Global Insight Perspective

Significance

Cuba remains hopeful for the potential of oil to be discovered in commercial quantities in the Exclusive Economic Zone in the Gulf of Mexico (GOM).

Implications

The opening up of the Cuban oil sector has led to an increase in oil and gas production over the past decade, with joint-venture (JV) projects with foreign firms accounting for around 60% of the country's crude output. Increased domestic production has meant that Cuba is now able to generate most of its electricity; that said, Cuba still imports around 100,000 barrels per day (b/d) of oil from Venezuela.

Outlook

It is hoped that foreign investment in the oil sector and the promotion of ethanol will allow the country to reduce its dependency on oil imports in the future.

Cuba to Intensify Oil Exploration

The Cuban Basic Industry Minister, Yadira Garcia, said yesterday that U.S. investments would be welcomed by the Latin American country if the U.S. trade embargo that currently prohibits U.S. companies from participating in Cuba's oil sector were ever to be lifted. Speaking at the opening of a congress in the Cuban capital, Havana, the Minister said that the country plans to intensify its search for oil onshore and in deepwaters of the GOM, reported Agence France-Presse.

Cuba met its 3.9-million-tonnes oil and gas production target for 2006, producing 22.3 million barrels of oil (61,000 b/d) and 920,000 tonnes of gas, according to an earlier report in Opciones. According to the report, production in 2006 was almost seven-times higher than in 1990 and was sufficient to meet around one-half of the country's total fuel consumption. However, despite this achievement, Cuba still relies on oil imports from Venezuela to supply the difference. Cuba hopes that exploration by foreign companies in deepwaters of the GOM will result in finds that will enable the country to become self-sufficient in oil production in the future. According to the U.S. Geological Survey, this area could contain 4.6 billion-9.3 billion barrels of crude and 9.8-21.8 Tcf of gas. To date, no commercial discovery has been made in this area, but hopes remain high and the sector has seen the entry of several new companies over the past year. In July 2004, Repsol-YPF announced that the company's first deepwater well in Cuban waters showed the existence of high-quality oil reservoirs, but not a commercially viable find. Exploration planned to start by the company in 2008 may yield more promising results.

Greater Emphasis on Renewables

At the same time as trying to encourage more oil exploration, Cuba is showing increased interest in renewable fuels. Last month, the local press announced the opening of an experimental wind farm on the Island of Juventud that could produce 1,800MW of electricity from six wind turbines. A second wind park in the province of Holguín is due to start operations later this year. The promotion of alternative energy in electricity generation is part of President Fidel Castro’s “Energy Revolution” launched in 2004 in response to an electricity crisis. The programme, which has also included the promotion of more energy-efficient light bulbs and domestic appliances and modernisation of the country's electricity-distribution infrastructure, led to a 90% reduction in the frequency of blackouts in the country last year, according to the government.

Cuba Hopes to Become an Ethanol Exporter

Cuba is also planning to increase production of fuel grade ethanol, with technical support from Brazil and possible financing from Venezuela and China. Marianela Cordoves Herrera a researcher for the Cuban Sugarcane Research Institute (ICIDCA) said last week that Cuba plans to build eight new ethanol plants by 2011 as well as to modernise the country's existing plants with the aim of increasing production and becoming an ethanol exporter. According to the researcher, Cuba plans to produce 450 million litres of ethanol per year by 2011, five times more than the 100 million litres it produces at present. Cuba currently uses ethanol as a transportation fuel as well as for other uses, but ramping up output would allow it to use more as a substitute for oil in the transportation sector as well as to export up to 200 million litres a year. The U.S. trade embargo means that Cuba would not be able to sell ethanol to the United States or benefit from the import tariff exemption offered by the United States to exporters of ethanol from other Caribbean countries under the Caribbean Basin Initiative, but rising global interest in biofuels means that it is bound to find alternative markets.

Outlook and Implications

Cuba seems to be engaging in a new regional strategy in light of the political changes of the last couple of years in the hemisphere. This new approach involves strengthening relations with key partners such as Venezuela and Bolivia as well as improving its relations with other countries in Central America. In addition, Cuba is also reforming its energy programme by undertaking a series of projects that aim to attract foreign direct investment, maximise the sugar resources of the island, and reduce dependency on oil imports from other countries.

These changes on the Caribbean island have lead to debate in the United States, with the possibility of Cuba increasing production of both oil and ethanol adding a new dimension to the debate over the desirability of continuing to isolate Cuba, despite the Cold War having ended years ago and Castro's ill health prompting the small island nation to embark on a degree of political change. Indeed, a series of bills have been introduced in the U.S. Congress proposing amendments to or revoking completely the U.S. embargo on Cuba. One of the bills calls for a full lifting of restrictions, while another is intended to give permission for U.S. investment in the Cuban oil programme.

Nevertheless, despite the Cuban Basic Industry Minister's comments that U.S. investments would be welcomed by the Latin American country if the embargo was lifted, a separate bill introduced in the U.S. Congress in March 2006 toughening the embargo and specifically banning U.S. involvement in oil projects is an indication of the continuing strength of the pro-embargo lobby in the United States.

Furthermore, even if the United States was to soften its stance on investment in Cuba's oil sector, it is not clear how U.S. investors would be received. Not only have companies from Europe, Canada, and Asia already got a foothold in the industry, but U.S. companies would probably be wary of investing in Cuba's oil sector while the issue of compensation to the U.S. oil companies that were expropriated during the 1960s remains unresolved.

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