Market Overview

January 5, 2011: Cuba Drills Deep, Losers And Winners


Well, well. In early March, Cuba will commence with deep water drilling under contract with Repsol (YPF)and Statoil ASA (STO), using an older rig that was recently rehabbed by the Chinese. Reports indicate that it has fewer safety features than the BP's infamous Deepwater Horizon. The site is located a scant sixty miles southeast of Key West, Florida.

How can this be? Thank President Jimmy Carter, who etched a 1977 agreement essentially splitting the Straits of Florida 50/50 between the US and Cuba. Expect scores of deep water wells around Cuba's multi-billion barrel oil pool over the next few years. Eight companies are presently working to quickly expand Cuba's fossil fuel capacity, including Brazil's Petrobas (PBR) and Sherritt International (SHERF.PK).Venezuela,India and China oil interests have diminished Sherritt's originally large role, thanks to providing Cuba with goodies necessary to keep the Cuban economy afloat. Spain has done likewise, based upon my observations as a legal visitor to Havana indicate.Many foodstuffs in the state-run groceries were Spanish and Brazilian in origin.

Winners in the deep water projects are the above-named companies and government-owned oil production companies, Hugo Chavez (he is already being thanked with billboards in and around Havana) and the Castro Brothers, for whom the oil revenue comes in the nick of time to avoid further economic distress.

Losers will be the unprotected, rich fishing areas and beaches of coastal North Carolina, which is where oil spilled from the first deep water drilling projects will almost certainly have a profound impact. Ironically, a modern Wilmington, NC container port that would have provided that economically depressed area with thousands of jobs and an enhanced Coast Guard environmental presence to contain oil spills has been effectively shut down by Democratic Congressman Michael McIntyre, environmental extremists and an organization called NoPort. So much for unintended consequences. Additional losers will be American deep water drilling companies that are not able to extract oil in and about Florida, which may be drawn into some Cuban deep water wells, all American coastal areas adjacent to the Gulf of Mexico (Cuba is planning wells from east of Havana to the western tip of the island near the Yucatan Peninsula), and the Cuban people who will see small benefits at the market but a further entrenchment of the communist regime.

Investors are likely to see opportunities in developing the woeful Cuban infrastructure with companies such as Halliburton (HAL) and interior mineral extraction by companies such as Freeport-McMoran (FCX). Certainly, the situation warrants investor interest, with many companies bidding to partner with the Cuban leadership to tackle problems on an island with one foot in the 1950s and the other foot implanted in the groin of the U.S. as the money from oil rolls in.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.


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