Repsol Oil Search in Gulf Could Transform Cuba, Paper Reports

June 28 (Bloomberg) -- Repsol YPF SA, the Spanish petrochemical company, is drilling for oil off Cuba's northwestern coast, and a discovery there could transform the communist nation, the Financial Times reported.

Cuba's portion of the Gulf of Mexico may have large quantities of crude, which would change the nation from a bankrupt oil importer to an oil-exporting country. A discovery also would add pressure on the U.S. to drop its trade embargo with Cuba, the newspaper said.

Repsol plans to spend more than $40 million on the project and said there may be as many as 1.6 billion barrels of oil in the area. A find of that size would boost Repsol's reserves by 30 percent, the Times said.

Cuba has 43,000 square miles of the Gulf of Mexico divided into 59 blocks for exploration. Repsol has the rights to six blocks, and Canada's Sherritt International Corp. has four, the paper reported.

(Financial Times 6-28 Online)

Repsol-YPF Helps Cuba in Search for Oil

The Miami Herald, Monday, June 28, 2004

Repsol-YPF has begun drilling for oil in waters 18 miles off Cuba's northwestern coast in an effort to reduce Havana's dependence on imports.

Although the decades-old U.S. trade embargo precludes the involvement of U.S. oil companies in the Cuban industry, oil officials in Cuba say they would be open to the possibility.

"We are open to U.S. oil companies interested in exploration, production and services," Juan Fleites, vice president of the state-run Cubapetroleo told U.S. executives at a recent conference in Havana.

"There is no reason U.S. companies shouldn't take advantage and compete so close to home," he said.

One of the main reasons for Cuba's welcoming attitude is that the island nation doesn't have the capacity to explore and develop a 43,000-square-mile area known as the Exclusive Economic Zone in the Gulf of Mexico, so it is eager for foreign partners with capital and know-how.

Fleites said 16 foreign oil companies, mostly from Canada, France and Spain, have already signed contracts to prospect and drill to a depth of between 1,000 and 3,000 meters.

"We have leased 10 of our 59 blocks in the Gulf of Mexico, but we expect many more companies to sign if Repsol finds oil," Fleites said.

And that is a big if.

Experts say Cuba must discover a deposit of light crude large enough to make it commercially feasible to spend more than $1 billion developing any deep-water field in the Gulf.

Some Spanish oil industry executives have been quoted as saying the odds of Repsol-YPF finding such deposits are only one in 25. A Repsol official quoted by the Spanish news agency EFE put the odds at one in four.

And a Repsol-YPF engineer working to sink the well told The Financial Times, "The chances that we will find oil are better than winning the lottery or a casino jackpot. More like getting some of the numbers right or coming out ahead at the blackjack table on consecutive nights."

Some observers say if Cuba does hit the jackpot offshore, there could be increased pressure to lift the U.S. embargo.

"It is difficult to imagine how the U.S. oil industry could stay on the sidelines for long if there is a commercial find," said John Kavulich, president of the U.S.-Cuba Trade and Economic Council, which monitors commercial relations between the two countries. "There will be pressure on the government from U.S. oil companies, both upstream and downstream," he told The Financial Times.

"We've been in contact with various American oil companies," Fleites said, but he declined to elaborate.

Cuba currently produces about 3.5 million tons of oil equivalent per year, or just more than 40 percent of the island's annual consumption of 8.5 million tons, said Jorge Perez-Lopez, a U.S. economist who specializes in Cuba issues. The rest is imported, almost entirely from Venezuela.

Repsol-YPF, which has six concession blocks along Cuba's northwestern coast from Pinar del Rio to Matanzas, has leased the Norwegian-owned Eirik Raude rig at $195,000 a day to drill in water more than a mile deep. It is the world's largest semi-submersible rig, a floating platform designed for very deep water.

The company has reported it would spend more than $40 million on the project but believes its investment could yield up to 1.6 billion barrels of oil below the seabed.

"If they find oil, we will share the production as well as the profits," Fleites said. "This is a risk you take whenever there is confidence in the country. Companies know we will live up to our commitments."

