May 11, 2006

May 11, 2006 | WebMemo on Latin America

Common Sense Over Cuban Drilling

Lawmakers on Capitol Hill are grabbing at straws to put off inevitable gasoline price hikes so Americans won't have to change their consumption habits. Now that China's state petroleum company, SINOPEC, plans to drill in Cuban waters between Havana and the Florida Keys, they are reacting to foreign competition as well.  

 

Some in Congress think the United States should join the Chinese so they don't recover most of Cuba's hydrocarbons. Others would block all drilling in the Florida Straits to keep the Chinese from establishing a presence there, safeguard coral reefs, and reassure tourists who don't want to see oil derricks on the horizon. 

 

There is a more practical middle ground: 

  • To counter current price hikes, regulators should eliminate supply bottlenecks by promoting refinery expansion, eliminating unnecessary gasoline blend requirements, and by easing tariffs on imported ethanol. 
  • For the long term, the United States should establish environmental and security oversight in its own waters and allow private firms to tap resources responsibly in the eastern Caribbean. 

Come on in, the water's fine

Brazilian, Spanish, and Canadian companies have drilled in Cuba's Economic Exclusionary Zone for years, ever since geologic surveys suggested potential deposits in the North Cuban Basin between Key West and Havana. (See Map 1.)

 

Map 1

 

Until now, few in Washington worried because commercial quantities of lightweight crude had never been found there, but China's entry into Cuba's hydrocarbon industry, which was announced in January 2006, has raised expectations. No one doubts the People's Republic is serious in its desire to fuel its rapidly growing economy or to flex its commercial muscle and even defend its interests near U.S. shores. 

 

This past year, Cuba dangled a tempting offer in front of U.S. oil firms. Like other private suitors, these firms were invited to bear all exploration and drilling costs in return for a share of any oil produced in partnership with Cuba's state petroleum company. Some in Congress favor partial lifting of U.S. trade sanctions against the Castro regime to let American firms enter such arrangements. 

 

Not so fast

Members of Florida's congressional delegation don't think exploration in U.S. or Cuban waters is a good idea, and argue that any leaks and loose byproducts could harm marine habitats and threaten Florida's $50 billion tourism industry. Moreover, nearby Chinese drilling platforms could provide better signal reception for electronic eavesdropping activities now reportedly conducted on the island. 

 

Florida lawmakers want to preserve an existing 1980s-era ban on oil and gas exploration and extend the off-limits zone to more than 200 miles off Florida's shores, which would include the western end of Cuba. New legislation would prevent U.S. renewal of the 1977 agreement that allows Cuba to conduct commercial activity on its side of the Florida Straits. In theory, foreign drillers would have to leave, including the Chinese. 

 

Practical pitfalls

Any response to the issue of oil and gas exploration in the Florida Straits will have long-term ramifications. Lifting U.S. sanctions against the Castro regime to permit joint ventures with the Cuban state raises security concerns and reduces incentives for a transition away from communism when Cuba's aging dictator dies. If wells produce, U.S. oil platforms would aid a hostile despot who once wrote that his destiny was to make war on the United States. 

 

Such wells could also be targets for asset seizure-the regime's early history of expropriations should be a warning. More recently, Canada-based FirstKey Technologies spent $9 million to figure out how to renovate an old Soviet-built power plant, but then reportedly lost its stake in 1999 when Cuban officials took the plans and used them to shop for other partners.  

 

Elsewhere, Castro ally Hugo Chávez in Venezuela just took over local operations of France's Total and Italy's Eni petroleum companies for their unwillingness to pay higher taxes. In April, Bolivian president Evo Morales told foreign gas field operators to hand over more earnings or get out. Ideologically friendly state companies from China and Iran are proving more compatible partners for these regimes. 

 

Blocking foreign energy production in Cuban waters may be impractical. The United States could have trouble suddenly laying claim to an economic zone it has ceded to Cuba. As one congressman pointed out, Canadian companies drill as close as 50 miles to American shores near Maine, Washington, and Lake Ontario. Fears of additional 200-mile no-drill zones around the United States could drive gasoline prices higher. 

 

In defending such a move, America might have to police waters that extend south of Cuba. Support from allied nations could come at a steep price or not at all since the United States has already called in chits for operations in the Middle East. Likewise, personnel, hardware, and fuel to enforce such a ban are largely tied up. 

 

What Congress should do 

Instead of debating whether to permit or block drilling in nearby Cuban waters, Congress should:   

  • Relieve supply line bottlenecks for the near term. Federal policy should promote fuel diversity, so that markets, not government regulations and taxpayer subsidies, determine abundant supply. It should ease complicated regulations that limit refinery expansion and mandate complicated regional recipes for gasoline that have made it difficult for existing refineries to meet growing demands. Congress should eliminate the current 54-cent per gallon tariff on imported ethanol. 
  • In the long term, promote the responsible development of U.S.-controlled energy resources in the eastern Caribbean and elsewhere to lessen the nation's dependence on imports and vulnerability to disruptions in supply. The Bush administration and Congress should elaborate appropriate safeguards to protect fragile habitats and ensure that commercial operations remain far enough offshore to avoid impacting tourism. U.S. vigilance in these waters could help safeguard environmental concerns over drilling on both sides of the Straits and alert U.S. decision-makers to possible hostile military or intelligence uses of foreign platforms. 
  • Allow market forces to shape demand. If gasoline gets too expensive when demand exceeds supply, consumers will change their consumption habits, promoting the development of alternate technologies such as fuel cells and hydrogen power. No one should get too comfortable with the status quo. 

Conclusion

Drilling wells won't lower prices in the near term. Exploration is speculative, and there is a lag time for viable wells to start producing. So far, existing fields near Cuban beaches have produced small quantities of poor-quality sulfurous crude that must be blended with lighter oil to refine into gasoline. Addressing our own limited refining capacity, complicated blend requirements for fragmented internal markets, and senseless tariffs on imported ethanol will help lower prices more quickly. 

 

Depletion of known reserves is a fact, however. To keep our economy moving until renewable energy sources come online, petroleum exploration must continue. The most practical place to look is right here at home. It makes little sense to permit U.S. oil firms to explore Cuban waters, let a hostile dictator reap profits, and then allow him to kick such firms out. Instead, they should be able to tap adjacent U.S. seabeds-where exploration is under U.S. environmental scrutiny-that share the same structures and potential deposits.

 

Stephen Johnson is Senior Policy Analyst in the Douglas and Sarah Allison Center for Foreign Policy Studies at The Heritage Foundation.

About the Author

Stephen Johnson Senior Policy Analyst
The Kathryn and Shelby Cullom Davis Institute for National Security and Foreign Policy

Related Issues: Latin America