Apr-2017

Cuba’s oil: due for development

Cuba’s ambitions for energy self-sufficiency require major investment in the nation’s oil reserves and refining industry

AMAURY PÉREZ SÁNCHEZ
University of Camagüey

Article Summary

Cuba’s internal power demand is expected to rise in the coming years in response to growth in private business, expansion of foreign business investment in the country, and progress and expansion in important power consuming industries such as biotechnology, tourism and construction. Today, Cuba generates about 95% of its internal electricity from hydrocarbons and their byproducts.

Unión Cuba Petróleo (CUPET) is Cuba’s largest oil company. It is owned and operated by the Cuban government and is involved in the extraction of petroleum deposits, refining and distribution of petroleum products (see Figure 1).

For the period to 2030, CUPET has conceived several ambitious plans and projects in order to enhance its profitability and productivity, as well as to develop its oil refining industry. Among these can be mentioned:
• Expand the refining capacity of the oil refinery located in Cienfuegos province to 150000 b/d
• Modernise and update equipment and accessories operating in the refineries, mostly combustion systems, boilers, vessels, tanks, heat exchangers, wastewater treatment structures, control valves and automation systems
• Produce dielectric oils for 33kV electrical transformers at Sergio Soto refinery
• Install sweetening units for Jet A-1 (Merox) fuel in Ñico López refinery
• Introduce liquefied petroleum gas (LPG) into the national power mix
• Elevate the quality of national fuels to international standards
• Increase storage capacity nationwide, both for crude oil and petroleum products
• Reduce/optimise the costs of logistics operations
• Intensify the exploitation of oil deposits located inland and offshore
• Expand the production level of existing oil deposits by means of enhanced oil recovery (EOR) technologies.

Private investment
To achieve sustainability in energy in the near future, the Cuban government has incorporated new perspectives and opportunities into its oil industry offered by recently approved foreign investment policies, in order to increase efficiency, reduce costs and boost production capacity. Accordingly, the main objectives of joint ventures and associations with foreign firms and companies are threefold: searching for unconventional oil; offshore exploration; and EOR. There are other collateral activities requiring direct capital investment such as technical services for oil extraction operations, the supply of modern, oil related technologies, equipment and resources, as well as provision of financial, engineering and management services.

The first business contract related to oil extraction operations between the Cuban government and a foreign firm was signed in 1990, in order to exploit the oil wells located at Block III south of Varadero beach. In the last three years, around 42 shared production agreements (SPA) have been agreed between CUPET and foreign firms, in accordance with the first Cuban Foreign Investment Law, approved in 1995, and 2014 legislation whose terms ease business transactions and increase the scope of the proposed investment objectives.

In Cuba, the National Office of Mineral Resources (NOMR) is the government institution in charge of certifying and approving potential investment projects and investors in the oil industry. Each business contract signed is protected under Cuban government decree and could have a legal validity period from 25 to 35 years. Taxes are not paid for the first eight years, be they municipal, regional, or those on the repatriation of earnings or products. Bonuses are not paid upon signing, and taxes are levied by the National Tax Administration only on net annual earnings. Nowadays, foreign companies interested in investing in the Cuban oil industry prefer to participate mostly in EOR operations since the exploratory risk is smaller and the zones where the crude oil exists are well identified and characterised.

The economic value of Cuban crude oil in the international market is about 60% of the reference crudes WTI and Brent. It is estimated that the production cost of a barrel of oil from offshore platforms in Cuba is about $20-35, while the production cost of oil produced from inland oil fields is $13-15/bbl.

Table 1 outlines foreign investment opportunities in the Cuban oil industry.

If oil is found, it is estimated that companies would have to invest in developing production capacity for at least three to five years before production could begin. However, production could be delayed due to, mostly, availability of offshore oil field development services. Once oil production begins, it is expected to grow slowly.

The main non-Cuban operator in Cuba is Sherritt International, a Toronto mining company which has been active in Cuba for more than 20 years. This firm operates Puerto Escondido, Yumuri, and Varadero West oil fields under two production-sharing contracts (PSC). In May 2014 the company negotiated a 10-year extension to the Puerto Escondido-Yumuri PSC. It has drilled eight wells, one more than required by the extension terms, and has ended the extension drilling programme. Six of the wells produce oil, one is suspended, and one has been abandoned.

Some studies have concluded that Cuba could produce enough oil in the future to become an oil exporter, but there are some uncertainties that still need to be considered first in order to support this conclusion. First, there are tangible reservations regarding when oil production will start and at what rate it could be obtained. Secondly, Cuba will need to offset the roughly 130000 b/d of oil it currently imports to meet existing demand prior to becoming a net oil exporter. Thirdly, oil demand is expected to grow in the near future, taking into account growth in sectors such as construction, tourism and industry. In this case, Cuba is still likely to trade more oil – especially as refining capacity increases – but its net trade balance in oil may not necessarily shift to a significant oil export surplus. All will depend only on how much oil is found and developed, and what will happen with domestic Cuban demand. What is more certain to take place is that an increment in oil production may reduce Cuba’s dependence on oil imports from Venezuela.

How oil is extracted in Cuba
Cuba has the second largest proven hydrocarbon reserves in the Caribbean area, surpassed only by those of Trinidad and Tobago. Since 1996, and taking into account that most oil deposits in Cuba are located offshore, CUPET changed its approach to extracting oil by introducing the horizontal perforation method (HPM), which has led to an increase in oil production levels since 2002. This change has had a substantial economic impact on the Cuban oil industry, considering that in most fields where HPM was applied the oil production rate increased markedly.

In the last 14 years, more than 245 million of oil barrels have been extracted from the so-called Heavy Crude North Fringe (HCNF) or Northern Oil Belt (NOB), an oil-rich area between Havana city and Matanzas provinces (see Figure 2). This area accounts for about 97% of Cuban oil production (an oil deposit located in that zone and qualified as ‘productive’ could generate about 2000 b/d), while there are other small production sites located in Ciego de Ávila and Sancti Spiritus provinces, some of them with exploitation periods of more than 60 years.

The most important oil deposit located in the HCNF, and in Cuba, is that of Varadero, which has 90 fields under exploitation and had produced about 185 million barrels of oil at the end of 2015. It is calculated that only about 6-7% of its potential oil reserves (estimated at 1.3 billion barrels) have been recovered to date because no secondary or enhanced extraction methods have been applied.

At present, annual oil production capacity in Cuba is about 25 million barrels (about 50 000 b/d). This is used entirely for power generation and meets about half of national energy demand, while the rest (about 90 000 b/d) is imported from Venezuela under an exclusive payment agreement. Cuba accounts for only 0.05% of the world’s total production of crude petroleum.