China company to lead $6B Cuba refinery update

China company to lead $6B Cuba refinery update
Project will include refinery, LNG terminal
By Esteban Israel, Reuters November 22, 2010

HAVANA - A unit of China National Petroleum Corp (CNPC) is set to begin
in 2011 a $6-billion expansion project at Cuba's Cienfuegos refinery in
one of the biggest investments ever on the communist-led island, a
source close to the project said Monday.

The blockbuster deal will be financed mostly by China's Eximbank and
backed by financial guarantees in the form of oil from Venezuela, Cuba's
close socialist ally and leading trade partner, the source said.

State-owned CNPC's Haunqiu Contracting and Engineering Corp is expected
to start the project in the first quarter with completion planned for
the end of 2013.

The Italian unit of French oilfield service company Technip will do
design and engineering for the project and assist in construction.

The expansion will increase the capacity of the Soviet era refinery 155
miles southeast of Havana to 150,000 barrels per day from 65,000.

But it will also include construction of a liquefied natural gas
terminal with capacity to process 2 million tons of gas annually, and a
150 megawatt electricity generation plant.

"It is one of the biggest investments in the history of Cuba. It's a
minimum of $4.5 billion just for the refinery and another $1.3 billion
for the LNG terminal," an executive involved with the project told Reuters.

The expanded refinery could play an important role in processing Cuban
oil if the island finds significant quantities of petroleum in its
waters in the Gulf of Mexico.

Several companies are planning to sink exploratory wells off Cuba's
northern coast starting next year.

The project greatly expands China's role in Cuba's energy sector, which,
at least publicly, has been small. China is Cuba's No. 2 trade partner.

Beijing is assisting in production of oil along Cuba's northern coast
and has leased an onshore block for exploration near Havana.

CHINESE FINANCING, VENEZUELAN GUARANTEES

The offshore drilling rig to be used in exploring Cuban waters next year
has been under construction in China, but whether the Chinese government
has had a role in that project is not known.

Although final details are still being negotiated by the governments of
China and Venezuela, the source said about 85 per cent of the cost will
be financed by China's Eximbank and secured by China Export & Credit
Insurance Corp.

"But the investment is totally guaranteed by the Venezuelan government,
through off-takes of PDVSA crude oil," said the source.

The Cienfuegos refinery, operated by state-owned CubaPetroleo and
state-owned Petroleos de Venezuela (PDVSA), has been the centrepiece of
the strategic alliance between Cuba and Venezuela.

The refinery was built during the Soviet era, but never operated until
it was activated in 2007 after Venezuela helped refurbish its antiquated
facilities to process part of the 115,000 barrels a day that Venezuela
sends to Cuba at preferential terms.

The most recent official figures showed Cienfuegos was producing about
55,000 barrels per day of oil products.

Refinery expansion will become important for Cuba if significant
offshore oilfields are found in its waters, and the Cienfuegos project
is being done with that in mind.

"The expansion of the refinery is tied to the exploration in the Gulf of
Mexico," the source said.

The U.S. Geological Survey has estimated Cuba has about 5 billion
barrels of oil and 10 trillion cubic feet of gas offshore, but Cuba says
it could have at least 20 billion barrels of oil.

A consortium led by Spanish oil firm Repsol YPF is planning to drill an
exploration well next year, as is Malaysia's Petronas in conjunction
with new partner, Russian firm Gazprom.

Other oil companies such as Brazil's Petrobras, ONGC Videsh, a unit of
India's Oil and Natural Gas Corp, PDVSA, PetroVietnam and Russia's
Zarubezhneft have exploration leases in Cuban waters, with plans to
develop them.

Oil expert Jorge Pinon at Florida International University in Miami said
Cuba has been installing oil storage tanks in Matanzas along the
northern coast and reconstructing a pipeline that runs from there to
Cienfuegos.

"The pieces of the puzzle are falling into place," he said.

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