Petroleum, oil was produced by Sherritt from near-shore oil deposits, which were explored and developed from land-based drilling locations. The company held an indirect working interest that varied from 40% to 100% in 10 production-sharing contracts (PSCs) in Cuba. Most of Sherritt’s Cuban oil production was derived from the Canasi, the Puerto Escondido, the Seboruco, the Varadero West, and the Yumuri oilfields. Other working interests included the exclusive exploration rights on four blocks in Cuba’s deepwater economic zone off the north coast and 100% indirect working interests in four PCSs with the Government (Sherritt International Corp., 2006a, p. 20).

Sherritt sold its petroleum production to the Cuban Government, most of which was consumed by state-owned powerplants. In 2005, Sherritt reported that it had six active drilling rigs in Cuba as part of its petroleum exploration and development program. The company planned to continue with its exploration program in 2006 and planned to invest about $140 million to maintain existing production levels and to extend reserve life. Exploration and appraisal efforts were to be focused on San Anton, Playa Larga, and Majaguillar-Corajol (Sherritt International Corp., 2006a, p. 5, 14).

In December 2004, a petroleum deposit with an estimated 100-million-barrel reserve, was discovered at the Santa Cruz field, which is located off the east coast of Havana, by Sherritt International Corp. and Pebercan Inc. The petroleum had a gravity of 18º API and contained less than 5% sulfur, which was of better quality than the petroleum used in Cuba for power generation, which had an average gravity of 16º API and a sulfur content of 8%. In 2005, Sherritt continued with its appraisal program for the Santa Cruz field to determine the commercial viability of the discovery. The first Santa Cruz appraisal well was completed in July 2005, but work at the well was suspended owing to high water production rates. A declaration of commerciality was expected to be made following the completion of the appraisal of the well. In 2006, the company planned to drill an exploration well on Block 10 at Playa Larga, appraise the Majaguillar-Corajol deposit, and follow up on the results of the 2005 exploration wells (Sherritt International Corp., 2006b, p. 20; 2006c, p. 21).

In April 2005, Petróleos de Venezuela S.A. (PDVSA) opened a branch in Havana, known as PDVSA-Cuba, to undertake the exploration, production, and refining of petroleum in association with CUPET (Agencia Cubana de Noticias, 2005§; Bilaterals.org, 2005§).

Pebercan Inc. held interest in five blocks in Cuba; these included: Block 7, Block 12, Block 13, Block 15, and Varadero Profundo, and together cover an area of 6,055 km2. During 2005, the company drilled at least 11 wells at a cost of $59.5 began the construction of an 85-megawatt (MW) expansion at its Cuban facilities, which was expected to be commissioned in the first quarter of 2006. The electricity produced by Energas was supplied to a Cuban Government agency under long-term fixed price contracts and gas was supplied to Energas at no cost. Sherritt planned to increase electricity production capacity to 376 MW from the existing 311 MW upon completion of an additional 65-MW expansion, which was expected to be completed during the second quarter of 2007 (Sherritt International Corp., 2006a, p. 5).

Government Policies and Programs

According to the U.S. Department of State (2005§), the Cuban economy continued to recover from a decline in the GDP of at least 35% between 1989 and 1993 following the disintegration of the Soviet Union and the loss of Soviet subsidies.

Although Cuba has pulled back on some of the market reforms it had introduced in 1993 and 1994 and has once again embraced a policy of recentralization, the Government has signed a series of agreements in the mining sector in the past 5 years that might significantly aid the economy in the near future. Among these agreements is one signed in 2000 with Petróleos de Venezuela S.A. (PDVSA) under which Venezuela would supply Cuba with 53,000 barrels per day (bbl/d) of petroleum at preferential prices. According to a 2005 study performed by the Institute for Cuban and Cuban-American Studies, the 53,000 bbl/d imports would supply about 30% of Cuba’s domestic petroleum demand. Under the terms of the agreement signed with PDVSA, 80% of petroleum imports were to be paid within 90 days at prevailing market prices, and the remaining 20% was to be paid in 5 to 20 years at an average annual petroleum price, with the option of paying up to one-fifth of the 20% through educational, medical, and sport services to Venezuela. For the period between 2001 and 2003, Cuba’s unpaid petroleum deliveries debt reportedly amounted to $752 million and was estimated to be about 80% of the debt owed to PDVSA by its foreign clients.

In December 2004, the Governments of Cuba and Venezuela signed the Bolivarian Alternative for the Americas Agreement (ALBA), which arranged for cooperation and bilateral relations between the two countries. In 2005, under the ALBA, Venezuela would supply Cuba with up to 90,000 bbl/d of petroleum, for which Cuba agreed to pay a price of not less than $27 per barrel. Other provisions under the agreement included allowing Venezuela to hold 100% ownership of its investments in the country, the opening of state bank subsidiaries in each other’s country, the elimination of tariffs and import duties on Venezuelan imported goods, tax exemption for all Venezuelan capital in Cuba, and the financing of infrastructure projects (Canadian Foundation for the Americas, The, 2004§; Cuba.com, 2004§; Havana Journal, 2004§). In 2004, Venezuela supplied 78,000 bbl/d of petroleum to Cuba. Cuba, however, reportedly did not consume all the petroleum domestically but instead sold part of it, through negotiations with PDVSA, to Guatemala, Honduras, El Salvador, Nicaragua, and Panama. In 2005, Venezuela was to increase petroleum supplies to Cuba to meet all of the country’s needs in excess of domestic production. In addition, Cuba was to provide 2,000 higher education fellowships to Venezuelans, while Venezuela was to transfer technology on energy to Cubans and to award fellowships in the field. As of October 2005, Cuba’s petroleum debt to Venezuela was estimated to be $2.5 billion.