Cuban Oil
Prospects Revisited
The poor results of these four wells, in which the companies invested an
estimated $250 million, if not more, strongly suggest that there will be a long
intermission in the search for oil in offshore Cuba.
By Gustavo Coronel | June 18, 2013
On January 18, 2011, I published on
this website a report about Cuban oil prospects entitled, “Petroleum in Cuba:
Current Situation and Mid-term Outlook,”. Using the evaluation of Cuban oil
prospects made by the U.S. Geological Survey, I outlined a likely scenario for
Cuba’s offshore search for oil. This scenario pointed to the finding of some
1.1-1.2 billion barrels of recoverable oil from Cuban territorial waters. The
process of recovering such an amount of oil, I added, would be slow and take up
to three decades. The first exploratory phase would probably require 5-8 years.
Several exploratory wells, perhaps as many as ten, would have to be drilled
before any commercial production was established. Each one of these exploratory
wells drilled at a depth of 2000 feet and a total depth below surface of some
21,000 feet, would probably cost anywhere between $50-100 million. The Chinese-built
rig to be contracted for this initial phase, the Scarabeo 9, would be rented at
the cost of some $500,000 per day. Production levels of up to some 120,000
barrels per day could be eventually established by year 15, which could serve to
make Cuba essentially self-sufficient for 20 to 30 years.
During the last 3 years, four exploratory wells were drilled by different oil
companies, including Spain’s Repsol, the Malaysian oil company PETRONAS,
Petroleos de Venezuela and the Russian company Zarubezhneft. The four wells have
been unsuccessful, although we have little or no details of the results.
Whatever oil was found proved to be of low quality and the rocks found by the
drill had poor reservoir characteristics. This scarcity of information is not
uncommon when dealing with exploratory wells, since the initial data obtained
from an area has to be analyzed carefully in order to see what the real
prospects of that area might be and to decide if further efforts are justified.
Oil experts in the region such as a former head of Amoco Latin America, Jorge
Piñon, currently at the University of Texas, correctly pointed out that this
first effort is just the initial chapter of a story that will likely continue.
However, the initial results do not bode well for the Cuban oil industry.
International oil companies will not be eager to spend great sums of money to
develop oil resources that could only be significant enough to satisfy the Cuban
domestic market. The results obtained by the four wells drilled definitely tend
to lower the expectations of major findings.
SPAIN’S REPSOL
Repsol’s president, Antonio Brufau, has recently announced that they will
probably stop prospecting for oil in Cuban territory after its unsuccessful,
costly, dry well. They had drilled another dry hole in the area in 2010.
MALAYSIA’S PETRONAS
Petronas drilled its exploratory well in association with Russia’s Gazprom. The
terse information given out about the results of this well came from the
official Cuban newspaper Granma, which read, “Analysis of the findings revealed
an “active petroleum system that could extend to other parts of the four blocks
contracted by PC Gulf [Petronas] and Gazpromneft, and even beyond their limits …
Nevertheless, at that point the rocks are very compact and do not have the
capacity to deliver significant quantities of petroleum and gas… so it cannot be
qualified as a commercial discovery.”" This confirms the rocks lacked sufficient
porosity and permeability to allow oil production.
PETROLEOS DE VENEZUELA
The third unsuccessful well was drilled by the Venezuelan state-owned company,
Petroleos de Venezuela. Again, scant information was provided by Granma, as
follows: “The technical information obtained is very valuable and will allow
PDVSA to continue its efforts later on.” It is believed that the oil found was
of poor quality and reservoir rocks had poor permeability. The original budget
for this well was $40 million but its final cost was probably much higher. This
was the last well in which the Chinese-built drilling rig Scarabeo 9
participated. The rig, owned by the Italian company Saipem SpA, has now moved to
Western Africa.
ZARUBEZHNEFT
The fourth dry well offshore Cuba was drilled by this Russian company using a
smaller rig, the Songa Mercur, owned by Songa Offshore. The well was drilled to
a depth of some 21,000 feet and was interrupted after five months or so, due to
“geological problems” of an unspecified nature. The rig has since been moved
outside of Cuban territorial waters.
Will oil exploration continue in Cuban waters?
The poor results of these four wells, in which the companies invested an
estimated $250 million, if not more, strongly suggest that there will be a long
intermission in the search for offshore oil in Cuba. Repsol has practically
stated that it will not return. Politics could have played a role in this
decision, since Cuba endorsed the action of the Argentinian government to
expropriate Repsol’s shares in YPF, the oil company Repsol owned jointly with
the government.
The oil company from Malaysia, PETRONAS, is managed with a well-developed
commercial sense and has probably decided not to return to Cuba, in order to
concentrate efforts in other, more promising areas worldwide. In line with this
assumption, the company has recently entered into an exploration agreement with
the state oil company of Suriname.
Petroleos de Venezuela will have strong political incentives to continue Cuban
offshore exploration, due to the close alliance existing between the two regimes.
However, the main obstacle faced by PDVSA is lack of money. Due to poor
management practices and political pressure from the central government, the
Venezuelan company has embarked on an almost suicidal policy of borrowing money
from China, Russia and some companies such as ChevronTexaco and Schlumberger.
Currently, its direct debt is estimated at some $60 billion, dangerously close
to the total value of its assets. Other, indirect, financial commitments such as
the large $30 billion loan the central government received from China, to be
paid back in oil, probably place its total debt well above its assets.
The Russian companies could return to Cuba but probably not in the short term,
due to lack of suitable equipment for deepwater drilling.
Political implications of this failure
The implications of these disappointing offshore oil exploration results for
Cuba’s political future are substantial. First, they indicate that energy self-sufficiency
for Cuba is not around the corner, making the country more dependent than ever
on the subsidized oil supply from Venezuela. A change in government in Venezuela
would be likely to immediately interrupt supply, the continuation of which is
highly damaging to Venezuela and is considered by much of the opposition to be
an act of treason. This sword of Damocles hanging over the Cuban regime’s head
is combined with the increasingly fragile hold on power by the Castro brothers.
As they get closer to exiting the political scene without being able to obtain
energy security for the island, there is little doubt future Cuban governments
will have to come to terms with energy reality by either a new Venezuelan
government that will not be as generous with its oil as the previous regime, or
with the U.S., the other logical future energy supplier of energy to the island.
Any new terms with these two countries will not be nearly as favorable to Cuba
as the prodigality shown by the Venezuelan Chavez- Maduro regime over the last
15 years.
It would seem, therefore, that the failure of their first stage search for Cuban
offshore oil will become, yet, another factor in marking the coming end of the
Castro regime.
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Gustavo Coronel, who served on the board of directors of Petróleos de Venezuela
(PdVSA), has had a long and distinguished career in the international petroleum
industry, including in the USA, Europe, Venezuela and Indonesia. He is an author,
public policy expert and contributor to SFPPR News & Analysis.