Sunday, June 24, 2012

Repsol’s Dry Well and the Domino Effect in Cuba

Repsol's Dry Well and the Domino Effect in Cuba
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

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 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.

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