The Miami Herald
June 28, 2004

Repsol-YPF Helps Cuba in Search for Oil

Repsol-YPF has begun drilling for oil in waters 18 miles off Cuba's northwestern coast in an effort to reduce Havana's dependence on imports.

Although the decades-old U.S. trade embargo precludes the involvement of U.S. oil companies in the Cuban industry, oil officials in Cuba say they would be open to the possibility.

"We are open to U.S. oil companies interested in exploration, production and services," Juan Fleites, vice president of the state-run Cubapetroleo told U.S. executives at a recent conference in Havana.

"There is no reason U.S. companies shouldn't take advantage and compete so close to home," he said.

One of the main reasons for Cuba's welcoming attitude is that the island nation doesn't have the capacity to explore and develop a 43,000-square-mile area known as the Exclusive Economic Zone in the Gulf of Mexico, so it is eager for foreign partners with capital and know-how.

Fleites said 16 foreign oil companies, mostly from Canada, France and Spain, have already signed contracts to prospect and drill to a depth of between 1,000 and 3,000 meters.

"We have leased 10 of our 59 blocks in the Gulf of Mexico, but we expect many more companies to sign if Repsol finds oil," Fleites said.

And that is a big if.

Experts say Cuba must discover a deposit of light crude large enough to make it commercially feasible to spend more than $1 billion developing any deep-water field in the Gulf.

Some Spanish oil industry executives have been quoted as saying the odds of Repsol-YPF finding such deposits are only one in 25. A Repsol official quoted by the Spanish news agency EFE put the odds at one in four.

And a Repsol-YPF engineer working to sink the well told The Financial Times, "The chances that we will find oil are better than winning the lottery or a casino jackpot. More like getting some of the numbers right or coming out ahead at the blackjack table on consecutive nights."

Some observers say if Cuba does hit the jackpot offshore, there could be increased pressure to lift the U.S. embargo.

"It is difficult to imagine how the U.S. oil industry could stay on the sidelines for long if there is a commercial find," said John Kavulich, president of the U.S.-Cuba Trade and Economic Council, which monitors commercial relations between the two countries. "There will be pressure on the government from U.S. oil companies, both upstream and downstream," he told The Financial Times.

"We've been in contact with various American oil companies," Fleites said, but he declined to elaborate.

Cuba currently produces about 3.5 million tons of oil equivalent per year, or just more than 40 percent of the island's annual consumption of 8.5 million tons, said Jorge Perez-Lopez, a U.S. economist who specializes in Cuba issues. The rest is imported, almost entirely from Venezuela.

Repsol-YPF, which has six concession blocks along Cuba's northwestern coast from Pinar del Rio to Matanzas, has leased the Norwegian-owned Eirik Raude rig at $195,000 a day to drill in water more than a mile deep. It is the world's largest semi-submersible rig, a floating platform designed for very deep water.

The company has reported it would spend more than $40 million on the project but believes its investment could yield up to 1.6 billion barrels of oil below the seabed.

"If they find oil, we will share the production as well as the profits," Fleites said. "This is a risk you take whenever there is confidence in the country. Companies know we will live up to our commitments."

Fleites said foreign investment in Cuba's oil sector is around $1.2 billion. Canada's Sherritt International signed rights to four exploration blocks last year. In 2001, Sherritt and Brazil's government-owned Petrobras sank $16 million into a well that proved dry. But Petrobras says it hasn't given up on Cuba.

Foreign companies led by Sherritt and another Canadian company, Pebercan, have joint ventures and production deals with Cubapetroleo that account for 60 percent of the island's oil and gas output.

"Thanks to the participation of foreign companies, we have had the possibility of introducing new techniques such as horizontal drilling," said Fleites. "This technique is quite new, and we haven't used it before. We also have multitube wells and have introduced new pumping systems that are much more modern than what we had before."

Madrid-based Repsol-YPF is tight-lipped about its Cuba venture, especially when it comes to U.S.-based reporters.

Valentin Alvarez, general director of Repsol's Caribbean business unit in Venezuela, declined comment and referred media inquiries to Jose Conesa Martinez, general manager of Repsol-YPF Cuba S.A.

In an e-mail, Conesa's secretary said her boss wasn't available for an interview "given the situation existing in Cuba-U.S. relations. . ., which could prejudice the work our company is doing in Cuba."

Fleites said Cuba has more than 310 miles of pipelines, and that the Matanzas oil terminal is now capable of receiving 150,000-ton supertankers.

In 1999, he added, about half of Cuba's electricity was generated by domestically produced oil and gas; today it's nearly 100 percent.

"For this, we had to upgrade our power plants to burn domestic crude. These investments took place over four years," he said. "At present... all our electricity is based on oil or gas."

Two ventures are currently underway for the sale of LPG: one in Havana, with Argentina's Puma Gas, and the other in the eastern city of Santiago de Cuba with Total of France. Combined investment in the two projects is around $50 million.

"Most of our people still use kerosene, which is not the best domestic fuel. Little by little, we are replacing kerosene with LPG," Fleites said.