Since President Obama said he would try to undo the 50-year-old economic lockdown on Cuba, many have speculated on how it could galvanize industries from tourism to telecommunications. But how about the energy sector?
Experts say the end of trade restrictions could mean a sizable new market, only 90 miles away, for all sorts of supplies and services from the United States’ energy industries. They encompass offshore oil exploration to natural gas turbines to electric infrastructure to solar panels to biofuels.
The lifting of U.S. sanctions could rehabilitate Cuba’s dilapidated power grid and lead to higher standards of living for Cubans, whose energy use could skyrocket. And an infusion of natural gas and renewables could lower the carbon emissions of an island that runs on oil.
"If the country wants to grow economically, one of the first things you have to do is guarantee that it has a reliable electric power system," said Jorge Piñon, a native of Cuba and director of the Latin America and Caribbean Energy Program at the Jackson School of Geosciences at the University of Texas, Austin.
The barriers to such changes could take years to fall. The embargo, embodied in at least six U.S. laws, would need to be abolished by a Republican Congress that remains largely hostile to the idea. Coming sooner may be the removal of Cuba from the list of state sponsors of terrorism. Obama may address that designation today at the Summit of the Americas in Panama, where, for the first time in 50 years, a president of the United States and the president of Cuba may meet face to face.
In Cuba, the government may need to fundamentally reorganize its electricity sector and rewrite trade laws so foreign companies are motivated to invest. To rebuild, Cuba would need to borrow tens of billions of dollars — money that, by U.S. law and executive order, it can’t yet access.
But the prospect of an opening in energy trade between the world’s largest economy and the Caribbean’s largest and most populous island is compelling, especially for Cuba. Participating fully in global fuel markets could end the island’s pattern of overwhelming reliance on a single patron nation, currently Venezuela.
The benefits could go well beyond oil imports. Cuba has an abundance of native energy resources, from potential offshore oil reserves, to sugar cane fields that are lying fallow, to lots of sun and wind.
Lenders and big companies that approach Cuba will find an energy bureaucracy unlike others they have encountered. Whether Cuba’s leadership has the desire to change it is unknown.
"It’s one of the most inefficient power systems in the world," said Juan Belt, an expatriate Cuban and an economist who has advised countries around the world on restructuring their energy systems for the U.S. Agency for International Development. He has studied the Cuban electric sector extensively — and seen a sudden uptick in interest for his services.
The inefficiency results from both stifled trade and Cuba’s bloated state-run economy. Power plants run on the country’s domestic crude oil, a relatively low grade that causes plants to belch black smoke while working at only a fraction of their potential. The national electric company, Unión Eléctrica, loses about $1 billion a year, said Belt. The power sector employs about 34,000 people, which is almost 10 times the number in Chile, even as it delivers only a third of the power per capita.
Finally, the opening could unleash a wave of Cuban brainpower onto the United States and the rest of the Caribbean.
The island has more engineers and Ph.D.s as a ratio to its population than any other country in Latin America. To see its potential, look no further than Florida Power & Light, just across the Florida Strait. Much of its recent leadership — former CEO Armando Olivera, at least four current or former vice presidents, and several senior engineers — were born in Cuba.
The power problem
Getting affordable energy is a problem for any island, because homegrown supplies are scarce and the suppliers are across the water. But in Cuba’s case, the quest has been especially fraught.
Cuba’s period of deepest hardship was tied directly to oil. For decades after Fidel Castro established a communist government in 1959, the nation expanded to provide electricity to almost everywhere on the island. The fuel was oil, supplied by the Soviet Union in exchange for the island’s abundant sugar.
After the Soviet regime collapsed in 1991, the flow of oil, as much as $7 billion of it a year, abruptly stopped. Cuba’s gross domestic product plunged, and the country entered what is now called the Special Period. Bus service was slashed for want of gas, the sugar industry crashed, factories closed, and food became so scarce that animals — cows, cats, even zoo animals — abruptly disappeared.
The island climbed slowly out of privation by the end of the decade with the help of two new sources of energy: its own oil industry and a relationship with a new oil patron, Venezuela. But each has presented its own difficulties.
Venezuela’s export program, called PetroCaribe, provides discounted oil to countries across the Caribbean, including about 90,000 barrels to Cuba — well over half of the country’s supply, according to Piñon.
While the exact terms of the deal are a mystery, Cuba supplies "an army" of medical doctors and other experts to Venezuela, said Jonathan Benjamin-Alvarado, a Cuba expert and political science professor at the University of Nebraska.
"The financial sustainability of the sector depends almost entirely on the largesse of Venezuela," Belt has written.
