Cuban oil prospects revisited

Article published in http://news.sfppr.org/author/gustavocoronel/

 

 

Cuban Oil Prospects Revisited

The poor results of these four wells, in which the companies invested an estimated $250 million, if not more, strongly suggest that there will be a long intermission in the search for oil in offshore Cuba.

By Gustavo Coronel | June 18, 2013

Chinese built drilling rig, Scarabeo 9
On January 18, 2011, I published on this website a report about Cuban oil prospects entitled, “Petroleum in Cuba: Current Situation and Mid-term Outlook,”. Using the evaluation of Cuban oil prospects made by the U.S. Geological Survey, I outlined a likely scenario for Cuba’s offshore search for oil. This scenario pointed to the finding of some 1.1-1.2 billion barrels of recoverable oil from Cuban territorial waters. The process of recovering such an amount of oil, I added, would be slow and take up to three decades. The first exploratory phase would probably require 5-8 years. Several exploratory wells, perhaps as many as ten, would have to be drilled before any commercial production was established. Each one of these exploratory wells drilled at a depth of 2000 feet and a total depth below surface of some 21,000 feet, would probably cost anywhere between $50-100 million. The Chinese-built rig to be contracted for this initial phase, the Scarabeo 9, would be rented at the cost of some $500,000 per day. Production levels of up to some 120,000 barrels per day could be eventually established by year 15, which could serve to make Cuba essentially self-sufficient for 20 to 30 years.
During the last 3 years, four exploratory wells were drilled by different oil companies, including Spain’s Repsol, the Malaysian oil company PETRONAS, Petroleos de Venezuela and the Russian company Zarubezhneft. The four wells have been unsuccessful, although we have little or no details of the results. Whatever oil was found proved to be of low quality and the rocks found by the drill had poor reservoir characteristics. This scarcity of information is not uncommon when dealing with exploratory wells, since the initial data obtained from an area has to be analyzed carefully in order to see what the real prospects of that area might be and to decide if further efforts are justified.
Oil experts in the region such as a former head of Amoco Latin America, Jorge Piñon, currently at the University of Texas, correctly pointed out that this first effort is just the initial chapter of a story that will likely continue. However, the initial results do not bode well for the Cuban oil industry. International oil companies will not be eager to spend great sums of money to develop oil resources that could only be significant enough to satisfy the Cuban domestic market. The results obtained by the four wells drilled definitely tend to lower the expectations of major findings.

SPAIN’S REPSOL

Repsol’s president, Antonio Brufau, has recently announced that they will probably stop prospecting for oil in Cuban territory after its unsuccessful, costly, dry well. They had drilled another dry hole in the area in 2010.

MALAYSIA’S PETRONAS

Petronas drilled its exploratory well in association with Russia’s Gazprom. The terse information given out about the results of this well came from the official Cuban newspaper Granma, which read, “Analysis of the findings revealed an “active petroleum system that could extend to other parts of the four blocks contracted by PC Gulf [Petronas] and Gazpromneft, and even beyond their limits … Nevertheless, at that point the rocks are very compact and do not have the capacity to deliver significant quantities of petroleum and gas… so it cannot be qualified as a commercial discovery.”" This confirms the rocks lacked sufficient porosity and permeability to allow oil production.

PETROLEOS DE VENEZUELA

The third unsuccessful well was drilled by the Venezuelan state-owned company, Petroleos de Venezuela. Again, scant information was provided by Granma, as follows: “The technical information obtained is very valuable and will allow PDVSA to continue its efforts later on.” It is believed that the oil found was of poor quality and reservoir rocks had poor permeability. The original budget for this well was $40 million but its final cost was probably much higher. This was the last well in which the Chinese-built drilling rig Scarabeo 9 participated. The rig, owned by the Italian company Saipem SpA, has now moved to Western Africa.

ZARUBEZHNEFT

The fourth dry well offshore Cuba was drilled by this Russian company using a smaller rig, the Songa Mercur, owned by Songa Offshore. The well was drilled to a depth of some 21,000 feet and was interrupted after five months or so, due to “geological problems” of an unspecified nature. The rig has since been moved outside of Cuban territorial waters.

Will oil exploration continue in Cuban waters?

The poor results of these four wells, in which the companies invested an estimated $250 million, if not more, strongly suggest that there will be a long intermission in the search for offshore oil in Cuba. Repsol has practically stated that it will not return. Politics could have played a role in this decision, since Cuba endorsed the action of the Argentinian government to expropriate Repsol’s shares in YPF, the oil company Repsol owned jointly with the government.

The oil company from Malaysia, PETRONAS, is managed with a well-developed commercial sense and has probably decided not to return to Cuba, in order to concentrate efforts in other, more promising areas worldwide. In line with this assumption, the company has recently entered into an exploration agreement with the state oil company of Suriname.
Petroleos de Venezuela will have strong political incentives to continue Cuban offshore exploration, due to the close alliance existing between the two regimes. However, the main obstacle faced by PDVSA is lack of money. Due to poor management practices and political pressure from the central government, the Venezuelan company has embarked on an almost suicidal policy of borrowing money from China, Russia and some companies such as ChevronTexaco and Schlumberger. Currently, its direct debt is estimated at some $60 billion, dangerously close to the total value of its assets. Other, indirect, financial commitments such as the large $30 billion loan the central government received from China, to be paid back in oil, probably place its total debt well above its assets.
The Russian companies could return to Cuba but probably not in the short term, due to lack of suitable equipment for deepwater drilling.

Political implications of this failure

The implications of these disappointing offshore oil exploration results for Cuba’s political future are substantial. First, they indicate that energy self-sufficiency for Cuba is not around the corner, making the country more dependent than ever on the subsidized oil supply from Venezuela. A change in government in Venezuela would be likely to immediately interrupt supply, the continuation of which is highly damaging to Venezuela and is considered by much of the opposition to be an act of treason. This sword of Damocles hanging over the Cuban regime’s head is combined with the increasingly fragile hold on power by the Castro brothers. As they get closer to exiting the political scene without being able to obtain energy security for the island, there is little doubt future Cuban governments will have to come to terms with energy reality by either a new Venezuelan government that will not be as generous with its oil as the previous regime, or with the U.S., the other logical future energy supplier of energy to the island. Any new terms with these two countries will not be nearly as favorable to Cuba as the prodigality shown by the Venezuelan Chavez- Maduro regime over the last 15 years.
It would seem, therefore, that the failure of their first stage search for Cuban offshore oil will become, yet, another factor in marking the coming end of the Castro regime.

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Gustavo Coronel, who served on the board of directors of Petróleos de Venezuela (PdVSA), has had a long and distinguished career in the international petroleum industry, including in the USA, Europe, Venezuela and Indonesia. He is an author, public policy expert and contributor to SFPPR News & Analysis.