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Cuba's known for cigars now, but discovery of oil could change that

Updated 2/22/2007 9:03 AM ET

One day soon ? possibly before the end of this year ? an oil rig will maneuver into position in waters less than 100 miles from the coast of Florida. A drill will plunge into the inky sea and begin chewing its way into the ocean floor, hunting for oil.

But the drilling rig won't belong to an American company, and any petroleum it discovers won't do a thing to curb the USA's addiction to foreign oil. Instead, any new sub-sea gusher will belong to Cuba.

That's right: Cuba. The island nation long has been known for its aromatic cigars and sweet rums. But after years of limited oil production on lands around Havana and in neighboring Matanzas province, Cuba is poised for a significant expansion of its oil program into the waters that separate it from the United States. And thanks to U.S. law, Cuba's drilling partners will be working closer to Florida beaches than any American company ever could.

"Our studies ? have shown there is a great potential, especially offshore," says Dagoberto Rodriguez, the senior Cuban diplomat in the USA. "Basically, we know that there is oil. The problem is just where it is."

The U.S. Geological Survey (USGS) agrees. Two years ago, after reviewing available data on the subterranean structures in the region, the agency estimated Cuba can lay claim to 4.6 billion barrels of oil and 9.8 trillion cubic feet of natural gas.

With oil prices hovering around $60 a barrel and global supplies persistently tight, any new supply source could benefit the USA, the world's top oil consumer. Likewise, Cuba, which relies on Venezuela for more than half of its daily oil consumption, craves self-sufficiency. "In economic terms, it could be a win-win," says Daniel Erikson, an analyst at the Inter-American Dialogue, a Washington, D.C., think tank.

There's just one problem: politics. Since 1962, the U.S. has maintained an economic embargo of Cuba, aimed at toppling the communist government of Fidel Castro. The ailing dictator, who has outlasted nine U.S. presidents, last summer handed power temporarily to his brother, Raul, while he recovers from abdominal surgery. Companies such as ExxonMobil (XOM), Chevron (CVX) and Halliburton (HAL), however, remain barred from the Cuban market, which a 2001 Rice University study said could be worth up to $3 billion annually.

The embargo also will increase the time and cost of the Cuban program by denying Havana access to the closest source of oil industry technology, spare parts and expertise. Likewise, U.S.-owned refineries in Aruba and St. Croix are off-limits for any of the heavy, sulfur-rich Cuban crude.

"The U.S. (embargo) presents them with significant barriers and obstacles," says Jonathan Benjamin-Alvarado, a political scientist at the University of Nebraska who studies Cuban energy issues.

Replacing the Soviets

Cuba is modernizing a dilapidated Soviet-era refinery at Cienfuegos with help from Venezuela's state-owned oil company, PDVSA, and refurbishing three other facilities, Rodriguez said. Within 18 months, Cuba will be able to satisfy all of its refining demand, he said. Independent analysts are less optimistic.

The Cuban oil fields were formed more than 50 million years ago in a slow-motion collision between Earth's tectonic plates, which entombed pulverized rocks, animals and plants. Over subsequent millennia, the resulting stew cooked into buried petroleum deposits, says Christopher Shenk, a geologist at the USGS in Denver.

Before Castro's 1959 revolution, U.S. oil companies such as Esso and Amoco carried out preliminary explorations. The following year, Cuba nationalized refineries belonging to Exxon, Texaco and Shell ( (RDSA,RDSB), and U.S. industry hasn't been back since.

In the modern era, Cuba's first significant oil find came in 1971 when Soviet engineers discovered the Varadero field, east of Havana. After the Soviet Union collapsed, Cuba opened its oil program to foreign investment in 1993. Today, companies from Spain, Norway, India, Malaysia and China are involved, either drilling wells onshore or using horizontal drilling to reach reservoirs in shallow coastal waters.

Canada's Sherritt is the most active foreign company with nine fields operating onshore and five exploration or appraisal blocs being drilled, says Michael Minnes, a company spokesman. Daily output from the company's wells averages a modest 30,000 barrels a day, down from about 43,000 in 2004.

"It's like any other foreign jurisdiction or developing nation. There are challenges, and there are opportunities," Minnes said. "We see Cuba as a great environment to do business in."

So far, only one offshore well has been drilled, in July 2004 by Spanish oil company Repsol. The company said it found oil at the site 95 miles southwest of Key West, though not in commercially viable deposits. Since then, the Spanish company has teamed with Norway's Norsk Hydro, one of a select number of global oil companies with expertise in deepwater exploration, according to Jorge Pinon, the former president of Amoco's Latin American operations.

