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Council On Hemispheric Affairs
MONITORING POLITICAL, ECONOMIC AND DIPLOMATIC
ISSUES AFFECTING THE WESTERN HEMISPHERE
Friday, November 17th, 2006
Press Releases, Venezuela, Cuba, Front Page

Cuban Oil and Ethanol Could Prosper in Havana’s Hunt for Energy Supplies

• The pace is now quickening for the Cuban oil industry, whose previous dependence on Moscow for its supplies and operations ended with the demise of the Soviet Union
• Havana is on track for securing energy independence through relationships with foreign investors, including China and Venezuela, among others
• Venezuela proudly flaunts its involvement in the Cuban oil industry, despite the failed efforts of other foreign investors to produce commercially ranked results
• The Cuban oil and ethanol industries have the potential to transform the island into a major player in global energy, which would guarantee its ability to successfully bypass the U.S. embargo

Hurdling over the barriers erected by Washington policymakers, Cuba, with increasing gusto, is turning to its oil and ethanol sectors to achieve energy security, despite the U.S. embargo. Cuba has slowly made progress through the operations of both state-owned and foreign enterprises, by means of new oil explorations and a stepped-up search for new energy alternatives, such as ethanol.

Cuba Opens Its Doors
Although Cuban oil exploration originally got underway in the 1960s, very little production actually took place during that period. During the 1970s, however, two factors led to an increased interest in oil-related matters: the discovery of the Varadero oil field on the Cuban coast in 1971, and the growing petroleum allocations from the Soviet Union. However, after the Soviet bloc unraveled in 1991, Cuba was cut off from its traditional supplier, thereby beginning its “special period” of harsh energy realities. The Soviet-built Cienfuegos refinery had not been completed and the country started to experience a severe shortage of oil. As the U.S. rallied its allies to collectively impose an embargo on Cuba, the island’s inhabitants were forced to drastically change their daily habits to accommodate the major disruptions of electricity through repeated outages as well as the fitful functioning of natural gas supplies. For example, many Cubans, who normally used automobiles or jitneys as their primary source of transportation, were now forced to use bicycles. As a result of these hardships, Cuban energy officials had no choice but to turn to capitalist markets.

In 1993, Cuban officials made the important decision to downgrade its protective barriers against energy-related investments and permit foreign firms to participate in the island’s energy sector. In order to encourage foreign investment in hydrocarbon extraction and production, the state-owned Cubapetroleo (CUPET) adapted its operations in accordance with the globally accepted Production Sharing Agreements as a way to demonstrate its respect for the immutability of contracts with foreign entities.

Despite this seemingly draconian reversal of policy, the Cuban economy retained many protective barriers against foreign corporations. In 1995, the Cuban National Assembly introduced the Foreign Investment Act, similar to the trade-related initiatives implemented by China and Vietnam, to encourage as well as regulate foreign investor activities. This measure allows private enterprises to enter into joint ventures with the state, but also assures limited and selective scope for investment opportunities. Nevertheless, even though foreign investors may be subject to a premium of at least 50 percent in duties payable to the Cuban treasury, offshore oil exploration remains open to them and several international oil operations still feel that there is a good chance for profits to be made in the future.

The Global Appeal for Cuban Petrol
After laboring with disappointing results in Cuban waters for many years, the perseverance of foreign oil companies looks like it now could be paying off. Cuban domestic crude oil production increased to 80,000 barrels per day in 2006, up from 18,000 barrels per day in 1992. More than 26 oil fields have been discovered and prepared for drilling; the largest being Varadero, whose reserves have been placed at approximately three billion barrels of oil. There is also an additional projected reserve of 2.8 billion barrels lying untouched in the southeast section of the Gulf of Mexico, just within Cuba’s Exclusive Economic Zone (ZEEC). In 2000, Cuba divided this area into 59 deepwater offshore blocks and by the end of 2001, investors from a number of nations, including the United Kingdom, Canada, France, Spain and Sweden, had secured deals accounting for some 20 blocks in this region.

Recently, although the cost of drilling has risen sharply, foreign companies are still looking to capitalize on these promising discoveries. Spain’s Repsol YPF discovered oil in 2004, but chose not to drill, as it did not believe that tapping its fields at that time would reap profitable returns. However, its exploration team continued its test drillings in Cuban waters. The Spanish company Repsol recently aligned itself in a joint venture with Norway’s Norsk Hydro and India’s ONGC Videsh to explore six offshore blocks, where quality oil deposits were found two years ago.

Brazil’s Petrobras, also active in Cuba, has yet to make any worthwhile findings since it began its search for crude in 1998. Later, in 2003, the company made further promises to continue exploration upon signing an agreement to exchange technology with CUPET. More recently, in 2005, Petrobras considered joining Repsol’s team, but announced it was waiting to see if the firm’s new explorations proved successful.