But now, with oil trading at around $56 per barrel internationally, Venezuela’s support for Cuba may be at risk. PetroCaribe is "wounded," Benjamin-Alvarado said. Reports have surfaced that Venezuela has slashed its PetroCaribe exports by half, and there is word of new power outages on the island. Piñon, however, has studied the Caribbean’s energy shipments in detail and believes that Venezuela’s deliveries to Cuba remain unaffected.
Cuba has tried to establish relationships with other oil suppliers, from Angola to Brazil to Russia, "but the problem is how to pay for it," Piñon said.
Most of Cuba’s oil production goes directly into running its own power plants, without first passing through a refinery. Cuba is one of only a handful of countries that runs its power plants principally on crude oil.
Every Cuban was responsible for 3.4 metric tons of carbon emissions between 2010 and 2014, compared with 17.6 tons for every American, according to figures from the World Bank.
Offshore energy hopes fade
Cuba’s domestic crude production stands at roughly 50,000 barrels per day, much of that made possible by a single Canadian company. It imports the rest, about 120,000 barrels per day, according to the U.S. Energy Information Administration.
Three years ago, about half a dozen companies looked in vain for offshore riches that may help alleviate Cuba’s energy shortfall. The U.S. embargo made their endeavors more expensive: Even though North America’s offshore energy hub, Houston, lies only 900 miles away, Cuba can’t rely on it for anything. Instead, Cuba used a special drilling built in China with no U.S.-sourced inputs.
For expansion of petroleum operations, the nation faces three key immediate challenges, all of them out of the Cuban government’s control.
Some experts on both sides of the Florida Strait believe there is much oil and gas to be had not too far off Cuba’s coastline. On March 31, the U.S. Geological Survey released an updated assessment of the mineral potential of the island, both onshore and offshore, and estimated that drillers may eventually find 4.6 billion barrels of crude oil and 9.8 trillion cubic feet of natural gas, lying mainly in Cuba’s Gulf of Mexico region. The Cuban government’s own estimates are larger.
Others are questioning whether either view is accurate.
In 2012, Repsol of Spain, Petronas of Malaysia and others spent nearly $500 million carrying out exploratory drilling in Cuba’s deepwater regions. Of the five wells drilled, three of them were dry holes, while the other two reported encountering hydrocarbons but in non-commercial quantities.
Piñon said the failed 2012 campaign was surprising and disappointing for all involved.
"These are companies that know what they are doing," he said. "The feedback that we are getting from some of them is that the geology was very complex, and that’s literally a quote. They didn’t go into any more details."
This was all before international crude oil prices plummeted by more than 50 percent starting in the fourth quarter of 2014. Now, companies are even pulling back on drilling in much more accessible waters, like the U.S. portion of the Gulf of Mexico.
Major oil companies with the size and capital to undertake further deepwater exploration are unlikely to return to Cuba should oil prices linger at their current lows.
Meanwhile, other Caribbean nations are pursuing offshore drilling, Piñon said, including Guyana, Suriname and especially Mexico.
For the first time in about 70 years, Mexico is opening up its energy sector to foreign direct investment and is inviting bids for prospecting in the Gulf of Mexico area, beginning with shallow-water blocks. Unlike Cuba, Mexico’s offshore potential is proven and is widely seen as a continuation of the hydrocarbons-rich geology that makes the U.S. Gulf one of the most active drilling regions in the world.
With such rich prospects in Mexico, Piñon said that Cuba can forget about developing offshore oil and gas resources, at least for now.
"That chapter is closed, but I don’t think the book is closed on Cuba’s potential in deepwater," Piñon said.
Then there is the aforementioned risk with Venezuela’s PetroCaribe program.
The only way for Cuba to defend against these challenges is to produce more crude oil domestically, through either conventional extraction or enhanced oil production.
Sherritt International, a Canadian firm and the largest private investor in Cuba’s energy infrastructure, including as the principal partner in delivering the island’s onshore oil, says it is working on doing just that. The company entered Cuba in the early 1990s and is invested in oil and gas, power generation, and nickel mining.
Sean McCaughan, vice president of investor relations at Sherritt, says his firm is currently expanding its footprint on the island. It now produces around 20,000 barrels of heavy crude oil per day from onshore wells, some of which are directionally drilled past the shoreline.
"We announced in December two new exploration blocks in Cuba, and we’re hoping to get two additional exploration blocks this year," McCaughan said.
The government of Cuba is also taking steps to entice more foreign investment in the oil and gas industry, McCaughan confirmed. Changes to the tax and royalty structure have been implemented, improving Sherritt’s business climate there.
Piñon estimates that current domestic oil output in Cuba could be expanded by 20 percent if companies introduced enhanced oil recovery (EOR) techniques and technologies to existing producing fields. McCaughan said his firm has looked into EOR in the past but has no immediate plans to move in that direction.
So a major increase in domestic oil production is out of the picture for now. Experts instead are advising the government to look toward another energy supply: imported natural gas.
