Castro's revenge: The Cuban oil rush
Seventy miles from Florida, a Cuban oil rush is underway - and U.S. companies can't join in, says Fortune's Carolyn Whelan.
(Fortune Magazine) -- Sometime later this year, less than 70 miles from Florida, a consortium of Spanish, Indian and Norwegian companies will likely start drilling for oil. It could mark the beginning of a Cuban oil rush - one that American oil companies won't be able to join, despite their proximity to the action.
And that has some U.S. oil industry executives and lobbyists seething, especially since the American Association of Petroleum Geologists calls the offshore Cuban oil deposits a "significant find."
U.S. oil companies can't play in these waters, of course, barred as they are by sanctions prohibiting them from doing business with Cuba. But irked at the irony of sanctions designed to isolate Fidel Castro that isolate them instead, some in the oil industry are seeking to exempt U.S. oil companies from the 45-year-old embargo.
Emboldened by a newly Democratic Congress and the potential for regime change in Cuba, oil industry lobbyists are promoting exemption bills. One, by Senator Larry Craig (R-Idaho), never got out of committee last year. But Craig plans to reintroduce it in the Senate as part of a larger energy bill in the coming weeks, says spokesman Dan Whiting.
The House version, sponsored by Jeff Flake (R-Arizona), which would allow the sale of U.S. oil services and equipment to the foreign companies already exploring in Cuba, may also be revived.
"This is not the 1960s, when the Kennedy administration was protecting the U.S. from a possible missile attack," says Charles Drevna, executive vice president of the National Petrochemical and Refiners Association, which represents 450 companies. "These resources will be developed and produced - the question is by whom. Prohibiting U.S. companies from developing resources 90 miles away is an Alice in Wonderland approach to policy that must be revisited."
Call it Castro's revenge. With Cuba's leader sidelined by illness and its economy in shambles, a major oil find - estimated by the U.S. Geological Survey at 4.6 billion barrels, nearly two-thirds the amount in the Arctic National Wildlife Refuge - could give Havana a new lease on life. "Cuba could be a major regional player in oil," says Jorge Piñon, an oil expert at the University of Miami and a former president of Amoco Oil Latin America.
So far Cuba's oil production has been puny - just 68,000 barrels a day, compared with more than ten million by Saudi Arabia, the world's largest producer. With help from the Soviet Union, oil was discovered in Varadero in 1971. Production stayed at about 18,000 barrels a day until Canada's Sherritt International arrived in 1992 and started joint production with Cuba Petróleo. Currently Sherritt is responsible for almost half of Cuba's production, entirely onshore.
In 2004, Spain's Repsol YPF found signs of oil in deep water offshore. Last year India's ONGC Videsh and Norsk Hydro of Norway joined Repsol to explore its six blocks. Separately, Malaysia's Petronas won concessions for four blocks, reportedly after seeing fresh data from the Repsol-led consortium. ONGC also secured concessions for two more blocks. In January, Venezuela's state-owned PDVSA picked up rights to four blocks. China also has an exploration agreement with Cuba, and Chinese oil giant Sinopec has been leasing rigs to Sherritt and others.
Even if the choicest blocks have been taken, there would still be opportunity for U.S. companies if the embargo were lifted tomorrow. And Cuban officials say U.S. companies would receive the same treatment as others. "American energy companies and investment are welcome in our country," says Ernesto Plasencia, Cuba's commercial attaché in Washington, D.C.
Len D'Eramo, a spokesman for Exxon Mobil (Charts), whose refinery was nationalized by the Castro regime, doesn't deny interest in Cuban oil but says, "Cuba is a U.S.-sanctioned country, and we are not permitted to operate there."
The offshore blocks are in the seismic-study stage, but the Repsol consortium hopes to start exploration and drilling this year. Oil experts say production is at least three years away. "The potential for ultra-deep-water reserves looks quite promising," says International Energy Agency analyst David Fyfe. "If oil prices stay high, it keeps the frontier areas in play. But Cuba needs help to access those resources."
The Bush administration opposes any relaxation of the embargo. Last year it went to the trouble of warning the Sheraton Hotel in Mexico City that it would violate the embargo by hosting Cuban delegates to a conference on Cuban energy attended by executives from Exxon Mobil and other U.S. oil companies. The venue was changed. Getting a foothold in Cuban waters won't be as easy.