An Information Service of the Cuba Transition Project Institute for Cuban and Cuban-American Studies University of Miami

 

Jorge R. Piñón*

Supply and Demand     

     Cuba has a deficit of approximately 90-100,000 barrels per day (b/d) of crude oil/petroleum products in order to meet the minimum internal demand estimated to be around 170,000 b/d. Almost all of Cuba’s heavy crude oil production is use directly as boiler fuel in the electric power, cement, and nickel industries. Less than 10 percent of Cuba’s crude oil production goes into refinery processing.

     Under an advantageous financial agreement, Cuba is receiving today approximately 100,000 b/d of crude oil and refined products from Venezuela.(1) Signed in October 2000, the cooperation accord calls for the oil to be repaid over a fifteen-year period with an annual interest rate of two percent and an initial two-year repayment grace period.

     At current crude oil/refined product prices, and estimating a 60/40 crude oil to refined products ratio, Cuba’s oil debt to Venezuela is estimated at $1.2 billion per year. It is also estimated that Cuba’s unpaid balance since the bilateral accord's inception has now surpassed the $2 billion mark.(2)

     Rice University economists Amy Myers Jaffe and Ronald Soligo estimate that in a future free market system generating an annual per capita gross domestic product (GDP) growth rate of four percent (along with an annual population growth rate of 0.5 percent), Cuba’s oil energy consumption would nearly double from 179,000 b/d in 1998 to 349,000 b/d by the year 2015. (3)

     Based on onshore and coastal oil reserves of 1 billion barrels, Cuba could sustain production rates of about 50-70,000 b/d of crude oil for the next 20 years. With future demand expected to reach the 350,000 b/d level within the next 15 years, Cuba would continue to be a net importer of oil, excluding any significant discoveries of oil below the deep waters of Cuba's exclusive economic zone (EEZ) in the Gulf of Mexico.

     However, recent U.S. Geological Survey (USGS) reports place the North Cuba Basin potential at approximately 5 billion barrerls of undiscovered oil, which could make the island self-sufficient in its oil needs as well as a net exporter. (4)

The Challenge

     Cuba’s energy challenge begins with its future economic growth and rising standard of living within a free market environment. This anticipated growth will depend largely on the development of a competitively priced, readily available, and environmentally sound long-term energy plan. There will be no sector, industry, or infrastructure that will not be directly impacted and/or influenced by such a comprehensive energy policy.

     A new energy policy should embrace energy conservation, modernization of the energy infrastructure, and a balance sourcing of oil and natural gas supplies in a way that protects the island’s environment. This future reconstruction period, along with the search and development of new energy sources, will also provide national and foreign firms alike with many investment opportunities worth billions of dollars.

A Decaying Oil Refining System

     Cuba has two operating oil refineries: the Ñico Lopez refinery (formerly Esso and Shell) in Havana harbor, and the Hermanos Diaz refinery (Texaco) in Santiago de Cuba. Over the years, these refineries have undergone some processing upgrades such as middle distillates and reformer feed hydrotreating, sulphur recovery, and naphtha stabilization. According to Cupet, Cuba's state-owned oil company, the island’s refinery system has a capacity of approximately 222,000 b/d. However, recent refinery production has been running around 75-100,000 b/d. Even though most Cuban crude oil production is directly earmarked as electric power plant fuel, about 20 percent (blended with Venezuelan crude) has sporadically gone into refinery processing.

     From 1985 through 1991, the former Soviet Union provided the financial and technical assistance to build a 76,000 b/d refinery in the southern Caribbean port city of Cienfuegos, which has nonetheless never become operational. This refinery, technologically obsolete today, has a similar configuration to the Schwedt (Veba-BP) refinery located near the Polish border of the former East Germany. The Cienfuegos refinery still requires a catalytic cracker, vacuum distillation unit, and other extensive modifications and upgrades, at an estimated cost of at least US$500 million. Over the years many national oil companies such as Pemex (Mexico), PDVSA (Venezuela), Ecopetrol (Colombia), and Petrobras (Brazil) have evaluated the economic and strategic potential of upgrading and activating the Cienfuegos refinery. At the time all reached the same conclusion: no economic or strategic justification existed for such a major investment under the current national political and economic structure.

