By Dianne Solis / The Dallas Morning News
Wildcatters pounce on island as nation aims to pump up economy
VARADERO, Cuba - Hidden behind knots of palm trees and a camouflaging billboard, pumpjacks wheeze and creak as they suck crude from the sugarlike sands of this island's premier resort.
Varadero's beaches, an hour east of Havana, are better known for foreign tourists slathered in suntan oil than rig workers caked in black crude. But these days the picturesque waterfront has become the focal point of the Cuban government's struggle to revitalize its energy industry - and a destination for wildcatters from around the world who are betting that Cuba could become an important oil producer. Even U.S. oil firms, still barred by U.S. law from doing business in Cuba, are eyeing possible future projects in the island nation.
"Cuba represents a world-class opportunity" for the world's energy companies, says Canadian oilman Frank C. Smeenk, who proudly displays a photo of himself with el Comandante en Jefe, as Fidel Castro is officially known here.
More broadly, the high-risk ventures of foreign energy firms are being closely watched for clues to how - or even if - Cuba adapts to capitalism. This Marxist outpost - one of the last of a dwindling breed - is still struggling from the 1991 collapse of the Soviet Union. Electricity blackouts are routine, bicycling is the favored mode of transport and scavenging for food in garbage bins is far too common.
In an attempt to cope with these problems, the Castro regime started a limited experiment with economic liberalization in 1993. The government has legalized the use of dollars, permitted some Cubans to start their own businesses in certain highly controlled areas, and allowed about 340 joint ventures between state-owned firms and foreigners in fields ranging from tourism to biotechnology.
Faced with paying more than $1 billion annually for petroleum imports - fully a third of all imports - Cuba placed special emphasis on its energy sector, which languished during the decades the Soviet Union sold oil to Cuba at drastically reduced prices.
While some analysts remain skeptical of Cuba's potential as a free market economy and an oil power, the island nation is attracting oil wildcatters, power-plant developers and nickel and gold miners from Canada, France, Britain, Sweden, Spain and Mexico. They range in size from Mr. Smeenk's tiny MacDonald Oil Exploration Ltd., which is drilling for crude in southeast Cuba, to France's giant Elf Aquitaine SA, which is in a joint venture to distribute propane and butane gas to Cuban households.
Currently, U.S. energy firms are barred from doing business in Cuba by a 36-year-old trade embargo imposed by the United States, in part because Mr. Castro's revolutionary government confiscated the refineries of Exxon Corp., Texaco Inc. and Royal Dutch/Shell Group in 1960. Moreover, the 1996 Helms-Burton law penalizes any foreign firm investing in properties formerly owned by U.S. companies before the 1959 revolution.
Many analysts discount the possibility the embargo will be lifted any time soon because the sex scandal involving President Clinton has diminished his political capital. Moreover, the arrest last week in Miami of 10 Cuban nationals on charges of spying on the United States may deepen tensions between the two countries.
But that hasn't stopped Texaco or Mobil Corp. from coming to Cuba this year on legal trade trips. And two months ago, when Cuba's Finance Minister Jose Luis Rodriguez made his first official visit to the United States for a U.N. appearance, at least one unidentified Texas oilman dined privately with him.
Also, Irving-based Exxon and Enron Corp. of Houston are said to be interested in oil, gas or power generation ventures in Cuba. Exxon, whose former refinery sits across the bay from Havana belching pollutants, is nothing if not persistent. It has recently returned to other countries where its assets were once expropriated - such as Mexico - or where the regime once barred it from investing, such as Vietnam.
John Kavelich of the U.S.-Cuba Trade and Economic Council in New York, says interest in Cuba among U.S. firms is "growing exponentially from oil to natural gas to alternate forms of energy."
Meanwhile, many Canadian energy firms gloat at the opportunity to operate in Cuba free of hardball U.S. competition. The point isn't lost on Cuban officials eager to portray the United States as isolationist in its political and trade position.
"There are some [companies] that are sure the blockade will be lifted and know that they need to be in place in Cuba," says Miguel Figueras, an official with Cuba's Ministry of Foreign Investment.
As Mr. Figueras offers up cups of potent Cuban coffee to a visitor in his office in downtown Havana, his nation's need for foreign investment is vividly demonstrated when the clanking of a window air conditioner abruptly stops. Yet another electrical brownout has hit the beautiful but peeling capital of La Habana.
Cuba's shortage of investment capital isn't helped by the shaky financial condition of other emerging markets, such as Russia and Brazil, which have made far more sweeping economic reforms than this Caribbean nation of 11 million. With a lousy credit rating and some $10 billion in foreign debt, Cuba can hardly afford to maintain its crumbling infrastructure, much less finance its own oil exploration, where costs can soar to $5 million per well.
That said, Cuba is far from abandoning its socialist ways, and the environment for foreign investors is still fraught with political risk - a state of affairs dramatically expressed by the big red letters on the route to embassy row in Havana that spell out "Socialismo o Muerte" (Socialism or Death").
Earlier this month, Deputy Foreign Minister Raul Taladrid told Bloomberg News that "neoliberal globalization presents more danger and damage than advantages and opportunities . . . Globalization of solidarity is what's most convenient to Third World nations."