In January 2005, CUPET officially signed a deal with China Petroleum & Chemical Corp (SINOPEC) to explore the northern coast of Cuba, around to the province of Pinar de Rio. Even more recently, on October 9, the Vietnam state-owned firm Petrovietnam agreed to Havana’s oil terms. The above multinationals are seeking to emulate Canadian oil giants Pebercan and Sherritt International, which have been the most fortunate in unearthing the island’s oil riches. These companies have been co-producing 60 percent of all Cuban output along with CUPET. Aside from the Canadian successes, the rush for Cuban oil may appear a strange sight to some observers, given the highly pitched revenue licensing fees and taxes that are applied in addition to the uncertain prospects that prime grade crude will be found in commercial amounts.

Cuba’s Relationship with Venezuela
A major promoter of the Cuban agenda is Havana’s closest ally, Venezuela’s President Hugo Chávez. During the Non-Aligned Movement Summit held in Havana, from September 11-16, Chávez predicted that Cuba could one day be elevated onto the list of nations belonging to the Organization of Petroleum Exporting Countries (OPEC). A Venezuelan government official interview by COHA on November 15 confirmed that: “We have a special relationship with Cuba. It creates lots of jobs and provides energy security for both countries. For Cuba, the U.S. embargo makes it difficult for them to import oil.” Since Cuba entered into a deal with Caracas in April 2005 to buy Venezuelan oil. The Chávez administration has played an expanding role in helping Havana overcome the embargo restrictions placed on it by Washington, which have made it difficult for the island to access global energy sources. Cuba now buys approximately 100,000 barrels of oil a day from Venezuela at highly discounted prices and can re-sell the amounts it does not use. Much of the oil received from Venezuela is bartered for the services of thousands of Cuban health care personnel. Also, at the beginning of this year, Havana officially entered into an agreement with Caracas to re-activate and expand the capacity of the Cienfuegos refinery, which had not been fully completed at the time that the Soviet era ended in the early 1990s. Chávez has an interest in developing refineries in Cuba and Jamaica that are in geographical proximity to its oil fields. At the present time, there is a global shortage of refineries, due to the high cost of building environmentally-sustainable facilities in addition to the awareness that crude supplies for refining may not always be readily available. Therefore, Cuba’s relationship with Venezuela puts the island in an advantageous position, as it can rely upon the almost immediate delivery of large crude shipments that guarantee the operation of its refinery at full capacity, allowing Havana to reap optimum benefits.

The Venezuelan Alliance Stimulates Competition
Washington has been apprehensively watching the growing friendship between Havana and Caracas with intense disapproval, as Venezuelan assistance nullifies the U.S. attempts to asphyxiate the island’s economy. This Havana-Caracas alliance appears to be one of several oil arrangements initiated by Chávez, which eventually could have an adverse impact on Washington’s strategy to flatten the Castro regime. In September, he announced that Venezuela would be joining with Iran to build a new refinery in Syria. In regards to Cuba, the U.S. State Department sees its relationship with Caracas as a threat to Washington’s national interests. In August, U.S. Director of National Intelligence, John Negroponte, created six special missions to deal with uniquely pressing intelligence matters, including one directed towards Venezuelan and Cuban relations. As the Bush administration carefully monitors this relationship, in a manner that scarcely differs from its stalking of both Iran and North Korea, Caracas officials have voiced their own misgivings in regards to Washington’s heightened scrutiny of the Castro-Chávez alliance. The aforementioned Venezuelan official believes that the nature of U.S.-Venezuelan relations “has become a competition, but it is not our objective to push the U.S. onto the sidelines. Cuba needs our help. We need to be careful with the most powerful nation in the world. We are not against the U.S. We’re trying to help ourselves and economically integrate, but the U.S. doesn’t make our contributions to the integration process easy.”

It will be interesting to see how the evolving oil partnership between Cuba and Venezuela impacts future U.S. security policy in the region. If Cuba’s position as an oil producing nation is gradually strengthened, its vulnerability to hostile U.S. acts, such as the embargo, will diminish. On October 12, President Bush asserted that often U.S. “national security issues are involved with countries that have oil. They have something we want, and so there’s a national security issue when it comes to the status quo.” During the international trade show in Havana, Cuban Foreign Trade Minister, Raul de la Nuez, voiced his belief that Bush “has a special plan to destroy us [Cuba].” While it is possible such political frictions may further deepen regional tensions, the U.S. oil industry’s lust for black gold may, to the contrary, slightly lessen the current political negativity between the two countries.

