Cuba's known for cigars now, but oil could change that
Updated 2/22/2007 9:03 AM ET
By David J. Lynch, USA TODAY
One day soon — possibly before the end of this year — an oil rig will
maneuver into position in waters less than 100 miles from the coast of
Florida. A drill will plunge into the inky sea and begin chewing its way
into the ocean floor, hunting for oil.
But the drilling rig won't belong to an American company, and any
petroleum it discovers won't do a thing to curb the USA's addiction to
foreign oil. Instead, any new sub-sea gusher will belong to Cuba.
That's right: Cuba. The island nation long has been known for its
aromatic cigars and sweet rums. But after years of limited oil
production on lands around Havana and in neighboring Matanzas province,
Cuba is poised for a significant expansion of its oil program into the
waters that separate it from the United States. And thanks to U.S. law,
Cuba's drilling partners will be working closer to Florida beaches than
any American company ever could.
"Our studies … have shown there is a great potential, especially
offshore," says Dagoberto Rodriguez, the senior Cuban diplomat in the
USA. "Basically, we know that there is oil. The problem is just where it
is."
The U.S. Geological Survey (USGS) agrees. Two years ago, after reviewing
available data on the subterranean structures in the region, the agency
estimated Cuba can lay claim to 4.6 billion barrels of oil and 9.8
trillion cubic feet of natural gas.
With oil prices hovering around $60 a barrel and global supplies
persistently tight, any new supply source could benefit the USA, the
world's top oil consumer. Likewise, Cuba, which relies on Venezuela for
more than half of its daily oil consumption, craves self-sufficiency.
"In economic terms, it could be a win-win," says Daniel Erikson, an
analyst at the Inter-American Dialogue, a Washington, D.C., think tank.
There's just one problem: politics. Since 1962, the U.S. has maintained
an economic embargo of Cuba, aimed at toppling the communist government
of Fidel Castro. The ailing dictator, who has outlasted nine U.S.
presidents, last summer handed power temporarily to his brother, Raul,
while he recovers from abdominal surgery. Companies such as ExxonMobil
(XOM), Chevron (CVX) and Halliburton (HAL), however, remain barred from
the Cuban market, which a 2001 Rice University study said could be worth
up to $3 billion annually.
The embargo also will increase the time and cost of the Cuban program by
denying Havana access to the closest source of oil industry technology,
spare parts and expertise. Likewise, U.S.-owned refineries in Aruba and
St. Croix are off-limits for any of the heavy, sulfur-rich Cuban crude.
"The U.S. (embargo) presents them with significant barriers and
obstacles," says Jonathan Benjamin-Alvarado, a political scientist at
the University of Nebraska who studies Cuban energy issues.
Replacing the Soviets
Cuba is modernizing a dilapidated Soviet-era refinery at Cienfuegos with
help from Venezuela's state-owned oil company, PDVSA, and refurbishing
three other facilities, Rodriguez said. Within 18 months, Cuba will be
able to satisfy all of its refining demand, he said. Independent
analysts are less optimistic.
The Cuban oil fields were formed more than 50 million years ago in a
slow-motion collision between Earth's tectonic plates, which entombed
pulverized rocks, animals and plants. Over subsequent millennia, the
resulting stew cooked into buried petroleum deposits, says Christopher
Shenk, a geologist at the USGS in Denver.
Before Castro's 1959 revolution, U.S. oil companies such as Esso and
Amoco carried out preliminary explorations. The following year, Cuba
nationalized refineries belonging to Exxon, Texaco and Shell (
(RDSA,RDSB), and U.S. industry hasn't been back since.
In the modern era, Cuba's first significant oil find came in 1971 when
Soviet engineers discovered the Varadero field, east of Havana. After
the Soviet Union collapsed, Cuba opened its oil program to foreign
investment in 1993. Today, companies from Spain, Norway, India, Malaysia
and China are involved, either drilling wells onshore or using
horizontal drilling to reach reservoirs in shallow coastal waters.
Canada's Sherritt is the most active foreign company with nine fields
operating onshore and five exploration or appraisal blocs being drilled,
says Michael Minnes, a company spokesman. Daily output from the
company's wells averages a modest 30,000 barrels a day, down from about
43,000 in 2004.
"It's like any other foreign jurisdiction or developing nation. There
are challenges, and there are opportunities," Minnes said. "We see Cuba
as a great environment to do business in."
So far, only one offshore well has been drilled, in July 2004 by Spanish
oil company Repsol. The company said it found oil at the site 95 miles
southwest of Key West, though not in commercially viable deposits. Since
then, the Spanish company has teamed with Norway's Norsk Hydro, one of a
select number of global oil companies with expertise in deepwater
exploration, according to Jorge Pinon, the former president of Amoco's
Latin American operations.