A diplomat in Havana, pessimistic about Cuba's economic reforms, adds: "If I were a foreign investor, I would get a little nervous, as they have a history of expropriations."
As for oil exploration, Rafael Quijano, a Washington energy consultant who formerly worked for Mexico's state oil monopoly, notes that "since there are not many geological basins to explore in the world, places like [Cuba] look attractive. But the future of oil production in Cuba is very uncertain."
Nonetheless, investment in Cuban energy already has helped boost the nation's oil production 10 percent in the past two years. Much of it comes from using new technology on old wells at the country's biggest fields at Varadero, a resort in an uncomfortable co-existence with camouflaged pumpjacks and the scent of sulphur.
There have also been four small oil discoveries, including a find of high-value, low-sulphur crude similar to West Texas Intermediate, Canadian drillers say. But the current production of 33,000 barrels of oil a day only fills one-sixth of the country's needs, the Cuban government says.
By world standards, 33,000 barrels is a minuscule amount. Texas, for example, produces 1.2 million barrels of oil a day. But for a small exploration and production firm looking to strike it rich by finding an "elephant," as huge oil discoveries are known, Cuba beckons - just as far-flung venues such as Madagascar and Vietnam have drawn other companies.
Sitting on a porch beneath coconut-laden palms, Gustavo Echevarria, the man many of the foreign wildcatters call the Cuban father of geology, says the hunt will be worth the effort. Mr. Echevarria is credited with discovering the heavy oil fields of Varadero and nearby Boca de Jaruco decades ago.
Showing off a bottle of light, chocolate-hued oil that smells like paint thinner, he says he's certain that similar high-quality oil can be found in Cuba.
There is "huge potential" for offshore discoveries for oil companies with deep pockets, Mr. Echevarria says. Mexico's state oil monopoly, Petroleos Mexicanos, drilled in deep water offshore a few years back. So did Total SA of France., but both left Cuba without finding oil. Mr. Echevarria says they just weren't persistent enough.
But he is. At 63, Mr. Echevarria should be getting ready to retire. But with foreign drillers stalking him for advice, he now says, "I want to find the elephant."
Other oilmen are similarly convinced exploration is worth their time and money.
"There is certainly oil there," says Brad Hollingsworth, vice president of Calgary, Alberta-based Cubacan Exploration Inc. "It's just a matter of in what quantity, and whether Cuba will be self-sufficient or if it will always be an importer."
Of course, commercial ventures in a country where, until very recently, private enterprise was outlawed are still laden with obstacles. Mario Miranda, a Chilean-born accountant who is chief financial officer of MacDonald Oil, calls negotiating with the Cubans "hard, complicated and frustrating."
Mr. Smeenk, MacDonald Oil's CEO, minimizes the problems. A lawyer, he is confident his contract with Cuba's state-owned oil company is sound. For example, it specifies disputes will be handled by international arbitration panels, which is common in global business ventures in which both parties wish to avoid each other's domestic court systems.
There are other problems to be grappled with, however. Many of the foreign firms now in Cuba are small companies without huge cash flows. Last year, exploration on the island hit a bottleneck when two of three foreign seismic crews in Cuba pulled out after learning the foreign drilling companies they were to work for were struggling for capital.
Another problem is contracting labor. The Cuban government provides workers for foreign firms through a state-run hiring hall. An oil company searching for a seasoned geologist with years of experience on the island is just as likely to get a young engineer. And while the foreign company must pay the government in dollars, workers are paid in Cuban pesos - at a fraction of what the investor paid the government, which pockets the difference.
Right now, the biggest players in Cuba's energy sector are the Canadians. Canada is also Cuba's leading trade and investment partner. In April, Prime Minister Jean Chr...tien even visited the island to cut a ribbon with Mr. Castro at a new Canadian-built terminal at the Havana airport.
But the Canadians' interest in Cuba has also brought them into conflict with the United States by way of the Helms-Burton Llaw. Sherritt International Corp. of Toronto, the biggest Canadian investor in Cuba, operates a nickel mine and processing plant at Moa Bay that was expropriated by a predecessor of Freeport-McMoRan Inc. of New Orleans. Citing Helms-Burton restrictions, the U.S. government has denied visas to Sherritt's chief executive, Ian W. Delaney, and his family.
A Sherritt affiliate is even facing Helms-Burton scrutiny over a new natural-gas-fired power plant it is building with the Cuban government near Varadero.
Likewise, Genoil Inc. of Calgary is drilling on land that was once leased by the predecessor of Amoco Corp. of Chicago. "We have had our calls from the [U.S.] State Department," says Michael Perkins, Genoil's vice president of international. He believes there are now no claims to the concession.
Ultimately, efforts to open up the Cuban economy - and in particular its energy industry - may determine the future of the Castro regime, analysts say. The Cuban government needs to provide electrical power to maintain its political power, says Dr. Jonathan Benjamin-Alvarado, a University of Georgia research associate who has studied Cuba's energy needs.
And whether Cuba moves toward a solidly mixed economy, or a market economy with political democracy, "I really see energy as paramount to a smooth transition," Dr. Benjamin-Alvarado says.
Otherwise, he adds, "democracy will be a hollow victory if there are no lights to read by."
© 1998 The Dallas Morning News