Investment Report: Nickel, Oil, and Sustainable Energy

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An oil refinery near Havana.

Of all the sectors of the Cuban economy in search of foreign direct investment, none surpass energy and mining.

Cuba’s foreign investment portfolio for 2016-17, presented at last fall’s Havana International Fair by Cuban Foreign Trade Minister Rodrigo Malmierca, contained 123 investment projects in energy and mining. This represented nearly a third of the total, followed closely by tourism (114 projects) and way ahead of food (76), biotechnology and health (18), industry (16), construction (10), and transportation (10).

Unquestionably, Cuba’s economic development depends heavily on investment in the energy sector. Without a modern and efficient energy system, all other strategic sectors of the island’s economy will suffer—which is why the Ministry of Energy and Mines has more projects in the latest investment plan than any other Cuban state entity.

That ministry controls three strategic entities: The Electrical Union (UNE); Cubaniquel; and the Cuban Petroleum Union (CUPET). All three hope to attract the right partners to develop the 123 projects identified by the Cuban government for generating electricity, producing nickel, and extracting and processing oil and gas.

Yet bringing such ambitious plans to fruition is a real challenge, given the current difficult scenario: rapidly shrinking shipments from Venezuela; falling world oil prices; declining nickel production and the abrupt collapse in world nickel prices; and rapidly growing consumption of electricity, prompted by an expanding private sector and tourism.

All this has taxed Cuba’s antiquated energy grid, which must be upgraded and dramatically expanded to increase power generating capacity. Here’s a look at key projects now underway:

The Pedro Soto Alba nickel refinery is 50 percent owned by Sherritt International.

Nickel 

The nickel industry is going through a tough period. In the face of falling world nickel prices, investment has shriveled up at Moa Nickel SA, a 50-50 venture between Canada’s Sherritt International and Cubaniquel that’s been a financial bonanza since its establishment in 1994. It now owns the Moa extraction, processing and smelting operation, a refinery located in the Canadian province of Alberta, and an international marketing company.

Statistics on nickel production and export reflect current difficulties. Beginning in 2000, nickel production began climbing steadily, exceeding 75,000 tons in 2005.

In 2007, nickel export revenues surged past $2 billion. With world prices at $50,000 a ton, the nickel industry became Cuba’s main source of export revenue, surpassing both sugar and tourism. This led to plans for two new nickel refineries—one in partnership with Venezuela (worth $700 million) and another with China (worth $500 million).

However, by 2010 both production and prices had fallen, sharply cutting into Cuba’s nickel export revenues. Consequently, neither investment materialized. In 2015, Cuban nickel exports came to only $521 million, a 75 percent drop from 2007 levels.

Cuba remains one of the world’s largest nickel producers and exporters. It also supplies 10 percent of the world’s cobalt. Nickel is essential in the production of stainless steel and other corrosion-resistant alloys, such as those used in mobile phones, batteries, automobiles, engines, and aircraft turbines.

Currently, Cuba has two refineries which must be upgraded in order to reduce production costs to compensate for the decline in nickel prices. Sherritt recently invested in a plant to produce sulfuric acid—a key input in nickel processing—with the aim of reducing production costs by 12 to 15 percent.

Nickel prices have fallen mainly because of lower demand from China, the world’s top nickel consumer, and rising use of cheaper materials in steel alloys. Given this scenario, no major investments will materialize in this sector until world nickel prices recover enough to justify them. If nickel prices remain low, Cuba should try to reduce costs rather than boost production.

Oil and gas production

Oil and gas account for 87 of the 123 energy and mining projects in Cuba’s current investment portfolio. In the last six years, Cuba’s annual oil production has remained constant at around 2.97 million metric tons. During this same period, gas extraction has risen by 16 percent; the Energas joint venture uses this gas to generate more than 1,875 GWh of electricity.

Cuba extracts only 5 percent of its oil, according to government authorities, because CUPET lacks the technology for secondary recovery, which requires substantial investment. At present, CUPET extracts about 80 percent of Cuba’s oil production; Sherritt extracts the remaining 20 percent. Production comes mostly from the offshore fields of Puerto Escondido and Boca Jaruco, using directional drilling from onshore in the vicinity of Matanzas.

