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Cuba may have 20 billion barrels of oil but cash crunch threatens investment
CubaNews / November 2008

By Larry Luxner

Does Cuba really have more petroleum reserves than Angola, Qatar or even Brazil?

Well, yes — if you believe the latest claim by state-run oil entity Cubapetroleo (Cupet). Speaking only about an oil belt north of the island deep underneath Cuba’s Gulf of Mexico waters, Cupet’s production manager Rafael Tenreyro Pérez, announced Oct. 16 that “this belt now has resources, calculated not hypothetical, of more than 20 billion barrels. They are the reserves. That could be multiplied several times.”

The geology of the oil belt extends to a basin further north where much larger structures hold the promise of hydrocarbons, he said.

“The effect of the [belt] is reflected in this zone in the presence of enormous structures,” Tenreyro told reporters in Havana. “Here we’re talking about structures of 80, 100, 120 sq kms. Therefore, the reserves multiply practically several times and the resources, too.”

Further out in the Gulf, Tenreyro said, are structures that belong to the same geological formations off of Mexico and the United States which had produced celebrated finds such as Mexico’s Cantarell and Poza Rica fields.

“All these geological elements indicate that we are talking about a new oil province — an oil zone that has not been drilled nor has it been touched,” said Tenreyro, adding that the potential is there for “giant and super-giant oil fields.”

Pie in the sky, retorts Jorge Piñón, energy fellow and Cuba expert with the University of Miami’s Center for Hemispheric Policy.

“I was in Houston when that announcement was made, and I think it backfired on them, because people in Houston thought Cupet was a little more professional,” he told CubaNews.

“Oil industry people are now taking Cupet less seriously, when they make unprofessional and unscientific statements like that,” he said.

Piñón, a veteran oilman who has held executive positions with Shell, Amoco and BP during his 30-year career, noted that offshore reserves of 20 billion barrels would catapult Cuba — which now produces only 60,000 barrels a day, all from onshore wells — into one of the world’s top 20 oil-exporting nations.

Yet a study by the U.S. Geological Survey says Cuba’s offshore filed contains 5 billion barrels of oil and 283 billion cubic meters of natural gas. Those numbers are the mean of estimates that go no higher than 9 billion barrels of oil and 595 billion cubic meters of gas.

“The methodology that Cupet used for its estimate is not an industry-acceptable method,” said Piñón. “In addition, there’s no independent, third-party source. Whatever data they have on which to base that 20 billion barrels has to be available for oil companies to take a look at.

“I was very surprised, because even the recent [offshore] finds in Brazil are only estimated at 15-18 billion barrels, and we know those fields are huge.”

Only one test well has been drilled in Cuban waters, that by a consortium led by Spain’s Repsol-YPF SA and Norway’s Norsk Hydro. Tenreyro said Repsol plans to drill another well in mid-2009 and that if all goes as hoped, Cuban oil could be flowing into the market by 2013.

Another Cuba oil expert, Jonathan Benjamin-Alvarado of the University of Nebraska at Omaha, told Reuters of Cuba’s 20-billion-barrel estimate: “I trust they are legitimate claims, but they must be verified.”

Asked if a substantial oil find would increase pressure by U.S. oil giants to ease the embargo against Cuba so they, too, could get a piece of the action, he said no. But, he added, “we may see the interim development of an ‘embargo-lite’ that lifts “some export controls on oil technology and project management knowledge.”

Repsol was the first to take on the challenge posed by Cuba in mid-1999 when it opened up a bidding process for 59 explora-tion blocks in a 112,000-sq-km area in Cuban waters in the Gulf of Mexico.

In addition, Venezuela’s PDVSA, Malaysia’s Petronas and PetroVietnam are all involved in projects in the EEZ, while other companies are working in what is considered the most promising area, the northeast coast of the archipelago, both on land and offshore.

On Oct. 31, Brazil’s Petrobras signed an $8 million agreement to explore Block 37. After an immediate exploration phase lasting 18 to 24 months, more funds from Petrobras and Cupet could be forthcoming, depending on how much oil is found.

Under the deal — signed in Havana by Brazilian President Luiz Inácio Lula da Silva and Raúl Castro — Petrobras gets seven years to explore, then another 25 years to produce oil and gas from the 1,600-sq-km concession.

“I don’t understand why it took so long to sign this agreement,” Lula told reporters. “There’s a geological study process and I hope the results will be positive and we will search at whatever depth.”

Piñón said he understands the Petrobras deal was delayed at the behest of lawyers worried that it would violate the terms of the 1996 Helms-Burton Act. Petrobras, based in Rio de Janeiro, owns a refinery in Houston, among other U.S. holdings.

“Block 37 is a very long, skinny block going from Varadero to Havana,” Piñón told CubaNews. “It’s not close to the U.S. demarcation line, so it’s politically safe. And it’s not going to be a geologically difficult area in which to drill exploratory wells.”

Veteran Cuba-watcher Phil Peters of the Lexington Institute in Arlington, Va., said the fact Repsol will return to Cuba next year for more exploratory drilling is a promising sign, not to mention the latest Petrobras contract.

Yet success in tapping Cuba’s oil potential depends on a variety of factors outside the country’s control.

“A lot of those blocks are leased, but that doesn’t mean any of those companies is ready or able to bring in a rig and start drilling,” said Peters. “In addition, deepwater rigs are scarce right now, so that’s another factor slowing things down.”

Furthermore, Cuba could have difficulty attracting investment in its oil sector, given its shaky cash-flow situation.

In early October, Canada’s Sherritt Interna-tional Corp., which produces most of Cuba’s 60,000 barrels a day from onshore wells in a joint venture with Cupet, announced it was owed $392.8 million by the Cuban government. According to the company’s third-quarter report, that debt “represents an exposed credit risk” and could jeopardize Sherritt’s drilling plans for 2009.

Back in July, the Toronto-based mining and energy conglomerate said it would abandon plans to drill in Cuba’s Gulf of Mexico EEZ, and would restructure its oil business toward land-based operations.

In addition to oil, Sherritt — the largest foreign investor in Cuba — also operates the Pedro Sotto Alba nickel refinery in Moa, in a 50-50 venture with state-owned Cubaniquel (see page 10 of this issue). That in large part explains why Sherritt is now owed money by the Castro regime.

“What’s happening now is that the price of nickel has dropped 60% in the last 12 months,” Piñón told us. “So Cuba doesn’t have enough cash in nickel to offset the purchase of Sherritt equity, and that’s where the $393 million comes from.”

He added: “For the first time, Sherritt says this is a credit risk. They also say, for the first time, that in the 4th quarter they have the option of exporting the oil they drill if Cuba doesn’t get the money to pay Sherritt.”

Sherritt isn’t the only Canadian company Cuba is indebted to. By year’s end, Cupet will owe $118.9 million to Montreal-based Pebercan, having only paid $2 million so far.

“Cuba doesn’t have any cash,” said Piñón. “They bought huge amounts of grain and foodstuffs this year, thinking nickel prices would keep on increasing. But nickel dropped and food prices went up. Cuba’s problem today is cash flow, pure and simple.”

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