Communist Cuba’s quest for greater energy independence was given a boost earlier this year when political ally Russia said it would help to develop its flagging offshore oil industry.
How much oil Cuba has offshore is unknown. Some reports cite 20 billion barrels; however this figure has been firmly disputed. Scientific data available from peer reviewed US Geological Survey (GSGS) estimates that Cuba has approximately 5 billion barrels of undiscovered oil reserves.
So far, deepwater exploration has seen nothing but dry wells, resulting in most major oil companies abandoning concessions in the country. The leading expert on Cuba’s energy oil industry, director of the Latin America and Caribbean Energy Program at The University of Texas at Austin, Jorge Pinion, says his sources tell him there is currently seismic activity underway on block 37 offshore Cuba, but it isn’t clear who is doing it."Who is doing it, whether it is Rosneft or not, I don’t know," Pinion says.
The block was previously held by Petrobras from 2008 to 2011, but abandoned after it was considered not commercially viable. In May Zarubezhneft, Rosneft and Cupet, Cuba’s state oil company, signed a Memorandum of Understanding on Block N37 offshore Cuba to develop new field projects. Later in July, Russian President Vladimir Putin said Russia would invest $3.5bn of Cuban debt with Russia into development projects on the island, stating "Developing new blocks on Cuba’s offshore shelf is [expected] in the very near future." The questions is, considering the challenges involved, can Russia succeed where other major oil companies have failed?
Deepwater drilling at a premium
In total, Cuba produces 50,000 barrels a day of oil. The Caribbean nation makes up the rest of its daily needs – approximately 150,000 barrels – by importing 100,000 barrels of oil daily from Venezuela on favourable terms.
Currently, Cupet in partnership with Canadian company Sherritt’s Oil and Gas, produces heavy crude from several coastal reservoirs via horizontal drilling from the shore. In regards to deepwater drilling, Petrobus, Repsol, Statoil, Petronas and Indian ONGC Videsh Ltd have all abandoned Cuba after several failed attempts. According to Pinion, only Angola’s Sonangol and PetroVietnam still hold concessions in Cuba’s deepwater.
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Pinion believes that, considering the lack of discoveries so far, even the USGS’s estimates of 5bn barrels could be optimistic. Despite this, Russia obviously sees potential offshore Cuba, but to meet with success Rosneft certainly has its work cut out.
While Russia isn’t short of money, deepwater drilling is very expensive, costing a minimum of $100m, but beyond that, if Russia decides to abide by the US’s 52 year old embargo on Cuba, it will have difficulty acquiring a qualifying rig to use.
Because Rosneft, in partnership with Exxon Mobil, holds assets off the US Gulf of Mexico, it is less likely to disregard US embargoes and risk its assets. Pinion says this puts them in the same position that Repsol was in when it drilled offshore Cuba in 2004 and later in 2012. "They were drilling in Cuba while having assets in the US and of course they were trying to walk that fine line," say Pinion.
"If the US finds the drilling operations in Cuba violate the US embargo then those assets could certainly be at risk by court or government actions; those assets are at risk of being used against you."
To meet the terms of the embargo any rig used offshore Cuba must be comprised of less than 10% of US components. "A deepwater well in Cuba is not only expensive on its own, but it also has a cost premium as high as 20% because operating companies have to go to either via the UK, Norway or Canada in order to get personnel and equipment for the drilling prospect," says Pinion.
This is despite Houston, the oil and gas industry’s global ‘capital’, being only 1,232 miles away. "The rig that was used in the prospects of 2012 was a semi-submersible [rig] that met the regulations of the embargo. This semi-submersible [rig] is today working offshore Angola and we do not believe the rig is going to be released for somebody else in Cuba."
Cuba’s energy future
"If you ask me do I think it is going to happen? We will have to wait," says Pinion. He later adds: "I personally think that it is highly unlikely that drilling will be done."
Jim Flanagan, regional research manager – Caribbean Energy Technical at IHS says Russia may try to drill shallower wells in Block N37 but not deepwater.
For example, Sherritt believes in the coastal belt offshore Cuba only 1 or 2% of the actual oil in place has ever been produced and each field is expected to have a billion barrels of oil, therefore there could be a lot left behind.
"Block N37 (might) extends into deeper water, but the work the Russians will do (are doing) with the Cubans I think will be strictly for the shallow potential if they decide to drill any wells," says Flanagan.
In a previous interview with Reuters, Pinion agreed on the potential of the coastal belt: "If successful, Cuba could increase its present recovery factor from 10% to maybe 17 to 20%, adding an additional 12,000 to 15,000 barrels of new production, if not more, to their current level of approximately 50,000 barrels per day."
Cuba’s President Raul Castro has also said Cuba will re-focus efforts onto the known coastal reservoirs. The government also plans to invest in alternative energy and reduce its reliance on oil, which meets 97% of its energy needs, by 20% by 2030.