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Will Offshore Crude Oil Lubricate US–Cuba Relations?

Politics / Crude Oil Oct 28, 2011 - 01:26 PM GMT

By: Marin_Katusa


Best Financial Markets Analysis ArticleMarin Katusa, Casey Energy Opportunities writes: One of Spain's largest oil companies, Repsol, is gearing up to spud a deep, offshore well in Cuban waters, just 60 miles from the Florida Keys. A huge rig is still en route to the site from Singapore, and as it draws closer to its destination the zealous opposition from Floridian politicians who rely on the Cuban expatriate vote gets louder.

They argue that the well should not be allowed to proceed because it violates the embargo and on a deeper level, that any oil found would prop up the Cuban regime. The first claim is incorrect – it does not violate the embargo as there are no American companies involved; but the second claim deserves closer inspection. Indeed, oil experts say Cuba may have as much as 20 billion barrels of oil in its as-yet untapped portion of the Gulf of Mexico, though the estimate from the US Geological Survey is considerably more modest, pegging potential reserves at 5 billion barrels.

And yes, finding and developing oil resources in Cuban waters would provide a major boost to the country's struggling economy and would help to reduce its total dependence on oil-rich, leftist ally Venezuela. Fidel Castro's close ally Hugo Chavez currently dispatches 120,000 barrels of oil a day to Cuba on very favorable financing terms. However, the arrangement is heavily dependent on the friendship between octogenarian Castro and cancer-stricken Chavez… hardly a recipe for permanence. Cuba's oil contracts with Repsol and various other international partners probing its waters call for Cuba to get 60% of the oil, so a few good wells would make a marked difference for the Caribbean nation.

But the more pressing issue is proximity. If this well were to blow – like the Macondo well did – the two American companies that provide blowout-containment services to deepwater drillers in the Gulf of Mexico would not be allowed to come to its aid. Yes, it is possible to obtain exemptions from the embargo, but spill responses are based on a simple premise: Everything has to be on standby, ready to go. While US officials say there is a longstanding practice of providing licenses (embargo exemptions) to address environmental challenges in Cuban waters, and Americans have previously provided booms, skimmers, dispersants, pumps, and other equipment to respond to a spill, obtaining exemptions from international embargoes does not fit the ready-to-go picture.

The Repsol well will sit just 60 miles from the Marquesas Keys, an uninhabited group of islands near Key West in an area of strong, 4-6 mile-per-hour currents that come from the Gulf, shoot through the Florida Straits, and then churn northward up the Atlantic Coast. It would take only a few days for an oil spill to reach the Keys. In fact, Repsol's well will be twice as close to US shores as drillers in American waters are allowed to operate.

Any angst over the situation should not be directed toward Repsol, as the Spanish company has done nearly everything it can to placate American concerns. The company has offered US agencies an opportunity to inspect the drilling vessel and its equipment before it enters Cuban waters, and Repsol officials have stated publicly that in carrying out its Cuba work it will adhere to US regulations and the highest industry standards. The only thing Repsol has not done is concede to demands from some US Congresspeople to walk away from the project, which the politicians described in a letter to Repsol as a venture that "endangers the environment and enriches the Cuban tyranny."

However, Repsol is inclined to be accommodating because it is a publicly traded company. It is the only such company operating in non-American Gulf waters – the others operating or considering operating in Cuba's Gulf waters are primarily national oil companies. The United States' sphere of influence over these state-owned, national oil companies is far, far less; in many cases, American desires have no bearing on these entities… and any effort to exert influence over them immediately raises questions of sovereign immunity.

So, while Repsol's case is at the forefront for the moment, it seems that the US government needs to pay more attention to these national companies and attempt to formulate a way to engage in their exploration process. It's a complicated, sensitive arena, incorporating issues like transboundary compensation for oil pollution damages, the role of international oil pollution liability conventions, and recovering costs when one country provides most of the spill response and clean-up assets.

But there are quite a few national oil companies interested in Cuba. Repsol is working in a consortium with Norway's Statoil and a unit of India's ONGC. The partners plan to drill one or two wells; once they are complete, the rig will pass to Malaysia's state-owned oil company, Petronas, and then on to another ONGC unit, ONBC Videsh, both of which have also leased offshore Cuban blocks. Brazilian state oil company Petrobras is also developing plans to explore its Cuban blocks.

