Cuba produces nearly half the oil and gas it uses, but that still leaves a yawning, expensive deficit. To cut the cost of importing the shortfall, the government wants to produce more.
Drilling for oil far from the island’s shore is a tough and expensive sell for the global oil firms that Cuba needs to help develop its potential reserves, but there is interest among foreign investors in expanding production in wells on land — and using pipes that extend horizontally into the sea to grab oil near the coast line.
State oil group Union Cuba Petroleo (Cupet) hosted an energy, oil and gas conference in Havana in late September to tout business opportunities for drilling and other energy-related services in Cuba. More than 200 people attended from 70-plus companies, representing countries as diverse as the United States, China, Australia, Trinidad & Tobago, Lebanon and Ireland.
Center stage at the event: Melbana Energy Limited, the small, publicly-traded Australian company that this year raised $5 million for an onshore block just east of the Varadero oil field, Cuba’s most productive to date. Melbana signed a production sharing agreement with Cuba in 2015 to explore the block and has been assessing its potential since then. It now aims to drill two onshore wells on the block starting mid-2018 at a projected cost of between $20 million and $30 million, and it’s looking for additional partners to help finance the project, said Peter Stickland, Melbana managing director and chief executive.
“The block is a lot better than we thought when we first started looking at it,” Stickland told Cuba Trade. He estimated its exploration potential at 12 billion barrels of oil equivalent in place, and its recoverable potential of around 600 million barrels, more oil than the Varadero field. He’s optimistic about finding partners, since Melbana previously brought in Brazil’s Petrobras and Italy’s ENI for projects in Australia. Indeed, the company already has started the permitting process for its wells and has hired Cupet’s former director of exploration, Rafael Tenreyro, as its Cuban representative to handle requirements.
Cuba made headlines for decades in its search for oil in deep waters offshore in the Gulf of Mexico, not far from where rigs operate in U.S. and Mexican waters. Spain’s Repsol and other companies have drilled four deep-water wells since 2004 but made no commercially viable finds. Repsol alone reported spending more than $100 million in its Cuba ventures.
Expensive explorations of offshore oil potential such as these are less likely going forward, say analysts, especially in an era of lower oil prices. Oil majors now prefer to drill offshore where they know there are deposits to pump, and “Cuba’s offshore oil reserves have not been proven,” said Jorge Piñon, who leads the Latin America and Caribbean Energy Program at the Jackson School of Geosciences of The University of Texas at Austin.
Onshore drilling in Cuba holds promise because of its proven track record, industry leaders say. Cuba now gets its domestic production – roughly 45,000 barrels of oil and 3 million cubic meters of gas per day – from wells drilled on land. While many have pipe systems that extend as far as three miles out to sea to pump oil from coastal waters, onshore drilling and production is much cheaper than offshore because it doesn’t require supply ships or tankers or rigs in the sea.
“We’re one of the few countries in the world where almost all the wells are horizontal, and we do it ourselves,” Cupet engineer Eredio Puentes Gonzalez told Cuba Trade. “We’re used to working in unfavorable circumstances. So, our philosophy is to find solutions not only based on engineering but ingenuity.”
Cuba needs onshore investment, however, because its existing wells are maturing and their production declining – onshore output has slipped 11 percent in the past decade or so. To raise production, Cuba needs either to find new productive wells or employ new technologies to boost output from existing ones through so-called “secondary recovery,” said Puentes Gonzalez.
U.S. oil industry veteran Lee Hunt, a partner in Texas consulting firm Hunt Petty LLP, thinks U.S. companies could get involved in Cuban oil despite Washington’s embargo. Recent U.S.-Cuba accords call for cooperation dealing with oil spills and pollution in coastal waters, and much of U.S. oil equipment aims to protect the environment. Hunt would like the U.S. government to grant export licenses to sell such U.S. products as booms, dispersants, and containment devices to Cuba. “With U.S. purchases, Cuba could reduce the cost of a [drilling] operation by up to 50 percent,” partly by slashing delivery time on items now bought in distant China and Europe, Hunt told Cuba Trade.
Houston-based attorney Felix Chevalier said there’s talk of forming a U.S. Energy Coalition on Cuba, similar to the U.S. Agriculture Coalition for Cuba, to pursue energy development on the island and advocate an end to the U.S. embargo. Meanwhile, under current U.S. law, companies can begin talks with potential partners for Cuba projects that may be allowed later.
“Sooner or later, the embargo will be lifted,” Chevalier told a panel discussion in Havana at the Cuba Energy Oil and Gas conference, organized largely by Global Event Partners of the United Kingdom.
Some non-U.S. companies are seeking a foothold in Cuba’s energy industry now before the U.S. embargo ends and before they face full-on U.S. competition. Among them: businesses from Trinidad & Tobago, the twin-island nation off Venezuela’s coast with a rich history in oil and gas. They see a chance to replace Cuba’s supplies from struggling Venezuela – and to help their nation become more global.
The National Gas Company Group of Trinidad & Tobago is interested in developing pipes, storage, and other infrastructure to supply cooking gas to the central part of Cuba, from Camaguey to Cienfuegos, said Alvin Dookie, business manager at group affiliate Phoenix Park Gas Processors Ltd. The likely price tag for the project: $50 million to $150 million. Trinidad could also supply the cooking gas for the project, substituting for gas that Cuba currently buys from Venezuela or other traders. “Our differentiator is that we are a producer, not a trader” and can ensure long-term supplies from an island relatively close by, said Dookie. “If the U.S. embargo is lifted, our comparative advantage goes away because of U.S. proximity. But right now, Cuba can’t access U.S. barrels.”
To be sure, foreign companies face challenges in entering Cuba’s oil and gas business, as Trinidad’s Perfection Services Limited learned. The small business offers drilling fluids, inspections, training, and other services for wells. CEO Desmond Roberts first worked with Cuba in 2004 in a project linked to Repsol’s deep-water drilling. But when Perfection Services registered as a commercial supplier in Cuba – a requirement to submit contract proposals – the process took more than 18 months.
What’s more, securing contracts may require offering Cuba credit for longer periods than in other countries, squeezing profit margins. But Perfection Services’ business manager David Soverall said he prefers steady, long-term relations to big, fast bucks. “If we know we have a five-year contract, we know we are eating little and living long,” Soverall said, using a typical Trinidadian expression.
Longer-term, Cuban officials remain confident that major oil companies will find commercially viable deposits in its deep waters offshore to help meet the island’s needs. Cupet has been working with BGP, a division of China’s National Petroleum Co., to offer investors more detailed seismic studies and maps of the ocean floor to help with exploration and potential drilling. Said Cupet’s business manager Pedro Urquiza: “If God gave oil to Mexico and the United States, we surely got some too.”