Fleites said foreign investment in Cuba's oil sector is around $1.2 billion. Canada's Sherritt International signed rights to four exploration blocks last year. In 2001, Sherritt and Brazil's government-owned Petrobras sank $16 million into a well that proved dry. But Petrobras says it hasn't given up on Cuba.

Foreign companies led by Sherritt and another Canadian company, Pebercan, have joint ventures and production deals with Cubapetroleo that account for 60 percent of the island's oil and gas output.

"Thanks to the participation of foreign companies, we have had the possibility of introducing new techniques such as horizontal drilling," said Fleites. "This technique is quite new, and we haven't used it before. We also have multitube wells and have introduced new pumping systems that are much more modern than what we had before."

Madrid-based Repsol-YPF is tight-lipped about its Cuba venture, especially when it comes to U.S.-based reporters.

Valentin Alvarez, general director of Repsol's Caribbean business unit in Venezuela, declined comment and referred media inquiries to Jose Conesa Martinez, general manager of Repsol-YPF Cuba S.A.

In an e-mail, Conesa's secretary said her boss wasn't available for an interview "given the situation existing in Cuba-U.S. relations. . ., which could prejudice the work our company is doing in Cuba."

Fleites said Cuba has more than 310 miles of pipelines, and that the Matanzas oil terminal is now capable of receiving 150,000-ton supertankers.

In 1999, he added, about half of Cuba's electricity was generated by domestically produced oil and gas; today it's nearly 100 percent.

"For this, we had to upgrade our power plants to burn domestic crude. These investments took place over four years," he said. "At present... all our electricity is based on oil or gas."

Two ventures are currently underway for the sale of LPG: one in Havana, with Argentina's Puma Gas, and the other in the eastern city of Santiago de Cuba with Total of France. Combined investment in the two projects is around $50 million.

"Most of our people still use kerosene, which is not the best domestic fuel. Little by little, we are replacing kerosene with LPG," Fleites said. Repsol-YPF has begun drilling for oil in waters 18 miles off Cuba's northwestern coast in an effort to reduce Havana's dependence on imports.

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Spanish Seek Oil Off Cuba, as Americans Watch Silently
By SIMON ROMERO
Published: July 6, 2004

Jorge Rey/Getty Images
Tankers arriving at a Havana refinery last year. With much of Cuba's oil imported, straining the country's hard currency, there is great impetus to find oil offshore.

HOUSTON, July 5 - Recent announcements from Repsol YPF, the big Spanish oil and gas company, indicate an ambitious expansion program, with projects planned for countries like Libya and Equatorial Guinea that are not for the risk-averse. But none has attracted as much attention as its gamble on Cuba.

Last month, Repsol hired a Norwegian drilling platform, the Eirik Raude, at a cost around $200,000 a day to search for oil in Cuban waters, in a narrow sector of the Gulf of Mexico off the northwestern coast. The venture, established with Cubapetróleo, the government-owned oil company, is being watched about as closely in Houston's executive suites as any in the energy industry.

A significant find by Repsol would, of course, be a boon for Cuba, which imports most of its fuel, mainly from Venezuela, and often struggles to find the hard currency to pay the bills. More broadly, it could shake up the dynamics of oil production in the Gulf of Mexico, dominated for decades by the United States and Mexico.

And a big oil discovery could change the political debate in the United States over the decades-old sanctions against Cuba, which now prohibit most commerce with the country.

The last thing that American energy companies want is to be trapped on the sidelines by sanctions while European, Canadian and Latin American rivals are free to develop new oil resources on the doorstep of the United States.

Halliburton, the nation's largest oil services company, is among the wary watchers. John Gibson, president of Halliburton's energy services group, recently said in a speech to employees that he favored lifting economic sanctions against Cuba, as well as Libya and Iran.

Pepe Varela/Digital Press Photos
Pumping oil on the coast near Havana. Besides Repsol, Sherritt International of Canada and Petrobras have searched with widely varying success. Economic sanctions prevent exploration by United States companies.

