Latin America Advisor

A Daily Publication of The Dialogue

Improved Relations with Cuba Unlikely to Spur Oil Sector


U.S. President Barack Obama on Wednesday announced plans to re-establish diplomatic ties with Cuba after more than 50 years, creating speculation that the move could lead to an easing of restrictions on economic and commercial ties affecting the country's energy sector, the Associated Press reported.

The waters off of Cuba's northwest coast are believed to contain sizable oil and gas reserves. The U.S. Energy Information Agency estimated that as of January 2013, the country had proven crude oil reserves of 124 million barrels.

International oil companies have drilled there in the past without success, but Sarah Ladislaw, director of energy and national security program at the Center for Strategic and International Studies, said promising locations remain and "there is lots more exploration people want to do," according to the AP. She said there has been some reluctance to work there for fear of angering the United States.

In recent years, Brazil's Petrobras, Malaysia's Petronas, Russia's Zarubezhneft and Spain's Repsol have all searched for oil off of Cuba's coast, but exploration wells either turned up dry or were determined to not be not worth commercial development.

This discourages other oil companies, Jorge Piñon director of the Latin America and Caribbean Energy Program at The University of Texas at Austin, told The Sydney Morning Herald.

Some geologists "think it is worth going back and taking a second look, but now is not the time to do it." One factor is that would dampen interest in exploring in Cuba is lower prices for oil, which mean that companies are cutting their budgets and focusing on core operations.

"There is not going to be a Cuban oil rush," Pavel Molchanov, an energy company analyst with Raymond James, told Politico. "Just because U.S. companies have been unable to drill in Cuba doesn't mean nobody has been able to drill in Cuba," he said. If other companies had found significant amounts of oil, other international companies would come. An oil rush "would not have happened even if oil was at $100, but it's certainly not going to happen at these price levels," Molchanov added.

However, if Obama's move leads to a loosening of the embargo, which only the U.S. Congress has the power to overturn, some companies will inevitably be interested.

"It's all about the potential return on investment," an energy analyst who asked to remain anonymous told Politico. "If they make it competitive, they could get eight to 10 companies in there." This would require a reliable legal framework and a lucrative royalty regime among other things, the analyst said.

While Obama's announcement did not include measures that would allow for major oil exploration deals by U.S. companies in the near-term, and even if U.S. producers aren't interested, improved diplomatic relations may open opportunities for drilling contractors and oilfield services.

Piñon said Cuban oil projects are recovering about 10 percent of oil, but "If Cuba could get U.S. service companies Halliburton and Schlumberger to come in and give them the technological assistance they need with enhanced oil recovery, Cuba could increase that recovery factor to 17 or 20 percent," he told The Sydney Morning Herald.

Recent drilling in Cuba has been constrained because wells had to be sunk with Saipem's Scarabeo 9 because it does not contain more than 10-percent American-made components, a limit set by the U.S. trade embargo. Obama said Wednesday that the U.S. will begin talks with Cuba and Mexico over maritime boundaries, which could open opportunities in areas with murky ownership now, but any resolution would take years.

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Private Conversation with Cuba Posible

On Friday, March 3rd, the Dialogue welcomed Director and Deputy Director of Cuba Posible, Roberto Veiga and Lenier Gonzalez, and a small group of Latin America policy experts for a discussion on social and political trends in Cuba. The discussion focused on upcoming leadership dynamics in Cuba and the role of young people in the future of the island.