The Current State of Cuba’s Offshore Oil Development

The Current State of Cuba’s Offshore Oil Development
Business Insights: Cuba
July 2014

While Cuba produces some energy – principally heavy oil and associated natural gas – its domestic production does not meet its requirements for daily energy consumption. Once dependent on the Soviet Union for energy imports, Cuba now relies on Venezuela for oil to keep its economy afloat. According to experts, Cuba’s arrangement with Venezuela is unsustainable over the long-term.

The U.S. Geological Survey estimates that offshore reserves in the North Cuba Basin could contain an additional five billion barrels of undiscovered technically recoverable crude oil. Cuba estimates its reserves in 20 billion barrels. However, all exploratory results have been a blow to Cuban hopes of finding oil. Some attempts came up dry or resulted in the discovery of a field devoid of commercial value.

Now, Cuba is asking for Russia’s help with the support of President Putin. Russian companies Rosneft and Zarubezhneft signed an energy agreement with Cuba in May 2014 to explore offshore oil deposits. The drilling area north of Havana straddles the Gulf Stream, a powerful ocean current that rushes north to the Florida coast. Oceanographers warn that an oil slick caused by a major spill could reach Florida’s beaches, reefs and marine sanctuaries in about a week.

Former U.S. Senator Bob Graham, who also served two terms as governor of Florida and co-chaired a presidential commission on the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, met with Cuban officials in January 2014. Senator Graham and energy experts said the Russians have little experience with deep-water drilling and that the U.S. embargo of Cuba prohibits the use of American technology to prevent or respond to a spill.

A State Department spokesperson said U.S. officials “have expressed our concerns” to Cuba and its partners, but the United States can do nothing to stop drilling in Cuban waters. While the embargo limits the use of American products, U.S. companies have been licensed to respond in case of a spill.

U.S. Embargo – Cuba Drilling

The embargo against Cuba denies access to Cuba of U.S. equipment for drilling and environmental protection. Exports and re-exports to Cuba of foreign made items incorporating, commingled with or drawn from controlled U.S. origin items exceeding 10 percent of U.S. components and technology – the so-called De Minimis Rule under Sections 734.4 and 736.2(b)(2) of Export Administration Regulations (EARs) – are prohibited by the Embargo.

Several experts have said that the only country that produces the necessary equipment is the United States. Therefore, Cuba would not have access to U.S. equipment unless the embargo is lifted or altered. At the very least, coordination between Cuba and the United States would be necessary to prevent any potential oil spill.

Members of Congress have presented several proposals to deny oil and gas leases and permits “to persons who engage in activities with the government of any foreign country that is subject to any sanction or an embargo” by the U.S. government.

Conclusion

A “safe” and “monitored” approach to Cuba’s oil offshore development is in the national interest of the United States, which should work together with Cuba and use multilateral agreements with Mexico to facilitate oil exploration in the Gulf of Mexico.

Source: The Current State of Cuba’s Offshore Oil Development | Fox Rothschild LLP - http://foxrothschild.com/newspubs/newspubsArticle.aspx?id=15032395046