Geologically, Cuba is framed on the south by the Caribbean volcanic arc and on the north by the North American platform. Cuba’s oil fields are located in an area between Havana and Matanzas, where the largest oil reservoir has been found, with reserves estimated at six billion barrels. According to Cuban government sources, nearly all of Cuba’s land mass has potential for oil production, as do offshore and deepwater areas.

Cuba has dozens of petroleum deposits, most of them consisting of very heavy oil, although some medium, light, and extra-light deposits have also been discovered. Most are offshore, in coastal areas, and are exploited using directional drilling. A 2004 study by the U.S. Geological Service estimated the potential of Cuba’s northern basin at 4.6 billion barrels of oil and 9.8 billion cubic feet of natural gas. Cuban scientists have made higher, but perhaps less reliable, estimates of up to 20 billion barrels of oil.

In January 2012, Spain’s Repsol-YPF became the first multinational oil company to explore in deepwater north of Havana, leasing the Chinese-built Scarabeo 9 drilling platform from Italy’s ENI. Yet the results were not encouraging, and Repsol-YPF soon ended drilling operations.

Subsequently, Scarabeo 9 made two other drilling efforts on behalf of Malaysia’s Petronas and Venezuela’s PDVSA, but the platform left Cuba without finding the hoped-for oil deposits. Russia’s Zarubezhneft drilled a fourth exploratory well using the semi-submersible drilling platform Songa Mercur—owned by Norway’s Songa Offshore—but this effort also came up dry.

Solar panels in the Cuban countryside near Viñales.

Renewable Energy

In recent years, Cuba has seen significant activity in renewable energy, driven above all by its need to phase out the island’s dependence on fossil fuels to generate electricity.

Although Cuba produces some four million tons of oil and gas per year—mostly used for power generation—this only covers half the country’s consumption. That’s why the electric grid still depends on subsidized Venezuelan crude. These supplies, which peaked at 125,000 barrels a day, fell to 45,000-50,000 barrels a day last year, prompting the Cienfuegos refinery to close.

Given this new reality, the government has accelerated investments in renewable energy. Its goal: to produce 24 percent of Cuba’s electricity from “clean” sources by 2030. To this end, the government has included $3 billion worth of renewable energy projects in its investment portfolio. Together, these would add 2.1 gigawatts of capacity from wind, solar, biogas, and biomass plants.

Unión Eléctrica alone plans 23 renewable energy projects; the most important are in wind energy and solar parks. The government recently contracted Spain’s Gamesa to build seven wind farms in eastern Cuba with total generating power of 750 MW. That’s in addition to Cuba’s four existing wind parks: two in Gibara (Holguín province, in the east); one in Turiguanó (Ciego de Avila province, in central Cuba) and one at Los Canarreos (on Isla de la Juventud, in the west).

Solar energy is another government priority. In Cuba, solar radiation averages about 5 kWh per square meter per day (1,825 kWh per square meter per year)—much higher than in European countries that rely on solar energy.

According to Cuban experts, 100 square kilometers of networked photovoltaic systems could generate 15,000 GWh/year of electricity—an amount now generated by conventional fuels. Other studies suggest that the solar radiation Cuba receives in one day is equivalent to the oil Cuba consumes in five years.

Cuba’s strategy is to have solar provide 400 MW of power by 2020. The country currently has 21 solar generating plants connected to the national grid; together they generate 34.8 MW. Another 2.4 MW plant is in the process of synchronization, and eight more facilities with a combined generating capacity of 15 MW are under construction.

Recently, the Abu Dhabi Development Fund (ADFD) loaned Cuba $15 million under favorable terms to develop four 10-MW solar power plants using photovoltaic silicon panels. The plants are slated for the provinces of Matanzas, Santa Clara, Camagüey and Sancti Spíritus.

Conclusions

Of the three investment areas under the jurisdiction of the Ministry of Energy and Mines, the most attractive are clearly oil and gas production, and electricity generated from renewables.

For these sectors to expand, however, foreign investment is essential. To facilitate that, the Cuban government will allow investments in the energy sector to be 100 percent foreign-owned—a development that would have been unthinkable 20 years ago.

Regarding oil and gas, projects related to secondary extraction methods are especially attractive. Similarly lucrative are facilities that use co-produced gas to generate electricity, given their low production costs and high efficiency in power generation. With respect to renewable energy, solar seems to be the most promising, given the high levels of solar radiation that blanket Cuba uniformly and throughout the year.

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