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Caribbean & Central America - June 2014 (ISSN 1741-4458)

CUBA: Cuban-Russian oil agreements attract US attention

Important new agreements signed by the Cuban state oil company with two Russian oil companies have stirred US interest in Cuba, both from those concerned about security implications, and from business frustrated by sanctions.

In late May officials from the Cuban state oil company, Cupet, signed five agreements in Russia with the companies, Zarubezhneft and Rosneft, for the exploration of hitherto unexplored territory to the north of the island, and the development of a logistical base for oil processing in the new Special Development Zone in the upgraded port of Mariel, to the west of the capital, Havana. Rosneft will also fund some Cuban oil technicians to study petrochemical sciences and train at its production facilities: the first Cubans to be granted scholarships in Russia since the last of the Soviet-sponsored cohort graduated in 1992. The Cuban delegation to Russia will be looking for more partners at the World Petroleum Congress in Moscow on 15-19 June.

In Cuba, the agreements have been heralded as part of the government’s long-standing efforts to secure international financing and technology for the development of its oil reserves, and its more recent drive to expand and diversify international trade. In the US, they are eyed with jealousy and suspicion.

Urgent efforts to reduce energy dependence

The Cuban oil sector has been open to foreign investment for two decades, but heightened political uncertainty in Venezuela has encouraged the authorities to intensify their search for new partners. Most of the oil consumed in Cuba is imported from Venezuela, which also supplies Cuba with crude for refining (at the Cienfuegos refinery, completed in 2008) and export. Domestic oil production, which covers only around one third of the country’s needs, is declining as existing wells are being exhausted.

Current Cuban oil production of around 60,000 barrels per day (bpd) is from deposits along the coastal zone to the north of central and eastern provinces, but far larger reserves are thought to lie in the country’s deep water Exclusive Economic Zone (EEZ) in the Mexican Gulf. A 2004 US Geological Survey estimate for undiscovered reserves in the zone cited a figure of 4.6bn barrels of oil, 9.8trn cubic feet of natural gas and 0.9bn barrels of natural gas liquids; Cuban scientists’ oil estimates are even higher, at 20bn barrels. However, international interest is inhibited by US sanctions, and of Cuba’s 59 license blocs in the EEZ, less than half have so far been taken.

Without access to the US market, and with obstacles to the use of US technology and logistics, the potential rewards for foreign investors from third countries are substantially reduced relative to costs and risks.

Investors have been further discouraged by the fact that none of the four exploratory wells that have been drilled in the EEZ over the past decade by international consortia (involving companies from Spain, Norway, India, Venezuela, Vietnam, Malaysia, Brazil, Canada and China) have found oil in commercial quantities. The last of these withdrew from Cuban waters in 2013.

US responses to Cuban-Russian oil deal: suspicion, concern, interest

Echoes of past Cuban-Russian ties have stirred unease among some observers in the US. Concerns about the political significance of the agreements were underlined by the presence of the Russian president, Vladimir Putin, at the signing ceremony, and the security cooperation that has also been agreed during recent Cuban-Russian talks.

The potential development of a Cuban oil industry in the Mexican Gulf has also raised concerns about the vulnerability of the southern coast of the US to any oil spills. The need to mitigate the risks has resulted in new cooperation between the two governments to allow their respective environmental protection agencies to exchange information, and for a special exception to be made for US technology transfer in this field. This cooperation has been instrumental – along with cooperation in other areas of mutual interest, including migration and anti-drugs trafficking efforts – in helping to build confidence between officials over the past few years.

This confidence-building has encouraged US businesses to re-evaluate Cuba’s potential, with growing expectations that the current US administration led by President Barack Obama might take new measures to ease sanctions in its final years of office.

Industry experts suggest that, if oil were discovered, Cuba could be producing around 250,000 bpd – sufficient to become a net exporter – within five to seven years. US oil companies would want to be involved in such an industry, and other businesses are growing more aware of the possibilities that might emerge from a more dynamic Cuban economy. These prospects, together with Cuban economic reforms that signal a renewed official interest in cultivating ties with foreign partners, including US businesses, encouraged a delegation led by the president of the US Chamber of Commerce, Thomas J. Donohue, to visit Cuba in late May, despite criticism from hard-liners.

US sanctions remain a major obstacle to foreign investment

The changes in Cuba that have generated most interest among US and other foreign businesses are the foreign investment law passed by the Cuban National Assembly in March, which will take effect from 28 June, and the Mariel Special Development Zone. Since its inauguration in January, the zone has hosted a series of international visitors, not only from Russia and the US but also from Brazil, Central America, Mexico, Europe, South Korea and China. However, US laws remain a major obstacle for foreign businesses investigating Cuban potential.

The lack of access to US markets, supplies or technologies severely limits the possibilities for production for export in Cuba, and the threat of falling foul of US sanctions serves as a strong deterrent for most companies. Removal of the US ban on trade with Cuba would require the approval of the US Congress. Although the majority of US citizens now favour such a move, it appears to be effectively blocked by the pro-sanctions lobby. President Obama could use his executive powers to ease restrictions on travel, but this would make no difference to foreign businesses.

A US move that would have a far greater impact on third country business interests would be the removal of Cuba from the State Department’s list of ‘state sponsors of terrorism’. Cuba’s inclusion, which now has no convincing justification, hampers international companies’ ability to raise finance and make payments for Cuba business and, perhaps more importantly, the risk of prosecution is sufficient to deter others. Until now, there has been little political pressure within the US for removing Cuba from the list, and international pressure has been weak. However, in the wake of a debate in Europe sparked by the threat of a record fine for BNP Paribas for transactions with countries on the list, the anachronistic inclusion of Cuba is now more likely to be raised by the European Union (EU) in bilateral talks. A breakthrough on this issue would significantly increase European business links with Cuba.

  • Sherritt International

Cuban energy ministry officials have also confirmed that an agreement had been reached to extend and expand the activities of Sherritt International, a Canadian partner that has been extracting oil from the coastal fields since the 1990s.

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