How Cuba's Oil Find Could Change the US Embargo

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Adalberto Roque / AFP / Getty

An oil pump in Havana

For decades, the only promise most Cubans saw in the ocean north of their island was the current that carries homemade rafts to Florida. That all changed a few years ago when geologists estimated that between 5 billion bbl. and 10 billion bbl. of oil lie beneath the waters off Cuba's northwest coast. Suddenly it seemed as though the hemisphere's sole communist nation might finally end its desperate dependence on oil-rich allies like the former Soviet Union and Venezuela — and perhaps even escape its impoverished economic time warp altogether.

Washington's own Cuba time warp got a jolt as well. The oil discovery has renewed debate over whether a crude-thirsty U.S. should loosen its 46-year-old trade embargo against Cuba and let yanqui firms join the drilling, which is taking place fewer than 100 miles off U.S. shores. Despite the Bush Administration's hard line on Cuba, Republicans in Congress have proposed legislation to exempt Big Oil from the embargo. That clamor is sure to rise — especially if Barack Obama, who is more open to dialogue with Havana, becomes the next President — now that Cuba's state oil company, Cubapetroleo, or Cupet, has announced a stunning new estimate of more than 20 billion bbl. bubbling off its shores. "This is not a game," Cupet's exploration manager, Rafael Tenreyro, assured reporters in Havana last week.

If true, those potential reserves could make Cuba a major petro player in the hemisphere. (The U.S. has reserves of 29 billion bbl.) And it could render the embargo an even more ineffective means of dislodging the aging Castro brothers, Fidel and current President Raúl. "If it really is 20 billion, then it's a game changer," says Jonathan Benjamin-Alvarado, a Cuba oil analyst at the University of Nebraska-Omaha. "It provides a lot more justification for changing elements of the embargo, just as we did when we allowed agricultural and medical sales to Cuba" a decade ago.

But is the Cuban calculation really on the level? Skeptics ask if the 20-billion-bbl. estimate is just a ploy to rekindle investor interest, at a time when falling oil prices could make the maritime find less attractive to the potential international partners Cuba needs to extract the oil. The effort is all the more urgent, they add, because reduced oil revenues could also make friends like left-wing Venezuelan President Hugo Chávez less able to aid Cuba with cut-rate crude shipments and capital to improve the island's aged refineries. "The Cuba numbers from my point of view are not valid," says Jorge Pinon, an energy fellow at the University of Miami and an expert on Cuba's oil business. "I think they're feeling a lot of pressure right now to accelerate the development of their own oil resources." Benjamin-Alvarado gives Cuba's geologists more benefit of the doubt; but he calls the 20-billion-bbl. estimate "off the charts." "I trust them as oil people, and their seismic readings might be right," he says, "but until we see secondary, outside analysis, this is going to be suspect."

The U.S. Geological Survey (USGS), a government agency, made the initial estimate of 5 billion 10 billion bbl. for Cuba's northwest offshore sector (known as the Exclusive Economic Zone, or EEZ) in 2004. Tenreyro says Cupet's analysis is based on what he calls a more accurate comparison of similar maritime oil fields like those off Mexico's Gulf Coast. "We're talking about that magnitude," he argued last week. "We have more data" than the USGS. But Cupet, an arm of Cuba's ultra-secret communist government, hasn't offered much more evidence than that. Chris Schenk, who as USGS coordinator in the Caribbean led the 2004 survey, agrees that Cuban geologists "are very good." But he adds, "We would like to see more data." Still, Schenk notes, because of the embargo and Havana's insular information policies, "we can't converse with the Cubans."

The Spanish energy company Repsol-YPF has entered into a production-sharing agreement with Cupet and is scheduled to start drilling the first real well in the EEZ next year. Other international firms, including Norway's StatoilHidro and India's Oil & Natural Gas Corp., are part of the Repsol-led consortium. Venezuela's state-run Petroleos de Venezuela is considered a lesser player because it has little deep-water drilling experience. (China is also interested but so far only involved in onshore drilling in Cuba.) Cuba is now in important negotiations with Brazil's Petrobras, which just made its own multibillion-barrel oil find off its coast near Rio de Janeiro and could, analysts say, be the major offshore drilling partner for Cuba if it jumps in.

Still, the concessions so far represent less than a quarter of the 59 drilling blocks that Cuba hopes to exploit in the 43,000-sq.-mi. (112,000 sq km) EEZ. Analysts say one reason is the daunting infrastructural difficulties facing any company that drills in Cuba: firms have to bring much more of their own capital, equipment, technology and on-the-ground know-how than usual. This year's severe hurricane damage in Cuba has made the situation worse. Canada's Sherritt, in fact, recently dropped out of its four-block contract. "Who else is going to be willing to actually come in and take the risk in Cuba?" says Benjamin-Alvarado. "In terms of proximity and technology, the only people really able to do it to the extent the Cubans need are the Americans."

Cuba now produces about 60,000 barrels of oil per day (BPD) and consumes more than 150,000 BPD. (It also produces natural gas.) Venezuela makes up the difference by shipping almost 100,000 BPD to Cuba. The University of Miami's Pinon says the more serious issue is refining capacity: even if Cuba has only the low estimate of 5 billion bbl. — which could yield more than 300,000 BPD — it needs Venezuela's investment to upgrade refineries like the Soviet-built plant at Cienfuegos. But plummeting crude prices mean that Chávez may have a lot less wealth to spread around for his petro-diplomacy projects. "Like the collapse of the Soviet Union," says Pinon, "this kind of thing has always been Cuba's Achilles' heel."

If Cuba really does have 20 billion bbl. to drill, however, it could more easily find other interested refinery investors, like Brazil. The question is whether the U.S. will want to step off the sidelines and get a piece of the action too. Kirby Jones, head of the U.S.-Cuba Trade Association and an embargo opponent, says Tenreyro's staff has been credible in the past, and he believes the new estimate is probably accurate. "So for the U.S., this becomes an 800-lb. guerrilla knocking on everybody's door," says Jones. "With that much oil, there would be the feeling that there's a real [U.S.] price to be paid for [maintaining] the embargo. It changes Cuba's economic situation drastically and makes the U.S. less relevant."

Perhaps, but in the short run it's more likely to make the U.S. more determined to do its own offshore drilling. Vice President Dick Cheney and other Bush Administration officials point to Cuba's petro fortunes as justification for opening more of America's coastline to oil production. Recent polls in U.S. coastal states like Florida support that idea, despite environmentalist complaints that both U.S. and Cuban offshore rigs will foul the Gulf of Mexico. Meanwhile, embargo proponents on Capitol Hill have sponsored bills that would, among other sanctions, deny visas to the executives of foreign oil companies that drill oil in Cuba. Their reasoning: the more oil wealth Havana gains, the less incentive it has to pursue democratic reform.

That last part may well be true. But at the end of the day, U.S.-Cuba relations continue to exist in a Cold War time warp. As a result, in both Washington and Havana, 20 billion bbl. of oil might not be such a game changer after all.

— With reporting by Dolly Mascarenas / Mexico City

(See pictures of Fidel Castro's years in power here.)