The Dimming Prospects for Helms-Burton Mischief
U.S. oil industry officials have observed that many U.S. allies and trading partners, such as Canada and almost all of Europe, systematically defy the Helms-Burton Act by investing in Cuba. This legislation clearly prohibits officials and stockholders of corporations doing business in the U.S. from investing in Cuban property formerly owned by Cuban-exiled nationals. Now U.S. oil industry CEOs are eagerly seeking involvement in the Cuban energy production. On June 28, Representative Jeff Flake, an Arizona Republican, introduced an amendment to the “Deep Ocean Energy Resources Act.” This legislation, which would allow U.S. oil firms to drill in Cuba’s outer Continental Shelf, now awaits action in the Senate. In the vote, Flake is confident that a positive legislative tide will further eliminate restrictions under the Helms-Burton Act. Prior to the mid-term elections, Flake argued that if the Democrats were to win, they would opt for changes to the status quo anyway, ensuring that the U.S. oil sector will have a large role to play in the Cuban oil sector. Now, that the Democrats have taken control of congress, it is likely that Cuban oil will incrementally wash away the geopolitical barriers between the two nations. If U.S. reforms occur in the direction of market liberalization between the U.S. and Cuba as a result of the recent Democrat victory, Washington could stop sulking over the $1.7 billion dollars in foreign investments that have entered the Cuban energy sector since 2004, and allow its nationals participate in the growing investment now occurring there.

The Growing Significance of the Cuban Ethanol Industry
The Castro regime has long been aware of the decreasing role to be played by fossil fuels and the importance of cutting greenhouse gas emissions. Consequently, Havana has turned its attention to developing alternative energy sources by expanding investment opportunities for foreigners in the island’s nascent ethanol industry. After being marginalized in worldwide capitalist markets for the past half century, Cuba has become more conscious of environmental sustainability of energy sources. As a result, the government is now starting to promote alternative energy resources, such as sugar ethanol – an alcohol-based substance made from fermenting and distilling sugarcane.

With a sugar industry that is more than five centuries old, Cuba can offer investment opportunities in its once highly developed sector, which has fallen upon hard times as a result of mismanagement. Cuba was once the world’s largest raw sugar exporter, but since 2003 it has dismantled 71 out of its 156 sugar factories. A nation that once exported 10 million tons of sugar per year is projecting that only 1.5 million tons will be produced in 2006, of which a meager 1 million tons will be exported. Despite the recent dramatic down-scaling of the Cuban sugar industry, the Jamaican Gleaner reported that high sugar prices in the world market could lead to a revenues bonanza for Cuba. Not surprisingly, this has led to the government’s decision to bolster the industry. Luis Galvez of the Cuban Research Institute for Sugar Cane Derivatives says Cuba has 17 distilleries with the combined potential of producing up to 180 million liters of ethanol annually.

Sugar Ethanol
Sugar still remains one of Cuba’s primary exports amongst other growing industries such as medical supplies. Given the relative strengths that Cuba’s sugar industry already possesses, ethanol remains perhaps the most logical solution to the government’s search for energy alternatives. Use of the product as an energy source is increasing around the world, since it reduces the per gallon cost of gasoline in addition to the consumption level of fossil fuels. The growing market for ethanol emerged in the 1990s with the Brazilian initiative to manufacture more than five million ethanol-compatible automobiles. Other nations, such as Canada, the U.S., China, Australia, Colombia, Peru and Thailand, are mixing gas with ten percent ethanol to fuel. Meanwhile, Paraguay, India, Sweden, South Africa and Japan have mixed gasoline with lesser percentages of alcohol. Considering unstable oil prices and pressure from environmental groups to curb greenhouse emissions, ethanol production will almost certainly emerge as a prosperous industry, putting Cuba in a front-seat position to reap huge profits in the future. This is mainly due to the fact that the cost of production for sugar-based ethanol in Cuba is less than what it will be for the U.S., whose ethanol industry will almost entirely be dependent on more expensive corn ethanol.

Venturing Out
At present, Cuba is beginning to increase its investment in the ethanol industry and Havana may finally see some significant returns after spending over $1 billion on oil and gas production efforts since 1991. While other developing countries are beginning to tap into Cuban energy resources to satisfy their own economies, Cuba is more and more venturing out into the capitalist-dominated, fast-growing alternative energy fields to develop new possibilities for its perennially straightened economy.

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This analysis was prepared by Research Associate Danielle Ryan
November 17th, 2006
Word Count: 2500

The Council on Hemispheric Affairs, founded in 1975, is an independent, non-profit, non-partisan, tax-exempt research and information organization. It has been described on the Senate floor as being “one of the nation’s most respected bodies of scholars and policy makers.” For more information, please see our web page at www.coha.org; or contact our Washington offices by phone (202) 223-4975, fax (202) 223-4979, or email coha@coha.org.

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