CUBA'S OIL CRISIS SPELLS TROUBLE FOR CASTRO, OPPORTUNITY FOR FOREIGN PETROLEUM INVESTMENT

Cuba's oil crisis presents long term woes for the government of Fidel Castro but new opportunities for foreign petroleum investment.

That's the main thesis of a study by East-West Center (EWC), Honolulu.

SOVIET SUPPLIES CUT OFF

Since the cutoff of subsidized oil supplies from the former Soviet Union at the first of the year, Cuba has endured a crippling loss of export revenues and draconian energy rationing measures at home (OGJ, Jan. 13, p. 18).

The Soviets had reduced oil supplies to Cuba since 1989 after decades of providing the Castro government with subsidized oil supplies. Former Soviet President Mikhail Gorbachev exempted Cuba from paying market prices for Soviet oil in 1991 while requiring that of Soviet trading partners in eastern Europe.

With the collapse of Communism in the former U.S.S.R., however, oil supplies from that region are available to Cuba only at market prices and for hard currency. That has triggered a crisis in the Western Hemisphere's sole Communist regime as Cuba's gross social product-equivalent to GNP-fell by 5% in 1990 and a further 20% in 1991.

Prior to the mid-1980s, Cuba's sugar exports had the key role in the country's economy, EWC notes. But as the Soviets provided additional oil supplies to Cuba beyond its immediate needs, Cuba could reexport Soviet oil for hard currency. And with sugar prices in decline during much of the 1980s, hard currency earnings from reexported Soviet oil often dominated foreign exchange in Cuba (OGJ, Mar. 2, Newsletter). Thus the loss of subsidized Soviet supplies not only caused the Cubans' oil import bill to skyrocket, Havana suddenly found itself stripped of a huge share of foreign exchange earnings.

The foreign exchange loss of $1.6 billion stemming from the loss of Soviet subsidized oil supplies exceeds that of total foreign exchange earnings from all other sources. If Cuba imports oil in 1989 volumes at current prices, its oil import tab alone will be $1.3 billion, EWC projects.

CUBAN OIL DEMAND, SUPPLY

In 1989, Cuba's primary energy consumption (see chart) outstripped that of Ecuador and Trinidad and about equaled that of Peru.

The heavy dominance of oil in the Cuban energy mix points to a per capita consumption level of about 8 bbl, among the highest in the developing world and compared with 5 bbl per capita in the Caribbean and 5.4 bbl per capita in Latin America overall. Compared with another Communist regime, Cuba's 10.5 million people consume 230,000 b/d of oil, 30 times greater per capita than Viet Nam with 70 million people consuming less than 60,000 b/d.

EWC attributes that to the country's energy intensive industrial sector, which accounts for 45% of total energy use vs. a 32% average for that sector in Latin America overall.

Cuba produces only about 6.5% of its oil, with output falling to 15,000 b/d from 19,000 b/d in 1986. Producing reservoirs typically are small and highly complex due to severe faulting, says EWC. Proven reserves are only 75-100 million bbl, with about 30 million bbl in offshore Varadero field and 20-30 million bbl in Guanabo field. Both yield heavy crudes with a sulfur content of about 4 wt % that must be blended with imports to be refined locally.

FOREIGN INVESTMENT?

The prospects are limited for a major oil discovery in Cuba, although Havana has modified foreign investment laws to attract foreign companies to conduct exploration. Among recent developments:

French companies Total and Cie. Europeene des Petroles signed a production sharing contract with Havana at yearend 1990 to conduct seismic surveys and drill four wells in the Santa Clara area off Cuba's northern coast (OGJ, Dec. 31, 1990, p. 29).
Braspetro, international arm of Brazil's state-owned Petroleos Brasileiro SA, at yearend 1991 confirmed it is negotiating a risk contract covering offshore and onshore exploration and development along Cuba's northern coast (OGJ, Nov. 18, 1991).
Havana has approached Iran in search of oil supplies and is asking for help in developing Cuba's refining industry (OGJ, Mar. 9, Newsletter).
Sweden's Taurus Petroleum AB signed an agreement covering exploration off Cuba's southern coast this year (OGJ, Apr. 27, Newsletter).

IMPORTS, EXPORTS

In 1990, Cuba was the second largest oil importer after Brazil in the Latin America/Caribbean region, EWC notes.

