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Jorge Piñón: Cuba's 'enormous' oil and gas potential
CubaNews / April 2009

By Larry Luxner

Just about every story on oil in Cuba — and so far this year, dozens of them have appeared in print and online — invariably quotes “energy expert” Jorge R. Piñón.

Late last month, CubaNews spent nearly two hours with the Cárdenas-born hydrocarbon maven, whose business card describes him as an energy fellow at the University of Miami’s Center for Hemispheric Policy.

Our interview took place at the Inter-Continental Hotel, where a day earlier Piñón lectured 100 participants at the Cuba Trade Expo about his favorite subject: his homeland’s oil and gas potential.

“There’s only myself and a few other Cuban-Americans — no more than five of us — who have become officers of major U.S. oil corporations,” said Piñón, explaining how he won his coveted status as an expert on the subject.

“First, I have the industry background, second, I am Cuban-American, and third, in my case, Latin America was my beat, and throughout my career I have met the Cubans at international forums, congresses and associations. At Amoco, I was the one who put together our Cuba entry strategy.”

Piñón, 61, arrived as a 12-year-old Peter Pan refugee in December 1960; his host was the Third Presbyterian Church in Elizabeth, N.J. His parents followed a year later, and the three of them relocated to Belle Glade, Fla., where his father landed a job in a sugar mill.

Among his other achievements, Piñón has the honor of being the first Cuban to graduate from Belle Glade High School. In 1975, Piñón earned a degree in economics from the University of Florida, and immediately went to work for Shell Oil in New Orleans.

“They were interviewing on campus, and I didn’t know anything about oil,” he said.

He sure does now. After seven years with Shell, Piñón switched to Trans World Oil, a Dutch company, and finally ended up with Amoco, in charge of developing that conglomerate’s Latin America business. Piñón retired from BP Amoco in 2003 and now lives in Coconut Grove with his wife, Maria Antonia, who’s originally from Camagüey. In addition to his position at UM’s Center for Hemispheric Policy, Piñón is a member of the Cuba Task Force at the nonprofit Brookings Institution in Washington.

“Cuba’s energy potential within the next 15 years is going to be huge — not only for oil and gas but also for alternative energy sources such as solar and wind. Cuba will be a major supplier of sugarcane ethanol,” he predicted. “I envision a Cuban automotive fleet in the future that runs on E85. Switching their domestic consumption from gasoline to sugarcane ethanol means they’ll be able to export more oil, increasing revenue.”

At the moment, Cuba consumes 147,000 barrels a day, but under a market system, Piñón believes that would rise to 350,000 b/d. Current production is steady at 55,000 b/d of liquids and 20,000 b/d in natural gas equivalent. The remainder all comes from Venezuela under a preferential agreement initiated by President Hugo Chávez.

“Cuba today depends on Venezuelan oil. They don’t pay cash, they pay in services,” he said. “In 2008, the value of Venezuelan oil delivered to Cuba was $3.1 billion, so the Cuban economy received a positive benefit of $3.1 billion in free cash flow. But like with the USSR in 1991, they’ve put all their oil eggs in one basket. And strategically, that’s the wrong scenario.”

This is why Raúl Castro recently traveled to four key oil-exporting nations: Angola, Russia, Brazil and Algeria.

“They learned their lesson and don’t want to repeat themselves,” Piñón said. “Just like 1991, Cuba is today dependent on one single, unstable source of heavily subsidized oil. You never want to do that, regardless of how reliable you think that country might be.”

This is mainly why Cuba has encouraged foreign participation in its offshore oil sector. The island’s exclusive economic zone (EEZ) consists of two areas: The North Cuba Thrust Belt, which may contain as much oil as Ecuador or Colombia, and the Sigsbee Basin. State-run oil entity Cubapetroleo (Cupet) says the EEZ may have 20 billion barrels of oil.

Since 1991, says Cuba’s Ministry of Basic Industry, some $1.8 billion in foreign money has been poured into Cuba’s oil sector. So far, the largest single cumulative investor has been Canada’s Sherritt International, which has spent at least $800 million.

Foreign firms have signed exploration and production deals for 21 of the 59 blocks Cuba has created for its Gulf waters, where the biggest oil finds are located. An additional 23 blocks are said to be the subject of talks with foreign companies.

Offshore, the top investor is Spain’s Repsol-YPF SA, which has invested $60 million. About $45 million of that, said Piñón, was spent on the drilling of Yamagua #1 (which proved to be a commercial failure), with the rest spent on seismic work. Others that have invested in Cuba include India’s ONGC, Brazil’s Petrobras, Venezuela’s PDVSA, Hanoi-based Petrovietnam and Malaysia’s Petronas.

OAO Gazprom, Russia’s largest company, and OAO Rosneft, both based in Moscow, are in talks with Cupet and may sign contracts for up to four exploration blocks by year’s end. CNPC, China’s top oil producer, may also reach an exploration deal by the end of 2009.

