BUENOS AIRES – After five decades of Cuban ostracism, the thaw between the United States and its former communist foe, announced by both Presidents Barack Obama and Raul Castro on December 17, could invigorate the island’s oil industry as it has significant resources off its northwest coast.
Renewed ties usher in an era of cooperation amid plummeting oil prices for the past six months – reaching the lowest levels since 2009. This is the result of the surge of oil production in the U.S. and slowing economic growth especially in China.
Cuba has 4.6 billion barrels of undiscovered oil, according to the U.S. Geological Survey estimates. Sherritt International, a Canadian firm, produces about one-third of it.
Up until now, the embargo against the Caribbean country, imposed in 1960, has hindered the island’s exploitation of its offshore oil and gas resources. Cuba relies today on Venezuela to get 100,000 barrels of oil per day in exchange for medical personnel. It also produces about 50,000 barrels per day of oil.
Yet, the staggering dip in oil prices is wreaking havoc in Venezuela and Russia, two of the world’s largest oil producers and two of Cuba’s main economic partners. The Caribbean island cannot therefore rely on these longtime allies.
Despite more interesting drilling opportunities in other countries, U.S. companies could provide the technical expertise to tap into Cuba’s offshore reserves.
“I think that the historical link, proximity and American affinity for all Cuban things will draw international oil companies to Cuba especially if the major impediments to trade are lifted,” explains Dr. Jonathan C. Benjamin-Alvarado, Professor of Political Science and an expert on Cuba’s energy sector at the University of Nebraska.
Fully lifting the embargo is in the hands of a U.S. Congress where Republicans hold the majority. The normalization of the relations between Washington and Havana has not ended the embargo. It has only enabled some travel, financial and commercial transactions.
In addition, Cuba’s complex geology with underwater rocks near the deep waters of the Gulf of Mexico presents a challenge for U.S. and international oil companies.
Cuban oil has a recovery factor of 10% because of the viscosity and the porosity of the rock formations from which it is extracted. In other words, it can recover only ten barrels for every 100 barrels extracted.
Yet, “international oil companies with access to first generation technology and little threat of sanctions may very well engage in a deeper investment,” adds Dr. Benjamin-Alvarado.
“Realistically, this should only take a few months of ‘all-hands-on-board’ interaction and integration among the respective [U.S. and Cuban] partners,” he explains.
This article was published in the International Finance Magazine on January 6, 2015. Click here.
