Cuban oil prospects and potential impact on the U.S. energy equation

Cuban offshore blocks waiting for customers.

A recent event on Cuban oil prospects organized by Paul Isbell at the Inter American Dialogue (“Developments in Cuban Oil”, October 8, 2010) gave the audience fresh information on Cuban Oil prospects. The panel was first rate: Jorge Piñón (Cuban Research Institute), Jonathan Benjamin-Alvarado (University of Nebraska), Kirby Jones (Alamar Associates) and Paul Isbell (Inter American Dialogue). The event was well attended although I was sorry not to see anyone from the U.S. Geological Survey, since this institution has made a technical evaluation of Cuban oil prospects that still is the basis for most of the discussions on this topic. The information obtained during this event led me to the following considerations:

1. Cuba produces about 48,000 barrels per day of oil and receives about 98,000 barrels per day of highly subsidized oil from Venezuela. The combined supply exceeds demand by about 30,000 barrels per day. I assume that some or most of this excess oil is exported by the Cubans, giving the Castro regime a welcome income at the expense of the Venezuelan people.

2. There are several oil companies active (or just present) in Cuba: Sherrit Oil Co, a Canadian company, has been the most successful and produces oil under a contract that gives them 49 percent of the production, while the other 51 percent goes to the government. Other companies such as Repsol, Statoil Petrobras, Petronas, PetroVietnam, Angola Oil Co. and Petroleos de Venezuela are in Cuba but have not established production. Repsol is the one company that is getting ready to explore offshore and has contracted the rig Scarabeo 9 for $400,000 a day, with a crew of about 200, to conduct exploration drilling starting in 2011.

3. The prospects for Cuban oil resources are essentially located offshore. In 2005 the U.S. Geological Survey made a technical estimate of how much oil could be present in this area, concluding that there might be a 50 percent probability of some 4.6 billion barrels of oil to be discovered.

It is important to comment about this estimate.

First of all, it means that there is a 50 percent probability of this amount being present but there is, of course, more than a 50 percent probability of less oil being present. As expectations for the oil to be found increase, the probabilities that these expectations will be met decrease. The amount of 4.5 billion barrels of oil represents, therefore, a convenient simplification for the purposes of discussion.

Second, the estimate represents oil in place. The lighter the oil to be found, the better the probabilities of a high recovery factor. For very light oils, depending on the production mechanism present in the reservoirs, a 50 percent recovery rate is possible. If the oil is heavy this recovery factor could be, at best, 25-30 percent of the total oil in place. The Cuban oil found so far tends to be on the heavier side. Lets assume, therefore, a recovery factor of 30 percent for the oil in place. This means that the total oil to be recovered from the Cuban offshore could be of the order of 1.4 billion barrels of oil.

Third, a total recovery of some 1.4 billion barrels will not be possible in less than, say, 30 years, again depending on the characteristics of the reservoirs to be found and the technical complexity of the activity. Usually there is a 5-8 years period of exploration and a similar period of oil field development to establish continuous production, reaching peak production after some 15 years of start-up. It is improbable that production from this area would ever exceed 200,000 barrels a day at peak production. The average production distributed during the 30-year period would be of some 120,000 barrels per day but actual production would be much less for the first 15 years and would decline after the 20th year or so.

What this all means is that any Cuban new oil production would allow Cuba to become self sufficient in oil but will not transform Cuba into a world-class exporter. At best, it would allow Cuba to export some 100,000 barrels a day for relatively brief periods of time. In the context of U.S. imported oil requirements this is a peanut. Cuba will probably never become a significant source of oil for the United States.

4. Consider also the capitals required to develop Cuban offshore oil. This will be a very costly operation and this capital can only be provided by international companies that will need to recover costs. I would not dare to make a back of the envelope estimate of costs involved but we are talking billions of dollars that will have to be invested for the first ten years, without any positive cash flow for the compnaies. The only way Cuba can pay back is with oil production, so that most of the Cuban oil might never see the U.S. market, considering that European, Latin American and Asian oil companies are the ones currently involved in Cuba.

5. The relationship between Cuba and Venezuela plays a crucial role in the oil and the political sectors of both countries. For the last 5 years or so Hugo Chavez has been sending the Castro brothers close to 100,000 barrels per day of Venezuelan crude oil and products. This represents a huge gift of some $3 billion per year from one dictatorship to the other, one that is deeply resented by the majority of the Venezuelan people and is basically designed to cement both dictatorships. There is no doubt that the day after Chavez is ousted from power, by whatever means, this enormous transfer of Venezuelan wealth to Cuba will cease. The energy deficit of Cuba would abruptly become enormous and its economic impact on the regime will likely lead to major political changes in Cuba. This means that Cuba will cling to Venezuelan oil desperately and that it will do all it can to keep Chavez in power. Cuba already controls much of the Venezuelan security forces and, literally, has Chavez’s life in their hands, through a ring of bodyguards that have Cuban interests at heart. This is a delicate balancing act that might be disrupted at any moment, bringing chaos into Cuba and, possibly, into Venezuela.

6. The development of Cuban oil resources will not be likely without a major contribution from U.S. technology. This is not really possible under the current embargo. This means that any significant development might be delayed beyond normal technical or economic reasons by the existing political situation between the two countries.



In summary,

· Cuban oil prospects are economically important to Cuba and politically important to Cuba and Venezuela.

· They are also important to the international companies present in Cuba

· They seem to be much less important as a potential agent of change of the U.S. energy equation.

· The environmental impact of Cuban offshore oil development should be monitored carefully.