About 5% of its oil imports came directly from the U.S.S.R., while 95% came from swaps of Soviet oil with Venezuelan and Ecuadorian crudes.

In 1989, imports of Soviet crude were 172,000 b/d and of Soviet products 98,000 b/d. That was unchanged in 1990, but Soviet oil supplies plunged to 190,000 b/d in 1991 and virtually dried up by the fourth quarter last year.

Most Cuban products imports are fuel oil and diesel-61,500 b/d and 27,000 b/d, respectively, in 1989-used in industrial and power sectors.

Cuba's crude exports of 38,200 b/d in 1985 netted Havana about $350 million in foreign exchange earnings. Crude and products totaling more than 45,000 b/d exported in 1989 totaled about $250 million.

In order to export surplus oil, Cuba launched a program to expand combined capacity at its refineries at Havana, Santiago de Cuba, and Cabiguan to 175,000 b/d in 1987 from 143,500 b/d in 1986. The island nation's three refineries had only a total catalytic cracking capacity of 14,500 b/d and reforming capacity of 10,400 b/d.

In 1989, state-owned Cupet completed construction of a fourth, 120,000 b/d refinery at Cienfuegos, thought to also have a simple downstream configuration, EWC said. The added capacity has slashed refinery utilization in Cuba to about 70% with the Cienfuegos plant still not fully commissioned this year.

SUPPLY DEALS CHASED

Havana has scrambled to line up oil supplies from other countries since the cutoff of Soviet supplies. It first targeted Latin American neighbors Venezuela, Ecuador, Colombia, and Mexico as it sought entry into the San Jose accord that features attractive prices to Latin American oil importers from the major exporting countries in the region.

Through an agreement with the U.S.S.R., state-owned Petroleos de Venezuela SA had supplied Cuba 60,000 b/d, and the Soviets supplied an equivalent amount to Pdvsa's joint venture Veba refinery in Germany. With the decline in Soviet oil exports to its former Communist bloc trading partners, that deal was unofficially inoperative after October 1991, and Cuba paid cash for several shipments of Venezuelan crude thereafter (OGJ, Jan. 20, Newsletter). Venezuela formally suspended the three way oil swap this spring because the former Soviet republic of Russia quit sending crude to Pdvsa's refineries in Germany.

Last September, Cuba offered Pdvsa a 50% stake in its Cienfuegos refinery under which Cuba would process Venezuelan crude and Cuba would export products to the Caribbean market.

Colombia's state-owned Empresa Colombiana de Petroleos is studying the possibility of processing 60,000 b/d of Cano Limon crude at the Cienfuegos refinery, according to EWC, noting Colombia must import 30,000 b/d of gasoline.

Ecuadorian trading company Tripetrol was involved in a controversial swap deal involving sending 50,000 b/d of Oriente crude to Cuba in exchange for Soviet Urals crude while Cuba sent sugar to the former U.S.S.R. Cuba abruptly canceled the contract in May 1991, alleging Tripetrol shipped Iranian heavy crude earlier in the year. Ecuadorian officials denied the charges, citing Cuba's efforts to secure Middle East crude instead. Ecuadorian shipments of 12,000 b/d were renewed in September 1991.

Cuban also has sought deals to barter sugar for oil. Mexico rejected that proposal earlier this year, and Iran still is reportedly studying the offer.

OUTLOOK

There are options available to Cuba by which the Castro government could avoid the kind of economic crises inviting destabilization, EWC says.

Cuba could encourage Latin American/Caribbean crude producers to process their crudes in Cuba's refineries and export products to the region, with Colombia a likely candidate. That depends on Cuba having the needed conversion capacity.

None of the countries in the region would likely defy the U.S. trade sanctions against Cuba, nor would they provide oil at concessional prices, says EWC. At best, Cuba might be allowed to join the San Jose accord and gain those importing nations' modestly preferential prices.

Or Cuba could sharply reduce its oil consumption. Castro has opted to curtail energy consumption via quotas and rationing vs. price hikes. It also has imposed public transportation energy efficiency-redesigned bus routes and imports of bicycles from China-while shutting down inefficient industrial plants and delaying new military projects.

Cuba could slash its oil demand 50%, a solution that will be extremely difficult but can be survived, EWC says. In any event, the effects of Cuba's oil crisis will be felt by the Castro government for years to come.