Memo to Sen. Bob Graham: Cuba's Oil Ambitions on (Long-Term) Hold

Sunday, May 4, 2014
This week, Petroleum Economist ran a good analysis (below) on how the Castro regime's oil ambitions have been "stymied by a triple whammy of geology, costs and sanctions."

But don't tell former U.S. Senator Bob Graham and former EPA Administrator William Reilly, who wrote a joint oped in The Miami Herald over the weekend, ingenuously arguing to ease some U.S. sanctions, which would only make it easier for Cuba to drill.

Graham and Reilly recognize that thanks to U.S. sanctions (10% U.S. content cap) there is only one rig in the world that can be used for deep-water drilling in Cuba's territorial waters.  That has made it cost prohibitive for foreign companies to pursue extensive drilling, in partnership with the Castro regime.

Yet, they argue to ease sanctions, so that more rigs will become accessible. That would only make it cheaper and easier for the Castro regime to pursue the deep-water drilling that Graham and Reilly purportedly dread. In other words, they want to make a feat that is currently inviable, viable.

Want to even further prevent the Castro regime from deep-water drilling? It's easy -- just raise the U.S. content cap and put that one rig out of commission as well.

After all, given the choice between preventing and facilitating the Castro regime's deep-water drilling, we should be preventing it -- right?

We argued it in 2008 and will argue it again, U.S. sanctions have been the environment's best friend in dealing with Castro's oil ambitions.

Even more strangely, despite these ambitions proving to be cost and logistically prohibitive, Graham and Reilly hold that the Cuban regime will continue its oil pipe-dreams based solely on some "intentions" they perceived from bureaucrats (at best) they met in Havana through long-time Castro propagandist, Julia Sweig.

Come on, Senator. You are better than that.

From Petroleum Economist:

Cuba’s deep-water drive on hold

Havana’s oil ambitions stymied by triple whammy of geology, costs and sanctions

The waters around Cuba once promised to be a new frontier in Caribbean exploration and an economic boost to an island that has been bound by US trade sanctions for more than five decades. However, after three dry wells, hopes of deep-water success have been tempered by tricky geology and high drilling costs. And a string of drilling failures in 2012 now hangs over the sector.

According to the US' Energy Information Administration (EIA), Cuba's proved oil reserves total just 24 million barrels, plus 2.5 trillion cubic feet (cf) of natural gas. But the country's little-explored deep waters are thought to share some of the same rich geology that has made the US Gulf of Mexico one of the world's most prolific oil provinces.

The US Geological Survey estimates the North Cuba basin holds 4.6 billion barrels of recoverable crude oil, as well as 900 million barrels of natural gas liquids and 9.8 trillion cf of natural gas. Around 70% of Cuba's offshore oil reserves are thought to lie in a narrow, near-shore section of the North Cuba basin called the North Cuba Foreland basin.

Cuban officials are even more bullish. In 2008, they claimed the country's offshore could host as much as 20 billion barrels of undiscovered crude.

A number of international companies, including Repsol, Venezuela's PdV and Malaysia's Petronas snapped up offshore blocks in Cuba's Exclusive Economic Zone, in the Gulf of Mexico, hoping to tap this bounty.

In 2004, Repsol, along with partners Statoil and ONGC Videsh, drilled Cuba's first deep-water well, Yamagua-1, in Block 27, around 32 kms offshore Havana. The well hinted at Cuba's potential. Repsol said oil was discovered, though not in commercial quantities.

But, after that initial success, it took eight years before the exploration campaign could continue. Companies had to wait on construction of Saipem's $750 million Scarabeo-9 ultra-deep water semi-submersible drilling rig, a unit which did not contravene the terms of US sanctions against Cuba.

A year of misadventure

The Scarabeo-9 mobilised into Cuban waters in early 2012. It was to be a pivotal year for Cuba's oil hopes. The country started 2012 optimistic that a deep-water oil boom would boost its economy and reduce its dependence on Venezuelan oil. While Cuba produced 171,000 barrels a day of oil in 2012, this met just a third of its oil demand, EIA data show. The shortfall was plugged with Venezuelan barrels.

The Scarabeo-9's first task was to spud the Jagüey well. Drilling started in January 2012, but in May Repsol said Jagüey was a duster. It added it would not go ahead with a second planned well.

Despite the disappointment, hopes remained high as the Scarabeo-9 began work for Petronas and Gazprom Neft, spudding the Catoche 1X well in a deep-water prospect offshore Pinar del Rio province, in the north. In August 2012, though, Cuba's state-run producer Cupet announced that Catoche 1X, despite showing indications of oil, was not commercial.

Venezuela's PdV was next, with the Cabo de San Antonio 1X well, also in the northern offshore. In November, it emerged that it too was a duster. It marked the end of a disappointing year for Cuba's offshore oil hunt, and the experience appears to have dampened explorers' enthusiasm for Cuba's offshore play.

A Repsol spokesperson told Petroleum Economist the company has no plans to return to Cuba's deep waters, preferring instead to focus on its Brazilian and West African projects. While Repsol admitted the long-standing US trade embargo was a factor in its decision, Cuba's difficult geology and the high cost of drilling there were more important concerns.

Cuba's hopes of developing an offshore oil sector now rest with Russian state-owned explorer Zarubezhneft. However, the pace of work has been slow. Zarubezhneft abandoned a shallow-water exploration well in Block L, offshore Cayo Santa Maria, in June 2013 when its charter for the semi-submersible rig Songa Mercur expired. The planned drilling programme was hampered by a number of problems, including a malfunction with the blowout preventer's shear ram.

Local media have claimed the Songa Mercur could return to Cuba at the end of 2014, once it completes work for Eni offshore Vietnam. However, this appears doubtful. Songa Offshore has not confirmed any Cuban contracts for the unit. Besides this, the Songa Mercur is contracted to drill at least one well offshore Vietnam for Idemitsu Oil & Gas once the Eni charter expires. And Idemitsu has an option to extend this charter for the rig for a second well. Besides which, the Songa Mercur is rated for water up to 1,200 feet; if, as is hoped, Cuba has substantial offshore resources, these are likely to be found in deeper waters. The Scarabeo-9 - which is capable to deep-water drilling and does not breach sanctions - is operating offshore Angola, and these is no indication it is likely to return to Cuban waters anytime soon.

For now, Cuba's offshore oil ambitions are on hold. And given the difficulties Cuban operations bring with them, operators are looking at other, less complicated, plays instead - Brazil's pre-salt and Mexico's offshore, for example. It may well be that Cuba has missed its opportunity.