The promise of LNG
With oil supply troubles both domestically and abroad, some say that Cuba’s quickest way to an affordable and more abundant — and not to mention cleaner — power supply is by retooling itself to use liquefied natural gas, known as LNG.
The crude oil price plunge has halted some gas export plans, but investment in additional LNG capacity continues. In the United States, at least four new export terminals will likely be built, most along the Gulf Coast. Cuba could source U.S. LNG on the cheap and with low transport costs, but not as long as the embargo is in effect.
It would cost about $2 billion to convert Cuba’s seven or eight power plants that run on oil to natural gas, Belt said. Cuba’s old power plants operate at 60 or 70 percent efficiency, far less than modern combined-cycle natural gas systems. With greater efficiency, the cost of generation could drop by half, Belt said. These plants would also be cleaner, since natural gas has about half the carbon emissions of oil.
"There’s probably no single investment that could be more beneficial to Cuba than to convert these power plants to gas," Belt said. "The savings are tremendous."
Cuba has one successful natural gas project under its belt. Near the resort town of Varadero, an oil-drilling operation used to flare its natural gas, creating air pollution at a key tourist destination. A joint venture between Cuba and Sherritt captures the gas and directs it to two power plants that produce 400 megawatts of power.
Use of LNG for power generation is slowly expanding in the Caribbean. In February, Houston-based Excelerate Energy announced that it had won final approval to build a facility to import LNG into Puerto Rico, using floating infrastructure for regasification.
The project is eagerly awaited by the Puerto Rican government as it will lessen its dependence on oil-fueled power generation and reduce emissions, thereby aiding the environmentally sensitive tourism industry. This precisely mirrors Cuba’s dilemma.
Experts believe that building LNG import infrastructure on the large Caribbean islands would create economies of scale that could permit smaller islands now using diesel for energy generation to make the switch to cheaper, cleaner natural gas. As the largest and most populous island in the Caribbean, Cuba could serve as a catalyst for a broader LNG trade in the Caribbean.
How Cuba climbed its way out of blackouts
In 2005, Cuba suffered from repeated and widespread blackouts, with even Havana going dark for hours at a time. One reason: Several of its power plants had broken down, "gummed up" by the high sulfur content of the domestic crude oil used to power them, according to Benjamin-Alvarado.
Another problem was (and still is) the extraordinary age of Cuba’s power plants, transmission lines and electric distribution system. Many components are American imports from the 1950s and earlier, the same vintage as the old Buicks and Pontiacs that still ply the streets of Havana. Other components came from the Soviets in the 1960s.
The Cuban government responded with sweeping measures. In a single year, most of the country’s incandescent bulbs were swapped out for compact fluorescents, while old appliances like refrigerators and fans were replaced with more efficient models imported from China. For the first time, Cubans began to be billed for their electricity usage. The country’s billboards — all of which carry government propaganda rather than advertisements — promoted energy efficiency.
Meanwhile, the government imported thousands of small diesel and oil generators that were installed all over the island, some connected to the grid and some serving as backup power to public buildings. Between them they can produce about 2,500 MW of power, said Belt, and have made the power supply much more stable, even when a hurricane buffets the island. But relying on these generators is both expensive and polluting and comes at a high environmental and economic cost, Belt said.
Finally, the government spent hundreds of millions of dollars in the last decade to upgrade its transmission infrastructure, making it the most modern part of the energy system, Piñon said.
Could renewable energy save the day?
The Cuban government and watchers from the United States agree that renewable energy will play an important part in the island’s future. Last year, Cuban officials announced plans to produce 24 percent of the island’s power from renewable sources by 2030.
As the largest Caribbean island with a larger power grid, it could produce more power locally while acting as a proving ground for its smaller neighbors. "I think Cuba’s a case study where renewable energy could be a huge game changer," said Christian Gomez, director of energy at the Council of the Americas.
"This is a prime opportunity to leapfrog central generation and put in these smaller distributed solutions that are more flexible," said Mark Konold, a program manager at Worldwatch Institute, where he advises Caribbean governments on climate and energy strategy.
It has a long way to go. The island’s current renewable portfolio is made up of small solar arrays at thousands of schools and hospitals, a few small biomass and hydropower projects, and a couple of small wind farms. The government estimates its current renewable portfolio at 4.3 percent, though U.S. observers peg it at closer to 2 percent.
Still, the government promised it would spend $3.5 billion over the next 15 years on renewable energy. Engineers have mapped the island’s wind resources and have studied its biofuels potential from sugar cane.
Cuba could produce 2 billion gallons of ethanol from sugar cane a year, according to one study. Piñon believes the government in Havana should promote a sugar cane ethanol industry to improve fuels supplies for both power and transportation, mimicking Brazil’s model.
"You’ve got sunshine and wind in the Caribbean everywhere," Benjamin-Alvarado said. "The potential is endless."