Opportunities In The Cuban Oil & Gas Sector
On the occasion of the annual Havana International Fair (FIHAV) the Ministry of Foreign Trade and Foreign Investment of Cuba (MINCEX) publishes the Foreign Investment Opportunities Portfolio, in which the Cuban State sets out various high priority sectors for foreign investors. At the end of 2014, the tourism and real estate sector comprised 52% of foreign investment in the country, followed by energy and mining (11%), industry (10%), food (5%), transportation (5%), sugar (5%) and construction (4%).
The model for foreign investment is still largely involves joint venture companies (50% of investments), and international economic association contracts (45%), with 100% foreign owned companies only making up 5%. The limited presence of the totally foreign capital company model, specifically targeting individuals acting on their own, has led Cuban subsidiaries of foreign companies to urge Cuba to prioritize this model; especially in industrial and infrastructure development projects, and turnkey contracts for engineering and construction.
In recent decades, Cuban extraction of crude oil and natural gas has been growing due to the government’s programs and joint operations conducted with foreign companies from Canada, France, Brazil, Sweden and Spain. The limitations for companies considered U.S Persons must be noted, as these companies need prior authorization from the Office of Foreign Assets Control (OFAC) and U.S technology and/or U.S components cannot exceed 25% of the total makeup of equipment. This has been seen by the Spanish energy and petrochemical multinational REPSOL, which has had to use Chinese technology and apply a corporate structure that meets international sanctions rules imposed by the U.S. in order to carry out its investments in Cuba’s energy sector.
The Cuban economy is heavily reliant on oil, and as domestic production is insufficient they depend on imports to ensure their economic and social development. Cuba imports 53% of the oil they use, annually they produce 4 million tons, and according to the Cuban Ministry of Energy and Mines 96% of electricity generation comes from oil. To this we must add the reliance on state energy grants. According to sources at the National Assembly of People’s Power (ANPP), in Cuba, one household consumes on average 180 kWh / month, and pays 36 Cuban pesos (CUPS), equivalent to 1.23 Euros. However, for the Cuban State the energy generation process is six times more expensive and the residential sector is the largest consumer of electricity. The Cuban strategy is based on the reduction of the island’s dependence on crude; from 48.35% today to 32% in 2030; from 15% to 5% of its fuel in power stations; from 18% to 9% in vehicle fuel; and the current 4.2% to 1% in diesel. In terms of renewables, it is expected to increase wind energy production from 0.1% to 5% of the whole; and biomass from 3.5% to 14%.
Cuba has geological reserves of approximately 6 billion barrels of oil and 100,000 km2 of the Cuban territory is favorable to oil exploration, in addition to its deposits located in shallow and deep waters. Most of the deposits constitute extra heavy oil, although there are also reserves of light oil, medium and very light. Cuba has thirteen retail companies, three oil production companies, four refineries (Nico Lopez in Havana, formerly of Shell; Hermanos Diaz in Santiago de Cuba, formerly Texaco; Camilo Cienfuegos a joint venture with the Venezuelan Cuvenpetropol; and Sergio Soto, in Cabaiguán), and sixteen companies that offer various services within the sector with 24,000 highly skilled workers, most of them having studied in centers in Canada (NAIT), Mexico (NORIA and TEXIMPET), Venezuela (PDVSA and AIVEPET), Brazil ( PETROBRAS), China (CPTDC) and Norway (PETRAD).
Currently there is a continued drilling of gas and oil of about 4 million tons annually, of which 3 are by oil companies (19 billion barrels) and 1 by gas companies, with 100 million cubic meters of natural gas a year. The latest Portfolio, published by the Government, proposes four projects in this regard; three oil exploration risk and production sharing, two of which would be in shallow waters and in the Exclusive Economic Zone in the Gulf of Mexico, and one in onshore blocks, making a total of 85 blocks. Finally, MINCEX has also proposed a secondary recovery in operating oil fields where drilling with conventional methods is not possible- in the provinces of Mayabeque and Matanzas. They will all be formalized through international economic association contracts for exploration and production sharing and secondary recovery. Cuba also has opportunities in liquefied natural gas (LNG) with plans for a regasification plant with the capacity to process two million metric tons a year.
In all these cases, the Cuban party in the deals will be Union Cuba-Petroleo (CUPET), a Cuban State organization responsible for meeting the supply of fuels to the domestic market, consisting of 41 companies, five of them joint venture companies, and authorized to carry out both upstream and downstream
José María Viñals Camallonga
Partner and Director of International Operations
LUPICINIO INTERNATIONAL LAW FIRM