he said, has little choice but to look for oil, especially since
it depends mostly on imports from Venezuela, which Piñon called "unstable."

While Cuba's CUPET is ill-equipped to carry out drilling operations,
many of the companies seeking to lease blocks off Cuba are veterans of
offshore drilling, Piñon said. He added that the DeepWater Horizon
incident was a game-changer in terms of following safety procedures.

Other companies planning to follow Repsol's lead are Statoil of Norway,
ONGC of India, Petrôleus of Venezuela, Brazil's Petrobras, Russia's
Gazprom and Petronas of Malaysia, according to several media reports.

"Cuba's national oil company does not have the experience and/or
technology for deepwater exploration," Piñon said in an e-mail. "But I
believe that the foreign operators operating in Cuba will now conduct
business by the strictest rules in the book. From this point of view,
the Deepwater Horizon incident helped us. [Repsol] can not risk the
reputation and cost of another catastrophic incident."

Hunt said he's also heard from people concerned that the rig may be
unsafe because it was made in China.

"One thing I'd like to respond to is the horrific response to the
Chinese deep drilling. There are five rigs in the Gulf of Mexico right
now that were made in China. The Chinese are not novices at this," he said.

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