Don't expect a Cuban oil bonanza

Don't expect a Cuban oil bonanza
By MATT DAILY and ELANA SCHOR 12/17/14 3:14 PM EST Updated 12/17/14 5:01
PM EST

More U.S. travelers may soon start flocking to Cuba, but don't expect
oil executives to follow them.

Cuba is believed to hold sizable oil and gas resources off its northwest
coast, in the eastern Gulf of Mexico — raising speculation that the
Communist nation could become an attractive target for energy companies
if Wednesday's diplomatic thaw eventually leads to the end of the
five-decade-old U.S. trade embargo. But exploration by Brazilian,
Malaysian and Spanish companies in the past few years has failed to
produce any gushers — and the current worldwide glut of cheap oil is not
going to encourage many others to follow.

"There is not going to be a Cuban oil rush," said Pavel Molchanov, an
energy company analyst with Raymond James. "Just because U.S. companies
have been unable to drill in Cuba doesn't mean nobody has been able to
drill in Cuba."

Brazil's Petrobras, Malaysia's Petronas, Russia's Zarubezhneft and
Spain's Repsol have all looked for oil off the Cuban coast, but success
has so far eluded them. Repsol had the most public failure, spending
$150 million over a decade, but ultimately gave up its program in 2012
after drilling a dry hole.

(Also on POLITICO: Marco Rubio calls out pope on Cuba)

If the oil industry truly believed the Cuban coast had significant
amounts of oil, Molchanov said, it would have drawn in British, French
and other European companies that have world-class skill at finding
deep-water reservoirs.

"Cuba, I think, is inconsequential as the oil industry goes," he said.

Another hindrance is the steep slide that has cut oil prices virtually
in half in the past six months. (The world benchmark price was about $62
a barrel at midafternoon Wednesday.) That sell-off has oil companies
scrambling to cut their budgets and reduce spending to focus on their
core operations.

An oil rush in Cuba "would not have happened even if oil were at $100,
but it's certainly not going to happen at these price levels," Molchanov
added.

William Reilly, the former EPA chief who led the Obama administration's
commission on offshore drilling safety after the 2010 Gulf of Mexico oil
spill, agreed that the industry is not likely to hustle to Cuba. In
addition to the current low price of crude, Reilly said in an interview,
oil companies are kept busy enough by leased offshore properties "not in
Cuban waters."

Reilly found few takers after he gauged "what it will take to get
American oil companies interested in" Cuba in late 2011 and early 2012,
he added, when crude prices were nearing $100 a barrel.

(Also on POLITICO: Tom Vilsack: Cuba deal a boon for U.S. farmers)

Still, if the thaw in relations between Cuba and the United States
continues, and business opportunities open up, at least some U.S.
companies could be expected to take a look.

"Oil does not respect artificial man-made boundaries," said one
Houston-based energy analyst, who requested anonymity. "We know there is
oil and gas all across the Gulf … so from that perspective, I think
companies would be interested."

If Havana were to create a reliable legal framework, sort out any legacy
issues with companies that may have lost assets there decades ago and
create a lucrative royalty regime, U.S. companies might be interested.

"It's all about the potential return on investment," the analyst said.
"If they make it competitive, they could get eight to 10 companies going
in there."

Little solid data exist about Cuba's offshore reservoirs, but the U.S.
Energy Information Administration says the country had proven reserves
of 124 million barrels as of January 2013. Its modest production of
about 50,000 barrels per day is less than one-third of its consumption,
and the shortfall is mainly made up by Venezuelan imports.

Reilly said that even if U.S. drillers don't flock to Cuba, the
softening of diplomatic relations could pay off for oilfield services
companies such as Halliburton or Schlumberger that would have new
opportunities to partner with Cuban industry. And it could aid U.S.
interests by making it easier to ensure the safety of any offshore
drilling that takes place off the Cuban coast — or aid the response to a
spill.

The offshore safety commission Reilly co-chaired with former Florida
Democratic Sen. Bob Graham identified potential risks from a spill
offshore of Cuba that could migrate into U.S. waters, including the
danger that trade restrictions would leave Cuba unable to obtain
important equipment.

On the other hand, he said the Cubans are showing an interest in what
the U.S. has learned about offshore safety. When Reilly visited Cuba to
discuss the panel's findings earlier this year, he said he was
"impressed and a little surprised" to learn that its officials had been
receiving "daily reports" from the U.S. on the possible migration of
spilled oil in the Gulf.

"We didn't know what kind of reception to expect," Reilly recalled. "It
turned out the Cubans had taken our commission report apart. Up on a
blackboard they had findings, recommendations, what they had done to
respond."

The new Cuban policy that the White House announced Wednesday will
include a reestablishing of diplomatic relations, the opening of a U.S.
embassy in Havana and a loosening of restrictions on travel and some
types of financial transactions. The steps don't appear to include
measures that would immediately allow major oil exploration deals by
U.S. companies, but the administration called for a discussion with the
Cuban and Mexican governments of "our unresolved maritime boundary in
the Gulf of Mexico."

"Previous agreements between the United States and Cuba delimit the
maritime space between the two countries within 200 nautical miles from
shore," the White House said in a release. "The United States, Cuba and
Mexico have extended continental shelf in an area within the Gulf of
Mexico where the three countries have not yet delimited any boundaries."

Source: Don't expect a Cuban oil bonanza - Matt Daily and Elana Schor -
POLITICO - http://www.politico.com/story/2014/12/cuba-oil-113647.html