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Oil find gives Cuba hope for some economic relief

Published Aug. 24, 2005

On Christmas Day, President Fidel Castro said he had some information to lift the spirits of Cuba's 11-million people: Two Canadian energy companies, Pebercan and Sherritt International, had discovered oil in the Gulf of Mexico in an area under Cuba's control.

Castro, in an announcement that raised eyebrows in the executive suites of energy companies here, disclosed that the Canadian companies had discovered estimated reserves of 100-million barrels. That was the good news. It was also the bad news.

The deposits, which are expected to produce oil as early as next year, might provide Cuba's government with some relief as it presses forward with efforts to use hard currency for purposes other than petroleum purchases from abroad. Shortly after Castro announced the discovery, the central bank said it was tightening measures intended to centralize the control of dollars circulating in the Cuban economy.

"Cuba simply needs the money," said John S. Kavulich, president of the U.S.-Cuba Trade and Economic Council in New York, which tracks trade activity in Cuba.

Still, the discovery, while considered something of a lifeline for a nation still recovering from the loss of Soviet-era subsidized oil imports more than a decade ago, is no panacea. The prospective output by the Canadian companies would cover only about three to four years of oil production by Cuba, which now imports much of its oil from Venezuela on favorable terms.

Yet the deposits showed how tantalizingly close Cuba has come to altering the dynamics of oil exploration in the Gulf of Mexico, an area that also provides one of the largest sources of oil for the United States. The economic outlook for Cuba is not as dire as it was a decade ago, with economic growth reaching 5 percent in 2004, according to government estimates; at least a small part of that growth was spurred by investments by international energy companies searching for oil.

Last month's discovery already has Cuba watchers here and officials there pondering potential changes in relations with the United States. American companies are currently prohibited from drilling in waters 100 miles or so from the coast of Florida.

American energy companies quietly chafe at restrictions that make Cuban territory off limits to them while Canadians, Spaniards and Brazilians search Cuban waters for offshore wildcatting possibilities. A significant oil discovery, one that could turn Cuba into an oil exporter from an importer, might prompt calls for reviewing policies that exclude the great majority of American companies from trading with Cuba.

The Cubans, since introducing policies in the early 1990s aimed at encouraging investment by foreign energy companies, have increased oil production to more than 75,000 barrels a day in 2004 from 18,000 barrels a day in 1992. The discovery last month by Pebercan of Montreal and Sherritt of Toronto illustrates how companies from other countries stand to benefit from the American embargo on most dealings with Cuba.

Shares in Pebercan soared on the Toronto stock exchange after Castro's announcement, climbing nearly 50 percent in the two and a half weeks since; thanks in part to the Cuba find, the company's stock performance ranked second in 2004 among North American energy-exploration companies tracked by John S. Herold of Norwalk, Conn., an energy analysis company.

Sherritt, a diversified minerals company, is a minority partner with Pebercan on the discovery and is already Cuba's largest oil producer through exploration ventures elsewhere on the island. Its stock also appreciated after the discovery was made public, rising more than 15 percent since Christmas.

A spokeswoman for Sherritt declined to comment on the find, citing limits on such disclosures from securities regulators. A spokeswoman for Pebercan, Cynthia Lane, also would not comment.

Castro, however, seemed eager to discuss details of the oil find, pointing out in comments carried in the official media that the deposits were lower in sulfur than those from Cuba's other oil fields.

Thus, the Canadians may have discovered lighter-grade, higher-quality oil than the mostly heavy oil now produced in Cuba. This in turn may enable the Cubans to refine the oil for use in vehicles or export crude oil in exchange for hard currency.

In the meantime, news of the find by the Canadian companies and the potential for larger discoveries of oil in the portions of the Gulf of Mexico controlled by Cuba are fueling speculation about how the emergence of Cuba as a promising oil exploration area might affect relations with the United States.

"If Cuba is able to show that it has higher-quality crude at sufficient levels," Kavulich of the U.S.-Cuba Trade and Economic Council said, "the Bush administration would come under pressure to permit, at a minimum, purchases of Cuban-origin oil."

"Politically in Cuba, the stakes are even higher," he added. "Even if Cuba needed all the oil that was found the government might sacrifice energy independence to sell oil to the U.S. and other countries."