     The main foreign crude oil unloading facility in Cuba is found in the north coast port city of Matanzas, east of Havana. The facility includes a 187 km – 21 inches crude oil pipeline with a capacity of 134,000 b/d, connecting the port with the Cienfuegos refinery located on the south central coast of the island. Other pipelines connect the port facility with the Ñico López refinery in Havana, the thermal electric power plants in Santa Cruz del Norte and Matanzas, and the crude oil fields of Varadero and Jaruco/Puerto Escondido.

     Recently, Venezuela’s PDVSA has again evaluated the feasibility of rebuilding the Cienfuegos refinery. With the current growing world oil demand and related world oil refinery processing capacity shortfall, the upgrading and even expanding of the Cienfuegos refinery makes long term economic and strategic sense. It would supply Cuba’s need for refined products and could also function as an export merchant refinery.

     The political will between Cuba and Venezuela exists in order to go forward with this project; whether the needed capital is available, along with the commitment to manage its associated political and legal risks, is another issue. The completion of this project would still be 3-5 years away, assuming a $1 billion upgrade to an expansion of 100-150 b/d of processing capacity.

Analysis and Recommendations

     Cuba’s refineries are technologically obsolete, energy inefficient, and huge environmental threats; and should be shut down. The 5.2 sq km Havana bay is one of the world’s ten most polluted harbors of the world. According to the Center for International Policy's Cuba Project, “The worst sources of pollution of the waters in the bay are the López Refinery, sewage, cargo boats and cruise ships docked at the harbor, and the untreated waters of three rivers that flow into the bay.”(5) The Hermanos Díaz refinery is also one of the main culprits in the contamination of the 11.9 sq km Santiago de Cuba harbor.

     Even though the former refinery owners might seek some sort of financial compensation for Cuba’s expropriation of their assets, in private they express very little hope of re-investing in these obsolete plants, which now are of very little value, not to mention the additional burden of assuming their environmental liabilities. These old sites should be refurbished and turned into distribution facilities for refined products supplied via pipeline from the the Matanzas superport, thereby avoiding tanker traffic in the environmentally sensitive Havana harbor. Once the Cienfuegos refinery becomes operational, Santiago de Cuba, the island's second most populous city, could be supplied via coastal tankers as well.

     Within an overall national energy strategy and an aggressive deep-water Gulf of Mexico oil and natural gas exploration strategy, an expanded and fully integrated Cienfuegos refinery could become one of the principal cornerstones of Cuba’s future oil and natural gas industry.

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Notes

1. Cf. Marianna Parraga, "Petrocaribe captara inversion del holding," El Universal (Caracas), 2 July 2005, [http://politica.eluniversal.com/2005/07/02/eco_art_02201A.shtml].

2. Cf. Cuba Facts, "How Venezuela Subsidizes the Castro Regime," April 2005 [http://ctp.iccas.miami.edu/FACTS_Web/Cuba%20Facts%20Issue%2010%20April%202005.htm]; Cuba Focus, "Castro's Venezuelan Bonanza," April 20, 2004, [http://ctp.iccas.miami.edu/FOCUS_Web/Issue54.htm].

3. Amy Myers Jaffe and Ronald Soligo, "Energy in Cuba," Cuba in Transition, Vol. 12 (2002), pp. 422-430, [http://lanic.utexas.edu/project/asce/pdfs/volume12/soligo.pdf].

4. Cf. U. S. Geological Survey, "Assessment of Undiscovered Oil and Gas Resources of the North Cuba Basin, Cuba, 2004," May 2005, [http://pubs.usgs.gov/fs/2005/3009/].

5. Cf. "Reclaiming Havily-Polluted Havana Bay," Cuba Project, Center for International Policy, 21 September 2000.

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*Jorge R. Piñón is an international energy consultant with over 25 years of international downstream oil and gas experience at leading multinational companies such as Shell, Transworld Oil, Amoco, and British Petroleum. A Research Associate at the Institute for Cuban and Cuban-American Studies at the University of Miami, Mr. Piñón holds a degree in International Economics and Latin American Studies from the University of Florida.

**First of a three-part series.