Why Cuba's Dreams of Major Oil Discoveries Might Come True

Recent estimates suggest that the island could move into the petroleum big leagues.

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HAVANA—There is a place tantalizingly close to American shores that—but for reasons of politics and foreign policy—could emerge as a welcome new source of oil for U.S. consumers. That surprising potential entrant onto the world energy stage is Cuba. The island nation, says Jorge Piñon, a leading expert on Cuba's energy at the University of Miami, "can certainly become a major producer of oil."

Cuba is one of the biggest wild cards in the Western Hemisphere's energy outlook. It is also the most politically sensitive. The nearly half-century-old U.S. embargo against the Communist country means that American energy companies and consumers cannot partake in Cuba's oil business. Even foreign firms using drilling technology of U.S. origin could face legal action. The Bush administration went so far as to disrupt a conference of Cuban and U.S. oil executives underway at a Mexico City hotel because the hotel was part of the U.S.-based Starwood chain. But given Cuba's proximity—and the relatively low cost of transporting its oil were the embargo removed—U.S. oil executives still pay attention.

A major oil find in Cuban waters could subvert the old logic behind the U.S. embargo of Cuba, a policy that endures in part because it imposes only minor economic costs while meeting the political demands of hard-line Cuban-Americans. "It would obliterate the domestic political excuse," says Julia Sweig, a Cuba expert at the Council on Foreign Relations in Washington. Adds Jonathan Benjamin-Alvarado, a Cuba energy watcher at the University of NebraskaOmaha, "It could be a game changer." In the Obama administration, Cuba's oil development is likely to be seen as an issue for the future. Says a senior State Department official, "If it's a game changer, it's not going to be a game changer for a while."

Other players. Other countries are not barred from investigating Cuban-controlled portions of the Gulf of Mexico, and they are doing just that. The future drilling byforeign oil companies as close as 45 miles from the shores of Florida injects new dimensions into the debate in the United States over the embargo. Some decry the lost opportunities of a policy that still aims to isolate Cuba while other countries do the opposite. Others worry about ecological risks of any oil spills, which ocean currents would tend to carry toward the Florida Keys and the state's east coast beaches.

Cuba now supplies about half of its own energy needs, say its officials, principally from an oil belt running along its northern coast. Operations include both traditional onshore wells and directional drilling rigs positioned close to the sea that tap oil under the shallow, coastal waters nearby. Many of the rigs are visible along the coastal highway between Havana and the beach resort of Varadero, itself a major oil-producing zone The oil is what specialists call heavy and sour, less suitable and more expensive to refine into gasoline because of its thickness and high sulfur content. All of Cuba's heavy crude goes into its oil-burning electricity plants.

The oil action that pulls in global interest lies farther off the coast, beneath the deep waters of the Gulf. How much lighter, lower-sulfur crude is out there remains unclear. The U.S. Geological Survey estimates that Cuba's offshore fields contain about 5 billion barrels of oil—comparable to Colombia or Ecuador—as well as 10 trillion cubic feet of natural gas. Last October, however, Cuba's state oil company unveiled a dramatically higher estimate: more than 20 billion barrels of recoverable crude—a level that, if proved correct, compares to that of the United States. Cuba, with just 11.2 million people, would enter the top 15 oil-reserve nations—courtesy of subsea oil geology like that off the Mexican and U.S. Gulf coasts. "Cuba has high potential from an exploratory point of view," says Rafael Tenreyro Pérez, exploration manager for the state oil company Cubapetroleo, or Cupet.

Experts say it would take three to five years to launch commercial oil extraction following a large discovery. Exploratory drilling is due to resume in the second quarter of this year 20 miles north of Havana by a consortium led by Spain's Repsol, along with India's Oil & Natural Gas Co. and Norway's StatoilHydro. Repsol struck oil in 2004, though not in commercial quantities. Other foreign firms will very likely do exploratory drilling in Cuban waters in 2010 and 2011, following on their seismic tests in recent years. Tenreyro calls the seismic testing "very encouraging."