Cuban Oil ?

Will Cuban Oil Find Break U.S. Embargo?
Saturday, July 29, 2006 12:27 PM EDT
The Associated Press
By TODD LEWAN

MIAMI (AP) — Some facts about America's trade embargo with Cuba:

— It's been U.S. policy since 1961.

— It has yet to loosen Fidel Castro's grip on power.

— It has cost America little strategically or economically.

Until now, that is.

From here on out, say a growing chorus of experts, America will pay a price for maintaining its 45-year trade ban with the communist nation — a strategic and economic price that will have negative repercussions for the United States in the decades to come.

What has changed the equation?

Oil.

To be more specific, recent, sizable discoveries of it in the North Cuba Basin — deep-water fields that have already drawn the interest of companies from China, India, Norway, Spain, Canada, Venezuela and Brazil.

This, in turn, has reheated debate in the U.S. Congress and the Cuban-American community on an old question:

Has the time finally come to shelve the embargo — given America's need for more sources of crude at a time of rising gas prices, soaring global demand and the outbreak of war in the Middle East?

Jonathan Benjamin-Alvarado, an expert on Cuba energy matters and a political science professor at the University of Nebraska at Omaha, says America's thirst for oil will soon force a fundamental change in Washington's relations with Havana.

"I've always argued that we would keep the Cuban embargo in place until we got to the point where it started to cost us something." Today, he adds, "we're almost there."

Says Phil Peters, vice president of the Lexington Institute, a think tank in Arlington, Va., that defends limited government and free trade, and a Cuba expert: "If Cuba discovers a lot of oil and becomes an oil exporter, the embargo almost becomes an absurdity."

Kirby Jones, founder and president of the U.S.-Cuba Trade Association in Washington, D.C., which has long sought an end to the trade ban, says the reality of Cuba as an oil producer makes the embargo too costly a policy to keep.

"Our choice is: Are we going to let those other countries take that oil? Or are we going to look at our strategic interests and recognize that very close to our shores is a substantial quantity of oil that is going to be exploited?"

Cuba has been oil hunting, not always successfully, for decades.

With Soviet help, it discovered the Varadero Oil Field in 1971. This reservoir, within 5 miles of Cuba's northern coast, today yields about 40 percent of Cuba's total production — roughly 75,000 barrels a day of poor-quality, heavy, sour crude.

In July 2004, however, the Spanish oil company Repsol-YPF, in partnership with Cuba's state oil company, CUPET, identified five fields it classified as "high-quality" in the deep water of the Florida Straits, 20 miles northeast of Havana.

Seven months later, a report by the U.S. Geological Survey confirmed it: The North Cuba Basin held a substantial quantity of oil — 4.6 billion to 9.3 billion barrels of crude and 9.8 trillion to 21.8 trillion cubic feet of natural gas. Cuba wasted no time, dividing the 74,000 square mile (120,000 square kilometer) area into 59 exploration blocks, and then welcoming foreign oil conglomerates with offers of production-sharing agreements.

Oil companies from China and Canada, already prospecting for oil along Cuba's coast, began talks with Cuban energy officials about investments in deep-water operations.

Then, in May, Spain's Repsol-YPF announced it was partnering with India's Oil and Natural Gas Corp., and Norsk Hydro ASA of Norway to explore for oil and gas in six of the 59 deep-water blocks along Cuba's maritime border with the United States. (Sherritt International Corp., the Canadian oil company, has acquired exploration rights in four of the deep-sea blocks.)

That raised the eyebrows of many an oil executive, says Jorge Pinon, a former senior executive with Amoco Oil and a research associate at the Institute for Cuban and Cuban-American Studies at the University of Miami.

Norsk and ONGC are among a select group of companies with deep-water know-how and technology, so when they signed on with the Spanish, "everyone else said, 'Maybe we better take a look at Cuba again.'"

The U.S. Congress certainly has.

In May, with much fanfare, Rep. Jeff Flake, R-Ariz., and Sen. Larry Craig, R-Idaho, introduced twin bills to the House and Senate that would exempt Big Oil from the embargo.

Before introducing his legislation, Craig told a reporter that "prohibition on trade with Cuba has accomplished just about zero." Ominously, he added: "China, as we speak, has a drilling rig off the coast of Cuba." (The senator failed to mention that the Chinese are working in shallow water near Cuba's shore, and possess neither the technology nor the expertise to tap Cuba's promising deep-water reserves.)

Regardless, the bills represent the best chance yet to "punch a big hole into the embargo," says Johannes Werner, editor of Cuba Trade & Investment News, published in Sarasota, Fla.

That scenario raises the hackles of the conservative, and highly influential, Cuban-American voting lobby of south Florida — not exactly what President Bush, or his brother, Jeb, who occupies the governor's mansion in Florida, would prefer three months before midterm elections.

Says Alfredo Mesa, executive director of the Cuban American National Foundation in Miami: "Those who would advocate for ... allowing U.S. companies to drill off Cuba lose sight of how that would damage our ability to press the Cuban government on other issues, such as human rights."

Environmentalists are also squarely set against oil-industry access to Cuba, though for different reasons. Oil spills — even routine toxic pollution from drilling — could pollute the Everglades and Florida's most economically important beaches, they say, and wreck the state's tourism industry.

Thanks to Sen. Bill Nelson, D-Fla., and Rep. Jim Davis, D-Fla., they, too, have measures in Congress for which to cheer: twin bills that would deny U.S. visas to executives of foreign companies that drill for oil in Cuban waters.

Nelson's bill would undo a 1977 maritime boundary agreement between the countries that bisects the Straits of Florida and allows Cuba to perform commercial activities (e.g., oil drilling) near the Florida Keys.

It's not clear how this could keep the Cubans from exploiting waters closer to their shores than America's. One semiofficial response from Cuba, an editorial by the state-run Prensa Latina newswire, called the measures "extraterritorial."

How likely is it that Congress will act?

"If the oil industry continues to sit on the fence as it has been — not too likely, especially with this administration and Congress," says Werner, editor of the Cuba trade newsletter. "But there are elections in November, which could change the whole equation."

Peters, of the Lexington Institute, agrees. "I think if you call (oil companies) up and ask them, 'What is your position on this?' they'd say yes, we're behind an exemption in the embargo. But I'm not sure if they would get behind it in a major way yet."

In response to queries from The Associated Press, the American Petroleum Institute in Washington, D.C., the industry's lobbying arm, issued this statement:

"We cannot speak to individual interest in Cuba, but we can say that API members are more focused on expanding access on the U.S. portion of the outer continental shelf, which is much closer to the existing pipeline network and where they have more information about oil and natural gas reserves."

All of this is still somewhat premature, says Pinon, the former oil executive and research associate. "We are still three to five years away from commercializing any of those Cuban reserves."

There is at least an 18-month backlog on the leasing of deep-water rigs, he says, and "crude oil is worth zero if you can't move it or process it. Even if they find the oil, what are they going to do with it?"

Benjamin-Alvarado, a regular visitor to Cuba who has been following that nation's energy development for 15 years, concurs. Cuba, he says, needs help "downstreaming" — upgrading its ports, refineries and maintenance equipment.

Already, though, Venezuela's state oil monopoly, PDVSA, has signed a $100 million deal to revamp Cuba's Cienfuegos refinery, a Russian relic from Cold-War days, and to increase oil storage capacity at the Port of Matanzas.

"Every day the United States puts off making the path into Cuba, that window of opportunity closes a little more," says Benjamin-Alvarado. Once Cuba gets to the platform stage of deep-water drilling, he says, "the Americans are going to be left out."

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