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."
The lure of offshore oil has drawn not only the Spanish, Indians, and Norwegians but also firms from Malaysia, Vietnam, Venezuela, and Brazil. Says a senior diplomat from one country partnered with Havana, "The Cubans are very hopeful, and so are we." Tenreyro says those companies have contracted for 21 of the 59 offshore Cuban blocks, with 23 more under discussion, including with Russian and Chinese firms. Venezuela's state oil company has guided the renovation of one of Cuba's aging refineries and has agreed to expand the capacity of that facility and one more, as well as build a new refinery at the port of Mantanzas. As Cuba's key ally, Venezuela has also thrown it an energy lifeline, shipping about 90,000 barrels per day under easy terms that amounted to a roughly $3 billion subsidy last year. Russian firms have pledged to help Cupet find, extract, and refine oil. [Russian officials expect also to participate in the construction of sea terminals and in training Cubans in oil work.] And Petrobras, the Brazilian state oil giant known for skillful deep-water drilling, also is investing in Cuba. At an oil deal signing ceremony here last year, Cuban President Raúl Castro wondered aloud whether Petrobras would hit oil. "Don't worry, Raúl," replied Brazil's President Luiz Inácio Lula da Silva. "We're going to find it here, and we're going to transform it into energy."
Cuba's dealings with outside oil firms have not been all rosy, though. Canada's Sherritt International last year relinquished its offshore oil blocks to the Cuban government before it started drilling. A cash-strapped Cuba fell behind on payments to both Sherritt and another Canadian firm, Pebercan, by a total of more than $500 million. In January, Cuba told Pebercan it was terminating their agreement prematurely. And observers are waiting to see how much the global oil price drop hinders plans for expensive, deep-water drilling in Cuban waters.
Though Americans may not join in, the prospecting on the Cuban side of the Gulf of Mexico has already become controversial. Last year, for instance, it drew the attention of advocates for drilling on the U.S. continental shelf, including then Vice President Dick Cheney. He wrongly claimed that China was drilling for oil right now 60 miles off the coast of Florida. (Cheney's office later conceded the error.) And Florida Democratic Sen. Bill Nelson seized on the issue last year, urging that a 32-year-old boundary accord evenly dividing the sea between the Florida Keys and Cuba be scrapped. Nelson charged that a Cuban oil spill could "desecrate part of Florida's unique environment and devastate its $50 billion tourism-driven economy." Cuban officials vow that offshore drilling will meet "the highest standards available" for environmental protection.
In Cuba, meanwhile, expectations run high that oil finds will help lift the struggling state-run economy. "It will give Cuba the capabilities of developing its economy very quickly,"predicts Josefina Vidal Ferreiro, a senior Foreign Ministry official. "It will give us a lot of independence." The other implication is that hard-currency flows from oil exports will strengthen the ruling Communist Party to withstand whatever pressures remain from Washington.
Cuba's needs. Cuba's leaders have been acutely concerned about energy dependence on others. The collapse of the Soviet Union, once the island's patron and energy donor, crippled Cuba's economy and spawned an energy crisis in the early 1990s. Use of personal cars and farm tractors was curtailed; thousands of Chinese bicycles were imported for people to get around. Power outages persisted for years and made the sweltering Havana summers feel all the more unbearable, locals recall ruefully. Energy independence is a Cuban foreign policy goal. Daniel Erikson, an analyst at the Inter-American Dialogue in Washington and author of The Cuba Wars, says Cuba's pursuit of offshore oil reflects wariness about its past energy dependence on the Soviets and today's on Hugo Chávez's Venezuela. "They realize that nothing lasts forever," he says.
It remains unclear, though, whether future oil wealth will hasten—or retard—the cautious moves toward economic reform under Raúl Castro. Oil revenues could cushion a broader but painful shift away from state direction of all major economic activity to a more open, market-oriented system. By easing the hardships of life in Cuba, oil wealth could reduce pressures for political change. It could even reinforce the status quo. "Resource revenues would feed the political patronage machine," reasons Archibald Ritter, a Cuba expert at Carleton University in Ottawa.
Oil development "will change the position of Cuba with respect to the United States and the whole world," says Luís René Fernández, a University of Havana foreign policy specialist. But, he cautions, "it can be a complex problem to have easy money at the same time you're rebuilding the society." Long accustomed to privation, that is a problem most Cubans would like to have.