"Sanctions are a very U.S.-centric thing, and I believe that free enterprise will establish better relationships," Mr. Gibson said, according to The Associated Press. "There are foreign companies making money in those countries, and I think American companies should have a shot at those markets as well."

That sentiment runs counter to the Bush administration's Cuba policy, which has been to maintain and even strengthen sanctions in hopes of isolating and weakening the Communist country's economy. The administration has recently imposed new curbs on travel to Cuba and on the amount of money and goods Cubans can receive from relatives in the United States.

Cuba's former lifeline of oil collapsed when the Soviet Union did, and the severe fuel shortages that the country suffered have prompted officials in Havana to allow foreign companies to explore for oil in Cuban waters, starting in the mid-1990's.

In the meantime, new technology to squeeze more oil from the small existing fields on the island's north coast has increased output to about 75,000 barrels a day from about 10,000 in the early 90's.

More than half of Cuba's oil is now produced by a Canadian company, Sherritt International, which has been active in Cuba for a decade. "We had the advantage of getting in early and sticking with it," said Ernie Lalonde, Sherritt's director of investor relations. He said the company was considering an exploration project similar to Repsol's in the Cuban portion of the Gulf of Mexico, which covers some 43,000 square miles.

Other foreign energy companies that have ventured into Cuba lately have not been as lucky as Sherritt. Brazil's national oil company, Petróleo Brasiliero, or Petrobras, one of the most experienced offshore producers, came up empty-handed after spending $17 million drilling in Cuban waters in 2001.

Senior executives at Repsol acknowledge that their Cuba venture is far from a sure thing. "These are high-risk areas, but we are optimistic," said Alfonso Cortina, Repsol's chief executive, earlier this year.

Cuba still depends on imports for about half its oil, nearly all bought on preferential terms under an agreement with the leftist Venezuelan government of President Hugo Chávez. The cost strains Cuba's limited hard-currency earnings, and the country is striving to reduce its dependence on imports.

When more than 100 representatives of American agricultural companies attended a trade conference in Havana this spring, senior energy and finance officials in the Cuban government used the opportunity to suggest Cuba as a destination for energy investments. "There is no reason U.S. companies shouldn't take advantage and compete so close to home," said Juan Fleites, a senior executive at Cubapetróleo.

No reason, that is, other than the American sanctions, which are not expected to be relaxed anytime soon. A significant hurdle to any plan to ease sanctions are the large claims outstanding against Cuba for assets and businesses seized when Fidel Castro came to power in the late 1950's and for debts run up since then. International creditors have been discussing the claims with the Castro government for a decade without making much headway.

An oil discovery large enough to yield exports as well as satisfy Cuba's own energy needs could change that, by significantly improving the economy and adding a major new source of hard currency to the modest amounts Cuba now earns primarily from tourism. With more resources to make payments, the Cubans would have an easier time settling the old claims.

"Put simply, oil would lift Cuba's boat, especially if crude prices stay high," said Tim Lynch, an expert on the Cuban economy and director of the Center for Economic Analysis at Florida State University. "Enough oil would also lessen Cuba's dependence on Venezuela, redrawing the political and economic map of the Caribbean."

Matthew Pickles, a senior manager in the Barbados office of Ernst & Young, recently told energy executives at a conference in Port of Spain, Trinidad, that an oil discovery in Cuba could also lead to the building of new refineries or the expansion of existing ones, potentially making Cuba a refining center for the eastern Caribbean, Mexico and Venezuela.

Such rosy predictions aside, geologists and industry analysts are eagerly waiting to see what Repsol's drill rig turns up, if only to learn more about one of the few stretches of the Gulf of Mexico that is still untested.

A significant find might catapult Cuba into a category of small countries that are emerging as risky but alluring new targets for oil development - among them Mauritania, Senegal, Morocco and Guinea-Bissau, according to Robert W. Esser, director of global oil and gas resources at Cambridge Energy Research Associates. A dry hole, on the other hand, would reinforce the conventional wisdom that American and Mexican waters are the best parts of the gulf for oil.

"Cuba's way out on the frontier of present-day wildcatting," Mr. Esser said.

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