“I have spoken at length with Cupet officials about that 20 billion figure, and now I understand what they’re saying,” Piñón told CubaNews. “The U.S. Geological Survey says there are 5 billion barrels in the North Cuba Thrust Belt. Then there’s the Sigsbee Basin off the west coast of Florida. In this area, very little seismic work has been done.

“But this is where from a geological point of view the Cubans look at rock formations and compare it with Gulf of Mexico, and conclude it has 12-15 billion barrels. When you add the two of them together, you get 20 billion.

He added, however: “I told them not to raise expectations unnecessarily, but to lower them. If you raise the bar too high and you fail, it’ll come back and hit you in the face. They’re doing this because they need foreign oil companies to come to Cuba. But if this second well now being drilled by Repsol happens to be non-commercial again, all the press people will say there’s no oil in Cuba, when that may not necessarily be true.”

Virtually all of Cuba’s current oil production derives from a geological formation 150 km long that sits 4-5 km off the north coast.

“Driving from Havana to Varadero, you see oil equipment along the highway, but all of this is horizontal and directional drilling. The oil is heavy and high-sulfur, and the recovery rate is only about 7% of reserves — not because they’re doing a bad job, but because the geology is very rough. The potential is huge, because 93% of the oil is still left in the ground. But for this to be economical, the price of oil has to be above $50 a barrel.”

The week before our meeting, Piñón was at a Havana energy conference in which Manuel Marrero Faz, senior oil adviser at the Ministry of Basic Industries, announced that Cuba would welcome U.S. companies’ help in developing the island’s offshore oil sector. “We are open,” he told reporters. “We’re very close to each other. We’re neighbors. Why not do business?”

Should nearby U.S. companies offer services and supplies, Cuba would be able to lower its costs and pick up the pace of development, said Marrero Faz. The difficulty of getting equipment from partners halfway around the world is a key reason only one offshore well has been drilled so far, he said.

The official’s comments marked one of the strongest signals yet that Raúl Castro wants a new relationship with the United States.

Whether Obama actually takes Raúl up on that challenge is another story.

“Current regulations allow the president to license U.S. oil companies and service and equipment companies to do business in Cu-ba,” said Piñón. “For a future Cuban government to be truly independent and make its own decisions, Cuba has to be free of any foreign influence. Today, Cuba’s biggest factor is its total dependence on Venezuelan oil.”

Another factor driving up future Cuban demand for gasoline and other refined products is a projected jump in tourism.

“Once the travel ban is lifted, people will be taking their cars to Cuba on a ferry from Key West, just like they did before the revolution. All the snowbirds now coming from Canada to Florida will get on ferries and drive around Cuba,” he said.

Standing in the way of an end to the embargo is the perennial issue of claims for property expropriated by Castro in the 1960s.

In 1972, the U.S. Foreign Claims Settlement Commission certified 5,911 claimants whose loss was fixed at around $1.85 billion. If interest were included, those claims would today be worth nearly $7 billion.

Yet when it comes to the oil giants, says Piñón, “the majority of those companies don’t have the least intention of ever going forward with their claims because of two main reasons: All of them have a Cuba plan, a strategy in place. The day things open up, they’ll pull that book out and off they’ll go.”

Secondly, he said, the value of those outstanding claims is negligible compared to future earnings.

“These companies don’t have any brand presence in Cuba. Why would Company X get bogged down in the Cuban court system in order to collect, and they’re not allowed to sell their brands, while European companies without claims [against the Castro government] come in and take away market share?”

Despite claimants’ reticence to talk about this issue publicly, he said, “the former refinery assets owned by Exxon-Mobil and Chevron-Texaco are obsolete, and the sites on which they’re located are environmentally contaminated. Therefore, the value of those assets is probably negative.”

Piñón added that “oil companies want to go back to Cuba not only because of the upstream potential, but also the downstream potential — building new refineries, marketing products and opening convenience stores.”

Today in Cuba, he said, there are around 600 “refueling facilities” but no more than 400 bona fide service stations across the whole island — compared to 9,000 in Florida alone.

“But there’s a problem with those stations,” he said. “The demographics of the cities have changed. Nobody’s going to buy any of them because there’s a question of site contamination, and the locations are wrong due to today’s traffic flow patterns. Also, they’re small compared to American-size service stations.”

The energy expert said a new gas station in Cuba today would represent an investment of around $1.2 million, not counting real estate.

Incidentally, Piñón praises Cupet for dramatically improving efficiency when it comes to natural gas production.

“For many years, they just flared the gas; it smelled like rotten eggs,” he told CubaNews. “But now, they’re recovering 94% of that gas thanks to the government’s Energas venture with Sherritt. They produce close to 400 megawatts of power, and they’re now trying to increase the recovery rate to 97%. This is one of Cupet’s success stories.”

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