Offshore drilling this year
In an interview this week, Rodriguez, the chief of the Cuban interests
section in Washington, said widespread offshore drilling could start by
the end of this year. Cuban exploration, like drilling ventures
elsewhere, has been slowed by a worldwide shortage of drilling rigs that
has increased daily lease rates by more than 60% since fall 2005.
Offshore wells aren't cheap: Those envisioned in Cuban waters will cost
$40 million to $50 million, says Pinon, the former oil executive now
affiliated with the University of Miami's Institute for Cuban and
Cuban-American Studies. "This is a very high-risk, high-reward area,"
R.S. Butola, managing director of India's ONGC, said on the company's
website.
Since 1981, the U.S. has observed a moratorium on coastal drilling,
except for a portion of the Gulf of Mexico and limited areas off of
Alaska. The drilling ban was enacted after a series of high-profile oil
industry environmental disasters. Perhaps the most notorious: the 1969
Santa Barbara spill that released 3 million gallons of oil in waters off
of California, coating 35 miles of coastline with oil up to 6 inches thick.
Last year, the House voted to relax the prohibition on offshore
drilling, but the measure died in the Senate. There may be close to 95
billion barrels of oil affected by the ban, according to the Interior
Department.
The House-passed bill still would have allowed individual states to ban
drilling up to 100 miles from their shores. But Cuba's wells could
eventually be as close to the USA as 60 miles from Key West. The two
countries agreed in 1977 to a maritime boundary that evenly divides the
waters between them.
Capitol Hill takes notice
The prospect of foreign oil companies drilling Cuban wells so close to
American shores has unnerved some on Capitol Hill. Sen. Bill Nelson,
D-Fla., last year introduced legislation to deny U.S. visas to
executives employed by oil companies involved in the Cuban program. Dan
McLaughlin, a spokesman for Nelson, says the senator plans to
reintroduce the measure this year. Nelson also wants the United States
to renegotiate the 1977 treaty that defines the U.S.-Cuban maritime
boundary, a proposal Cuba's Rodriguez called "silly."
Others see the prospect of Cuban offshore oil rigs as a reason to relax
the U.S. embargo. Rep. Jeff Flake, R-Ariz., co-authored legislation last
year that would have permitted U.S. firms to sell their services to
companies drilling for Cuba or to drill themselves.
"U.S. companies should be able to bid on these oil leases. … If there
are going to be oil rigs within 50 miles of Florida, … I'd rather see
U.S. oil rigs than Chinese oil rigs, given technological and safety
considerations," Flake said in a telephone interview.
For now, Big Oil is staying out of the political fray. But, at a time
when unexplored terrain is rapidly shrinking, the oil industry would
eagerly jump into Cuban waters if given the chance.
One year ago, a U.S.-Cuba Energy Summit attracted representatives from
Exxon and a handful of smaller oil service companies to three days of
meetings in Mexico City. Attendees viewed PowerPoint presentations from
Cuban government ministries including state-owned oil company Cupet that
invited American companies to help exploit "several giant oil and gas
fields."
Events since July, when Castro's illness forced him to step aside, have
rekindled industry interest in Cuba's future. "U.S. oil companies would
love to do business there as soon as this thing opens up," says Ron
Harper, an analyst at IHS Energy in Houston. "They're looking at it
quietly. They'd be short-sighted not to."
Earlier this week, Rodriguez reiterated that Cuba remains open to the
U.S. industry's involvement and may hold a second summit this year,
either in Mexico or Canada. But he said time may be running out for the
U.S. to change course. "In my opinion, if the American companies are not
able to get something, some changes before no more than one year, after
that it will be too late," he said.
For now, any U.S. involvement remains only hypothetical. Houston oilman
Antonio Szabo, president of Stone Bond Technologies, says U.S. companies
likely would require greater transparency, a commitment to the rule of
law and market economics in Cuba before investing significant money there.
Some in the oil industry also have long memories when it comes to Cuba.
At the 1997 World Petroleum Congress in Beijing, a Cuban official
approached Lee Raymond, then Exxon's chief executive, and asked in a
jocular tone when the U.S. oil giant might return to Cuba. "When you
give us back our (expletive) refinery," Raymond growled.
Cuban officials note they already have willing partners from Canada,
Spain, Norway, Brazil, India, Malaysia, Venezuela and China. Rodriguez
made clear that the United States has no veto over Cuba's oil plans.
"Everyone knows how advanced is American technology," the Cuban diplomat
said. "But we are going to continue with our programs — with American
companies or without American companies."
Posted 2/22/2007 1:34 AM ET
http://www.usatoday.com/money/world/2007-02-22-cuba-usat_x.htm