Offshore drilling this year

In an interview this week, Rodriguez, the chief of the Cuban interests section in Washington, said widespread offshore drilling could start by the end of this year. Cuban exploration, like drilling ventures elsewhere, has been slowed by a worldwide shortage of drilling rigs that has increased daily lease rates by more than 60% since fall 2005.

Offshore wells aren't cheap: Those envisioned in Cuban waters will cost $40 million to $50 million, says Pinon, the former oil executive now affiliated with the University of Miami's Institute for Cuban and Cuban-American Studies. "This is a very high-risk, high-reward area," R.S. Butola, managing director of India's ONGC, said on the company's website.

Since 1981, the U.S. has observed a moratorium on coastal drilling, except for a portion of the Gulf of Mexico and limited areas off of Alaska. The drilling ban was enacted after a series of high-profile oil industry environmental disasters. Perhaps the most notorious: the 1969 Santa Barbara spill that released 3 million gallons of oil in waters off of California, coating 35 miles of coastline with oil up to 6 inches thick.

Last year, the House voted to relax the prohibition on offshore drilling, but the measure died in the Senate. There may be close to 95 billion barrels of oil affected by the ban, according to the Interior Department.

The House-passed bill still would have allowed individual states to ban drilling up to 100 miles from their shores. But Cuba's wells could eventually be as close to the USA as 60 miles from Key West. The two countries agreed in 1977 to a maritime boundary that evenly divides the waters between them.

Capitol Hill takes notice

The prospect of foreign oil companies drilling Cuban wells so close to American shores has unnerved some on Capitol Hill. Sen. Bill Nelson, D-Fla., last year introduced legislation to deny U.S. visas to executives employed by oil companies involved in the Cuban program. Dan McLaughlin, a spokesman for Nelson, says the senator plans to reintroduce the measure this year. Nelson also wants the United States to renegotiate the 1977 treaty that defines the U.S.-Cuban maritime boundary, a proposal Cuba's Rodriguez called "silly."

Others see the prospect of Cuban offshore oil rigs as a reason to relax the U.S. embargo. Rep. Jeff Flake, R-Ariz., co-authored legislation last year that would have permitted U.S. firms to sell their services to companies drilling for Cuba or to drill themselves.

"U.S. companies should be able to bid on these oil leases. ? If there are going to be oil rigs within 50 miles of Florida, ? I'd rather see U.S. oil rigs than Chinese oil rigs, given technological and safety considerations," Flake said in a telephone interview.

For now, Big Oil is staying out of the political fray. But, at a time when unexplored terrain is rapidly shrinking, the oil industry would eagerly jump into Cuban waters if given the chance.

One year ago, a U.S.-Cuba Energy Summit attracted representatives from Exxon and a handful of smaller oil service companies to three days of meetings in Mexico City. Attendees viewed PowerPoint presentations from Cuban government ministries including state-owned oil company Cupet that invited American companies to help exploit "several giant oil and gas fields."

Events since July, when Castro's illness forced him to step aside, have rekindled industry interest in Cuba's future. "U.S. oil companies would love to do business there as soon as this thing opens up," says Ron Harper, an analyst at IHS Energy in Houston. "They're looking at it quietly. They'd be short-sighted not to."

Earlier this week, Rodriguez reiterated that Cuba remains open to the U.S. industry's involvement and may hold a second summit this year, either in Mexico or Canada. But he said time may be running out for the U.S. to change course. "In my opinion, if the American companies are not able to get something, some changes before no more than one year, after that it will be too late," he said.

For now, any U.S. involvement remains only hypothetical. Houston oilman Antonio Szabo, president of Stone Bond Technologies, says U.S. companies likely would require greater transparency, a commitment to the rule of law and market economics in Cuba before investing significant money there.

Some in the oil industry also have long memories when it comes to Cuba. At the 1997 World Petroleum Congress in Beijing, a Cuban official approached Lee Raymond, then Exxon's chief executive, and asked in a jocular tone when the U.S. oil giant might return to Cuba. "When you give us back our (expletive) refinery," Raymond growled.

Cuban officials note they already have willing partners from Canada, Spain, Norway, Brazil, India, Malaysia, Venezuela and China. Rodriguez made clear that the United States has no veto over Cuba's oil plans.

"Everyone knows how advanced is American technology," the Cuban diplomat said. "But we are going to continue with our programs ? with American companies or without American companies."