Obama’s Cuba visit shakes up Latin America’s oil scene

The wider energy significance of the reopening of ties with Cuba lies across Latin America, writes Robin Mills.

A White House photographer captured a striking image of Bar­ack Obama seeing Cuba for the first time through the windows of Air Force One. Oil was probably not foremost in his mind, but the American opening to Havana, the reward for patient diplomacy, was abetted by falling oil prices. In turn, it weakens the appeal of the leftist-resource nationalist model throughout Latin America.

Cuba has a lot to gain from the lifting of the US embargo, not least in energy. On its northern coast, just east of Havana, are some heavy oilfields, producing about 50,000 barrels per day, less than a third of the country’s consumption. Geological estimates, although still speculative, suggest billions of barrels could be found offshore.

Ironically, while the oil industry continues to be barred on environmental grounds from drilling in the US eastern Gulf of Mexico, the Cuban sector, at its closest point about 50 kilometres from Key West in Florida, is open. It is certainly preferable for the US to be able to discuss emergency response with the Cubans in case of any spill.

In 2004, the Spanish company Repsol drilled in deep waters, finding oil but not in commercial quantities. Brazil’s state giant Petrobras, though, withdrew from exploration in 2011, finding it unpromising.

A Canadian company, Sherritt, has capitalised on the embargo, producing most of Cuba’s oil and also mining nickel. Now it faces competition from newly liberated US companies, as well as others who can more easily bring in rigs and equipment.

With most of its power generation coming from oil, which is dirty and expensive, Cuba could benefit from importing gas from the US, and perhaps in return exporting ethanol fuel made from sugar cane, for which its climate is ideal.

But the wider energy significance of the reopening with Cuba lies across Latin America. The petro-diplomacy of the former Venezuelan president Hugo Chávez involved sending more than 100,000 barrels per day of crude oil and refined products from Venezuela to Cuba by 2012, in return for doctors, teachers and – more sinisterly – intelligence advisers and ideological cover.

The slump in oil prices makes this aid less valuable to Havana, and the shambolic state of the Venezuelan economy and the growing power of the opposition make it doubtful that it will continue for long.

In contrast to Mr Obama’s disappointment at the Middle East’s failure to follow his “arc of history”, a low-key approach has paid dividends in Latin America. Leftist governments, reliant on natural resource earnings, are all faltering in the face of the commodity slump.

Argentina, with enormous resources of shale oil now in early development, elected a centre-right president, Mauricio Macri, in October, replacing an administration friendly to Venezuela and Cuba. Rafael Correa in Ecuador (an Opec member) will not run again for the presidency next year.

In Bolivia, a producer of gas, gold and lithium, the economy has done well but is slowing, and its president Evo Morales failed to change the constitution to allow him to make an­other run in 2020.

Even Brazil, which has had good relations with Washington and Havana under moderate left-wing leadership, is staggering under a corruption scandal and the enormous debts of its deepwater giant Petrobras.

The Castros are still well entrenched in power in Havana, of course. And if right-wing or centrist governments return to power across the continent, they have to balance necessary financial retrenchment against preserving popular social programmes. New international investors will worry about expropriation or higher taxes if and when commodity prices bounce back, as citizens feel their natural resources were given away at bargain rates.

But for now, more US and free market-friendly politics are ascendant. That, in turn, may mean more opportunities for oil companies, and more production in a glutted market, from the plains of Patagonia to the ocean depths off Cuba.

Robin Mills is the chief executive of Qamar Energy and the author of The Myth of the Oil Crisis