The multinational face of exploration in Cuba's waters is a good representation of the support Cuba has received from the rest of the world. Indeed, every year for the past 19 years, and soon for an almost-guaranteed twentieth time, the United Nations General Assembly has overwhelmingly adopted a resolution condemning the US embargo. Every year, something like 187 of 189 nations appeal to the United States to end the embargo, with (usually) only Israel voting with the US.

Almost no one else supports the embargo, and it is time to assess whether it is still in the US's best interests.

The embargo on Cuba represents the most comprehensive set of economic sanctions the US imposes on any nation in the world. The goal has always been to make the Cuban people suffer so much that they would tear down a government that was at one point a Cold-War security threat. The US has: imposed sharp limits on Cuba's access to American food, medicines, and visitors; banned almost all other business activity; used sanctions to stop third countries from trading with Cuba; blocked Cuba's access to high-technology goods; and even siphoned off some of its most promising thinkers by giving Cubans incentives to emigrate and persuading its highly trained doctors to defect.

None of this has, of course, caused an uprising, let alone broken the back of the Cuban system. It has been a generation since the Cold War ended, since the Soviet Union fell, and since the US intelligence community concluded that Cuba posed no threat to American security. Why does the embargo still stand? Well, for several reasons, two of the clearest being opposing communism in general and maintaining political support from the large Cuban expat community. However, another reason may be a lack of data. There is no formal mechanism within the US government to monitor the impact of the embargo on economic and social rights in Cuba; nor is there a process to assess the impacts of the embargo on the United States.

Without a way to gather this information, there are tough questions that remained unanswered. Do the sanctions backfire and take away from everyday Cubans the prospect for leading more prosperous and independent lives? Is the embargo damaging US standing in Latin America? Do the sanctions cost the US jobs for workers, markets, profits for businesses, or liberties for American travelers?

These questions have lingered for years, but with Fidel Castro having passed the reins over to his slightly more liberal younger brother Raul, changes are afoot in Cuba that make these questions more pressing. Adding all the new interest in Cuba's deepwater oil potential to the mix only increases the pressure.

Raul Castro took over the presidency in 2008, and his goal is to have 35% of the economy privatized by 2015. In April the Cuban Communist Party approved 311 decrees designed to meet that goal, though to date only a few have passed into law. Those that have been enacted are mild relative to the bigger picture of creating a private sector. Nevertheless, they represent dramatic change for Cubans, who have not been allowed to buy or sell vehicles or real estate for fifty years. Now they can.

For the first time since the early years of Castro's 1959 revolution, private individuals in retail services, agriculture, and construction are allowed to hire employees, even though there remains an article in the Cuban Constitution that says one's property and equipment "cannot be used to obtain earnings from the exploitation of the labor of others."

Over the next five years the regime intends to lay off up to a million public sector workers – no less than 10% of its workforce. The food rationing system, on which many Cubans rely daily, is also set to be phased out. The goals are clear – to reduce the state payroll, boost productivity (especially in the agricultural sector), and nourish the private sector – even if the timeline and plans for dealing with the fallout are far from clear.

Cuban authorities are careful to depict this restructuring as upgrading the revolution, not forsaking it. As one political analyst said, the Cuban government is trying to "let the economic genie out of the bottle while keeping the political genie in." It's a tough act. And the fact is that the regime can no longer afford to finance the socialist ideas upon which it was founded. The question is: Which way will it turn?

If reforms are too limited and private enterprise remains too restricted to flourish, nothing much really changes, aside from a few aspects of the current black market becoming legal. At the other end of the spectrum is rapid and rampant capitalism, with all of the debt and accumulation of wealth in the hands of a few that today are such clear downsides of free-market economies.

The Goldilocks answer is somewhere in between, positioning Cuba as a miniature China with a mixed economy, the state holding tight grip over some sectors but loosening control over others. The state will almost certainly retain its grip over mining, oil, sugar, health care, and tourism, cumulatively a large chunk of the country's economic strength.

Nevertheless, even this partial transition to capitalism offers some good economic opportunities to the US, if it were to open those avenues. The embargo may be aimed at restricting the Cuban regime so harshly that it fails, but it is also preventing the US from even encouraging, let alone participating in, a more modern Cuba. In terms of the Gulf, the embargo restricts US opportunities to provide exploration expertise to a developing nation and to share in the spoils of that work, which could be another, much-needed, convenient source of oil, while also hamstringing the US's ability to protect its own waters.

[The US can ill afford to turn its back on close sources of oil, especially with a triple threat to the current supply looming large. Read this free report to learn more about it… and the profit opportunities it offers.]

© 2011 Copyright Casey Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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