For world's 'dark zones,' instability outweighs abundant oil

In the next couple of months, the Spanish oil company Repsol will finish drilling Jaguey, a reservoir deep in Cuba's untapped northwestern waters, and learn whether it contains commercial volumes of oil. If the answer is positive, it could be both good news and bad news for the company.

The good news would be the validation of an extended hydrocarbon belt near Havana that U.S. government geologists say may contain 3.2 billion barrels of oil. The bad news would be identical.

In recent months, members of Florida's congressional delegation have demanded that the Obama administration stop Repsol from drilling in Cuba. Since that has failed, one congressman has urged the administration to punish any nation that aids Repsol's operations. Now, should the company actually strike commercial oil, the misery could get worse. "Your countrymen have decided to use us as a whipping boy for Cuba," groused a Repsol official who asked not to be identified.

For months, U.S. energy experts have issued increasingly bullish assessments of a future regional oil boom stretching from Brazil to French Guiana to the U.S. Gulf of Mexico to North Dakota and on north to Canada. Altogether, according to these forecasts, such plays could add 10 billion to 20 billion barrels of liquid hydrocarbons to regional production, and make imports from the volatile Persian Gulf unnecessary.

Yet all the major forecasts exclude the potential arrival of Cuba as another petro-state: After a half-century of Cuba's severed diplomatic and economic relations with the United States, most private oil analysts seem resigned to its status as an economic blank slate.


Call Cuba a dark zone. It is not alone -- Venezuela, Cuba's main regional ally, is also missing from the much-trumpeted regional boom equation. After a history of nationalization and declining oil production, Venezuela is all but ignored when it promises to significantly boost its output of some 2.5 million barrels a day. But the problem is not only a disbelief in its oil potential. "People are focused on 'friendly sources,'" said Michael Levi of the Council on Foreign Relations, "and neither Cuba nor Venezuela is friendly."

Venezuela, which has 296 billion barrels of oil, the largest reserves on the planet, has been at odds politically in Washington since the ascent of President Hugo Chavez 13 years ago. As for its reputation in oil, its current image for unpredictability traces back to 2003, when Chavez fired some 18,000 striking workers from PDVSA, the state oil company, and later nationalized Venezuela's foreign-controlled oil fields. The country's oil production plummeted to between 2.5 million barrels and 2.9 million barrels a day, from 3.1 million barrels a day prior to the strike.

Today, the government says it will raise oil production to 4 million barrels a day by 2014 and to 6 million barrels a day by 2019. Much of that production would come from the Orinoco Belt, an enormously rich but difficult-to-produce area of extremely heavy crude. But most analysts are skeptical of the forecast. "If PDVSA can work efficiently with foreign partners, production in the Orinoco Oil Belt could effectively be increased by 1 million or more barrels per day by 2020," said David Voght, managing director of IPD Latin America, a consultant firm.

In Cuba, Repsol first drilled in the belt north of Havana in 2004 but said oil it found was not commercial. In the meantime, new drilling technology was developed that significantly improved the company's chances of a commercial discovery.

The company decided to drill again. Yet it has had to heed U.S. politics -- it owns 1,500 square miles of oil and gas acreage in the U.S. Gulf of Mexico, and is a partner with Shell in the Beaufort Sea off Alaska's coast.

Repsol stripped the mention of Cuba from almost all its public presentations in order to keep a low profile. In order to avert violation of the U.S. embargo, the company had its drilling platform, called Scarabeo, built in China. Scarabeo's only U.S. component is the blowout preventer, a gigantic mechanism that, if it works, is intended to stanch a well accident before it gets out of control.

'A very contentious issue'

In the wake of the 2010 Macondo well blowout in the Gulf of Mexico, U.S. opposition to the Cuban drilling intensified. So Repsol walked its emergency plans around Washington and in December invited U.S. Coast Guard and Department of Interior officials to inspect the Scarabeo before it was installed. That did not silence critics in the Florida delegation in Congress, but Repsol won grudging respect for meeting U.S. safety standards in foreign waters.

"Cuba, when it comes to U.S. domestic politics, is a very contentious issue," said Jorge Pinon, a former BP executive for Latin America and now a private consultant. "The United States to Repsol is very important, and they don't want to jeopardize that.

"You're an independent company, you're an international company. The U.S. should not tell you what to do overseas. But by the same token, you have assets in the U.S. that are very, very valuable, in fact are more valuable than any Cuban assets," Pinon said. "So somehow you have to walk that thin line."

Repsol estimates that the Cuban drilling will be completed next month. If it is successful, that will initiate another challenging period for the company, which then must find or assemble a floating production platform, but again excluding U.S. technology. Pinon reckons that, in the best of circumstances, no oil will be produced from Jaguey for three to five years.

Until then, Cuba and Venezuela will probably still be absent from reports and analyses distributed in the United States. "Most of those estimates come from the United States, which by definition have to exclude Cuba," said Jose Raul Perales, director of the Americas department of the U.S. Chamber of Commerce.

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