Cuban offshore oil
Dan Reed

Diplomatic Normalization Won’t Lead to a Cuban Offshore Oil Boom

Airline executives, resort developers, cigar and rum importers and even bankers may be excited about the new business opportunities created by President Obama’s controversial plans to normalize relations with communist Cuba.

But oil producers? Not so much.

There’s little doubt that the political/moral/geo-political debate about the propriety of Obama’s warming of relations with Cuba will continue deep into 2015. This is especially true because Republicans will be in solid control of both the House and Senate and eager to battle the Democratic President on multiple fronts. But there’s also little doubt that several big sectors of U.S. business will be gearing up to capitalize on the opening of the 11 million person market on a beautiful tropical island only 90 miles south of Florida. Oil producers, however, aren’t likely to be among them for five key reasons.

1. It’s far from clear that there’s a lot of oil beneath the coastal waters surrounding Cuba. Both Repsol, based in Madrid, Spain, and Petronas, owned by the Malaysian government, recently bought into 2008 research, hyped by the Cuban government, suggesting there’s more oil off of Cuba’s north coast than traditionally had been thought to be the case.

The traditional view is that there’s about 124 million barrels of proven crude reserves off of Cuba, but in 2004, the U.S. Geological Survey suggested there may be as much as 1.1 billion barrels of retrievable crude in Cuban waters. Research from 2008 suggested that using new drilling techniques could obtain as much as 20 billion barrels. However, in 2012 and 2013, Repsol, Petronas and their various partners, including Russia’s Gazprom, gave up and pulled out of the market after drilling multiple dry holes in the Cuban seabed.

2. Drilling off Cuba promises to be very costly. There’s little in the way of oil industry infrastructure in Cuba, so all-new support facilities and services would have to be built and paid for. Few of those needs could be met using local contractors and material suppliers, so nearly all of the equipment and materials required would have to be shipped in. There’s also not much of a trained workforce in Cuba, so key drilling professionals would have to be relocated, at considerable expense, to launch and manage the projects and, over time, train locals.

3. Getting critical materials and equipment to Cuba promises to be unusually expensive, even compared with provisioning such supplies to other underdeveloped markets. That’s because the U.S. embargo on exporting most types of goods to Cuba remains in place. Though Obama’s plan certainly envisions commerce between the U.S. and Cuba, the embargo was put into place by Congress, and only Congress can remove it. In the immediate aftermath of the President’s announcement of his Cuba policy change, there seems to be little chance that a Republican-controlled Congress would lift that embargo any time soon.

4. Drilling off of Cuba represents an enormous environmental, legal and financial risk for production companies. Thanks to the underdeveloped nature of Cuba’s oil industry infrastructure and the U.S. embargo, there’s no way to get state-of-the-art oil spill prevention and clean-up technology (all of which are U.S. made) into Cuba. It’s far from clear how off-shore projects could operate with high enough levels of environmental protection to meet global standards. Nor is it clear that they could obtain adequate – or even any – insurance against potentially enormous environmental liabilities, given the fragile nature of the Gulf of Mexico’s ecosystem and the proximity of the Florida Keys and the Florida peninsula. Remember, the currents off of Cuba tend to flow north, where they merge into the Gulf Stream, the massive northeasterly current that strongly influences weather, agriculture and economics in North America and Europe.

5. Finally, there’s a weak business case for investing in the Cuban offshore market – and that’s before factoring in the dramatic plunge in crude prices over the past few months. The remarkable development of unconventional drilling in the United States, coupled with weakening economies in Asia and other parts of the world, had already begun dramatically changing the global supply-demand equation for crude before oil prices began their dramatic drop this fall.

Thus, even if projections of larger Cuban oil reserves are eventually proven correct, there’s little economic incentive to go after it in the current market conditions. Throw on top of that the expensive profit sharing deals that the notoriously kleptocratic Cuban government is likely to demand, and the case for investing in Cuba’s offshore market becomes even more marginal.

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