The Current State of Cuba’s Offshore Oil Development

The Current State of Cuba's Offshore Oil Development
Business Insights: Cuba
July 2014

While Cuba produces some energy – principally heavy oil and associated
natural gas – its domestic production does not meet its requirements for
daily energy consumption. Once dependent on the Soviet Union for energy
imports, Cuba now relies on Venezuela for oil to keep its economy
afloat. According to experts, Cuba's arrangement with Venezuela is
unsustainable over the long-term.

The U.S. Geological Survey estimates that offshore reserves in the North
Cuba Basin could contain an additional five billion barrels of
undiscovered technically recoverable crude oil. Cuba estimates its
reserves in 20 billion barrels. However, all exploratory results have
been a blow to Cuban hopes of finding oil. Some attempts came up dry or
resulted in the discovery of a field devoid of commercial value.

Now, Cuba is asking for Russia's help with the support of President
Putin. Russian companies Rosneft and Zarubezhneft signed an energy
agreement with Cuba in May 2014 to explore offshore oil deposits. The
drilling area north of Havana straddles the Gulf Stream, a powerful
ocean current that rushes north to the Florida coast. Oceanographers
warn that an oil slick caused by a major spill could reach Florida's
beaches, reefs and marine sanctuaries in about a week.

Former U.S. Senator Bob Graham, who also served two terms as governor of
Florida and co-chaired a presidential commission on the 2010 Deepwater
Horizon oil spill in the Gulf of Mexico, met with Cuban officials in
January 2014. Senator Graham and energy experts said the Russians have
little experience with deep-water drilling and that the U.S. embargo of
Cuba prohibits the use of American technology to prevent or respond to a
spill.

A State Department spokesperson said U.S. officials "have expressed our
concerns" to Cuba and its partners, but the United States can do nothing
to stop drilling in Cuban waters. While the embargo limits the use of
American products, U.S. companies have been licensed to respond in case
of a spill.

U.S. Embargo – Cuba Drilling

The embargo against Cuba denies access to Cuba of U.S. equipment for
drilling and environmental protection. Exports and re-exports to Cuba of
foreign made items incorporating, commingled with or drawn from
controlled U.S. origin items exceeding 10 percent of U.S. components and
technology – the so-called De Minimis Rule under Sections 734.4 and
736.2(b)(2) of Export Administration Regulations (EARs) – are prohibited
by the Embargo.

Several experts have said that the only country that produces the
necessary equipment is the United States. Therefore, Cuba would not have
access to U.S. equipment unless the embargo is lifted or altered. At the
very least, coordination between Cuba and the United States would be
necessary to prevent any potential oil spill.

Members of Congress have presented several proposals to deny oil and gas
leases and permits "to persons who engage in activities with the
government of any foreign country that is subject to any sanction or an
embargo" by the U.S. government.

Conclusion

A "safe" and "monitored" approach to Cuba's oil offshore development is
in the national interest of the United States, which should work
together with Cuba and use multilateral agreements with Mexico to
facilitate oil exploration in the Gulf of Mexico.

Source: The Current State of Cuba's Offshore Oil Development | Fox
Rothschild LLP -
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