Cuba oil plans could put hole in U.S. embargo

Thu Jun 12, 2008 8:05am EDT

By Jeff Franks

HAVANA (Reuters) - Sometime next year, Cuba plans to begin drilling a major oil field off its northern coast that might do what little else has done -- bring change to U.S-Cuba relations. In a rare confluence of circumstances, oil could grease the wheels for the two bitter enemies to come together in the middle of the Florida Straits out of mutual need, experts say. Getting there would require a sea change in U.S. policy -- namely putting a major hole in the U.S. trade embargo imposed against Cuba in 1962 to topple Fidel Castro's communist government.

If the embargo stays as is, a nearby source of oil will be off-limits to the energy-thirsty United States and the American oil industry will miss out on billions of dollars of business. Embargo opponents rule out change until President George W. Bush, who has toughened the embargo, leaves office next year. Even then they can expect a fight from influential Cuban-American leaders, who argue that helping Cuba produce oil will aid the Cuban government and undermine the 46-year-old embargo's reason for being.

"We think what really needs to happen in Cuba is for that system to change," U.S. Commerce Secretary Carlos Gutierrez told Reuters. But embargo foes say the combination of economics, energy needs and environmental concerns, as well as new leaders in the two countries make easing the embargo possible. "The pro-embargo status quo is really threatened right now," said Sarah Stephens, director of the Center for Democracy in the Americas. "The sands are running out of the clock on the policy and I think that has the pro-embargo folks worried."

DRILLING

The U.S. Geological Survey has estimated the Cuban field holds at least 5 billion barrels of recoverable oil and 10 trillion cubic feet of natural gas. In a few years, Cuba could be producing 525,000 barrels of oil per day, enough to make it energy independent and perhaps even an oil exporter, said former oil company executive Jorge Pinon, now a researcher at the University of Miami. Cuba consumes 145,000 barrels daily, of which 92,000 come from Venezuela. The government has sold oil concessions to seven companies and has said a consortium of Spanish, Indian and Norwegian companies will drill the first production well in the first half of 2009.

Drilling was supposed to begin this year and has been put off twice due to undisclosed factors that U.S. experts say likely include difficulty getting a rig because global drilling activity is high, the need for more downstream facilities to handle the oil and possible effects of the U.S. embargo.

The Cuban field lies as much as 6 miles below the sea surface, depths at which U.S. production technology is superior, said Cuba oil expert Jonathan Benjamin-Alvarado at the University of Nebraska-Omaha. "Cuba and none of the present partners have that (depth) capability without accessing American technology, and therein lies the rub," he said. "U.S. export controls forbid them to transfer that technology to Cuba."

Cuba, looking past the United States, has been in talks with Brazil's Petrobras, which has much deepwater expertise, about getting involved. The embargo has withstood repeated legislative attempts to water it down, including unsuccessful bills in the U.S. Congress in 2006 to exempt oil companies. But embargo foe Kirby Jones, a consultant on Cuba business and founder of the U.S.-Cuba Trade Association in Washington, said a big Cuba oil find changes the political equation. "This is the first time that maintaining the embargo actually costs the United States something," he said. "And we need oil. We need it from wherever we can get it, and in this case it's 50 miles off our coast," he said.

CLOSE TO U.S.

An odd fact is that Cuba will be drilling 50 miles from the Florida Keys, or more than twice as close as U.S. companies can get due to regulations protecting Florida's coast. U.S. Rep. Jeff Flake, an Arizona Republican who has introduced bills to lift the embargo for oil companies, said the environmental argument may be key because there is much concern in Florida about potential oil spills. "If there are going to be oil rigs off of Florida, I think most Americans would be more comfortable if they were U.S. oil rigs, rather than Chinese for example," Flake said.

He said U.S. companies are definitely interested in Cuba, but have not publicly pushed for embargo change. In interviews, industry executives emphasized they did not oppose the embargo because it is U.S. national policy and were pushing instead for access to U.S. areas that are currently prohibited, such as offshore western Florida.

"When U.S. companies are not even allowed to drill in the eastern half of the Gulf of Mexico, we have a long way to go before we can think about international waters off the coast of Cuba," said Larry Nichols, chairman of Houston-based Devon Energy. Cuba has said it would welcome U.S. companies to their offshore field and showed its interest by sending Cubapetroleo representatives to a 2006 conference in Mexico City with companies including oil giant Exxon Mobil and top U.S. refiner Valero Corp.

The conference became the center of international controversy when the Sheraton Hotel kicked out the Cuban representatives after the Bush administration told the U.S.-based hotel chain it was violating the embargo by having paying Cuban guests. The incident may have convinced the oil industry to lie low on Cuban oil. "Nobody wants to rankle the Bush administration and get them in a tizzy about what may occur," said Benjamin-Alvarado.

The political landscape for the embargo already has changed with Raul Castro taking over in February as Cuba's president, succeeding his ailing brother, Fidel, Flake said. Raul Castro has made small openings in Cuba's state-run economy, but perhaps more importantly he is not the anti-American firebrand and lightning rod his brother was for 49 years.

(Reporting by Jeff Franks; Additional reporting by Bruce Nichols in Houston; Editing by Eddie Evans)