Repsol’s dry well and the domino effect in Cuba
June 21, 2012
by Emilio Morales and Joseph L. Scarpaci

Raul Castro’s government’s attempts to jumpstart Cuba’s economy and its own prospects keep meeting with frustration. Numbers of new nations have become oil producers in the last several years, and Cuba hopes to be one. But after its major development prospect, the Spanish consortium Repsol struck a dry well in deep waters off the northern shore after having spent $150 million USD in its search for hydrocarbons, it backed off.

Repsol was the largest bidder on Cuban oil but it tossed in the towel after only the first round in a long struggle to find black gold. The company was further discouraged by striking a dry well in the Florida Straits. Perhaps, equally critical was the Cuban government’s support of Argentina’s recent expropriation of the energy firm YPF, which is affiliated with Repsol. They will defer new exploration commitments until 2016.

This is not the time for Cuba to support nationalizations anywhere. It is in desperate need of foreign capital to develop its industries. Who is going to risk investing millions in long-term projects that could be lost in a matter of minutes?

This bodes poorly for the future of the island’s economy and could trigger a domino effect among other potential investors.

Undoubtedly, this bust will dissuade investors who were looking at the island as a potential emerging market, not just in the energy sector, but also in tourism, real estate, agriculture, sugar, among others.

Raúl Castro’s government has to send strong signals if it hopes to tap into foreign investment.

A substantial Cuban oil supply would make the best argument in more than 50 years to end the U.S. trade embargo against the island. It would give large U.S. oil companies a chance to exert pressure to ease up on the embargo and establish new terms of trade for the 21st century.

The mere presence of the recently installed, mammoth drilling platform, Scarabeo 9, represents a beacon of hope for the Cuban government. Even if oil is discovered, it will take between five and seven years to install the necessary drilling equipment to bring the well into full production.

But Repsol’s failed attempt casts doubt over the Cuban government’s claim that there are 20 billion barrels of oil between Florida and Cuba, considerably more than the U.S. Geological Survey’s estimate of just 5,000 barrels of crude.

Perhaps the most visible symptom of Cuba’s economic battle is its untiring medical team devoted to Venezuela’s President Chávez’ fight with cancer, keeping him alive along with his support of the Cuban economy. But keeping Chavez alive and presidential until elections may be ‘mission impossible’ for the team of Cuban physicians tasked to his wellbeing in light of the apparent aggressiveness of the disease and the frequent operations he has had in Havana.

If Chávez is replaced in the race because of his deteriorating health, it will place the Cuban government in a precarious position.

Raul’s next step? He needs a deeper and faster economic opening. The government cannot succeed if it is perceived as incapable of controlling its economy and implementing meaningful reform.

No country can progress if it is relying solely on miraculous oil windfalls or the kindness of allies. Rather, countries are built on the rights that their citizens hold in forging their own businesses that can freely produce, import, and export with minimal state interference

Cuba remains one of the most backward western hemisphere economies in the 21st century. Now is not the time for improvisation or counting on strokes of good luck. Instead, this is the moment for embracing a new mindset about work and for opening up to foreign investment that affords the right for Cuban private enterprises to develop across the board.

Real-estate and a revived sugar industry [was "domino" a pun intended?] could generate as much revenue as oil and with a shorter turnaround time. They would also instill much needed incentives for investors who could help to solve unemployment, reduce housing shortages, grow the private sector, increase wages, and drive up exports. In the end, small and medium enterprises could help raise the quality of life.

Repsol’s initial failure to discover oil may be a blessing in disguise and serve as a wake-up call to the governing octogenarians to launch a real plan for development. Otherwise, the situation in Cuba could deteriorate quickly as a wave of uncertainty grows across the island. And time is running out.

The authors are principals at The Havana Consulting Group and recently published: Marketing without Advertising: Consumer Choice and Brand Preference in Cuba (Routledge, 2012). Scarpaci chairs the marketing and management department in the West College of Business, West Liberty University, West Virginia. They are members of the American Geographical Society’s Writers Circle./small>

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