Is China Drilling Off the Coast of Cuba?

There has been on going speculation over the last year that China is drilling for oil off the coast of Cuba. Recently Republican Florida Sen. Mel Martinez said China drilling off the coast of Cuba was just not so and was merely an urban legend.

So…which is it? Are they drilling or aren’t they? Since I don’t believe anything politicians say and half of what I read without investigating it to be true myself, I decided to do some research. Here is what I found.

In March 2004, China’s Petrochemical Corporation, Sinopec, signed a memorandum of understanding with Cuba’s national oil company, Cuba Petroleo or Cupet, to explore four oil blocks in Cuba. China’s Sinopec conducted six months of geological studies of the four Cuban blocks. This was the first attempt by Sinopec, China’s second largest oil and gas company, to enter oil and gas exploration and production in Cuba. It is important to also note the communist governments of China and Cuba owns these companies.

Approximately a year later in February 2005, China’s Sinopec signed an agreement with the Cuban government to jointly produce oil off the coast of Cuba.

So, basically what you have here is a production sharing agreement between Communist China government owned Sinopec and Cuba. Now for those of you who do not understand such business savvy terms, this basically means the Cuban government awards the execution of exploration and production activities to an oil company. In this case the company is Sinopec. The company bears the mineral and financial risk of the exploration and if successful, the company is permitted to use the recovered oil (cost oil) to pay all the expenses to recover it. All money after that (profit oil) is split between the government and the company at the rate agreed upon.

Here is some more information about oil exploration in Cuba. It is basically a timeline of energy news compiled from the World Security Institute. Here you will find not only is China dealing with Cuba, but so are places such as Canada, Brazil, Venezuela and Spain, to name a few.

Since we are focused on China, I have copied and pasted that information here.

January 31: Cuba and China signed a contract in Havana providing for the Asian giant's participation in extracting oil from a deposit off the island's north shore, the press reported. The deal is between Cubapetroleos and the Chinese oil company Sinopec, said the official daily newspapaer Granma. In December, Fidel Castro announced discovery of oil at a site offshore from Santa Cruz del Norte, some 55 kilometers (33 miles) east of Havana. The deposit is believed to hold some 100 million barrels of "light" crude, or the equivalent of 14 million tons. (EFE, Prensa Latina, 31/1/05)

February 8: China's oil giants began cultivating their virgin soil in Cuba. China Petroleum & Chemical Corporation (Sinopec), as the first comer, has inked a contract with Cuba Oil Company (Cubapetroleo) to jointly exploit oil in the Caribbean country. Under the terms of their contract, the two sides will join forces to prospect and exploit a potential oil-producing region. Chinese experts believe it is a significant beginning of the cooperation between China and Cuba in the petroleum industry. (SinoCast, 8/2/05)

March 22: Chinese oil drilling equipment has begun arriving in Cuba as state-run Cubapetroleo (Cupet) and its foreign partners prepare to significantly increase drilling along the northwest coast, industry sources said. "Four service units and a small rig have arrived and we are waiting for more," said a Cuban oil service manager, asking his name not be used. There are currently five rigs operating along the northwest heavy oil belt, an 80-mile (128-km) stretch of coast in Havana and Matanzas provinces from whence come all of Cuba's 70,000 to 80,000 barrels per day of heavy crude at 8 API to 18 API and with a high sulfur content. The poor-quality oil is burned in modified power plants and factories. Cuba imports a similar amount of oil and derivatives, with preferential financing from Venezuela. Canadian companies Sherritt International (S.TO) and Pebercan Inc. (PBC.TO), in conjunction with Cupet, account for 60 percent of the output, plus 2 million cubic meters of natural gas per day. (Reuters, 22/3/05)

April 6: The operator of China's second-largest Shengli oilfield is stepping up overseas exploration, spending more on such ventures this year as the world's No. 2 oil user grapples with falling reserves, officials said. Shengli Oilfield Administration Bureau, a unit of state-run Sinopec Group, will spend about $40 million drilling for oil and gas in Cuba, Iran and central Asia in 2005, company officials said. "This will be the heaviest spending in a year and we expect the pace to continue in the next few years," a Shengli executive told the press. Shengli, which is among the first Chinese companies to venture abroad, will sink a total of eight wildcat and appraisal wells this year, four in Kazakhstan, two in Iran, and one each in Cuba and Kyrgyzstan. (Reuters, 6/4/05)

November 24: PetroChina Great Wall Drilling Co., Ltd. and Petroleum Company of Cuba held a ceremony for signing two drilling service contracts on November 3, 2005. It is the second-time cooperation between Great Wall Drilling Co., Ltd. and Petroleum Company of Cuba after the signing of a one-year petroleum service agreement on one 1500HP drilling rig and one 2000HP rig on April 8 this year. The contract signed this time includes three 2000HP drilling rigs. The contract has a period of one year and a value of over US$24 million. The project will be launched in January 2006. (China Chemical Reporter, 24/11/05)

Then I also found some 2005 reports from the Energy Intelligence Group and the National Post’s Financial Post & FP Investing in Canada.

…China is seeking oil everywhere and Cuba is no exception. Three large Chinese companies, SINOPEC, Petro China and CINOOC - China National Offshore Corporation, are involved in a large agreement, perhaps already underway, for coastal and deep-water explorations. Most significant to this topic, especially in light of other Chinese investment in Cuba, is the fact that Sinopec, China’s second largest oil company, has stated a goal of helping boost Cuba's domestic oil production and producing 60% of its oil needs by 2006. (As best we can gather by extrapolating from various sources, the island is producing roughly 43-45% of its minimal needs today, thus 60% self-sufficiency by next year would be a tremendous aid for Cuba‘s desperate needs for energy, particularly electricity and gasoline.) Although Cuba's oil production is relatively tiny, it has managed to quadruple its production levels of 1990 to 71,000 in 2003 and increase that to 75.000 b/d in 2004, but the country needs 160,000b/d to function just minimally (source: Energy Intelligence Group, Inc. International Oil Daily, February 1, 2005).

Additional plans for exploration and development of other blocs of potential reserves were announced by two other Chinese oil companies, China National Petroleum Corp. and China National Offshore Oil Corp., after talks with CUPET, Cuba Petroleum, Some exploration will be in coastal regions but much, based on the better quality of the oil, will take place in off-shore deep waters (source: National Post's Financial Post & FP Investing [Canada], February 1, 2005, all but Toronto Edition).

So, Sen. Martinez may be right. China may not be drilling oil off the coast of Cuba. Not yet anyway…look folks, the point isn’t that China is not presently drilling for oil 50 to 90 miles off the coast of Florida, but the bigger picture and point is they can! And thanks to the United States Congress, we can’t!

Some politicians like Sen. Martinez would like to focus on what is happening instead of what could happen. They can drill, we can’t. They are planning to, we aren’t. Even the government educated dumb masses should be able to figure that out.