CUBAS PRODUCTION SHARING AGREEMENT CONTRIBUTES TO EXPLORATION AND PRODUCTION SUCCESS In an earlier article, we discussed the different types

of oil and gas agreement used by governments throughout the world to govern exploration and production activities. In particular, we reviewed the Production Sharing Agreement and discussed why it was particularly attractive to governments and their national oil companies, especially those in developing countries. Of the many countries which have adopted the Production Sharing Agreement, the Republic of Cuba is one of the more interesting from a Canadian viewpoint because of the dominant position which Canadian companies hold in the Cuban oil and gas sector. The Republic of Cuba consists of an archipelago which includes the largest island in the Caribbean but which occupies an area only about 1/6 that of Alberta. With a population of 11 million and a developing economy, Cubas energy requirements are increasing substantially. Historically, Cuba has never been able to satisfy its energy demands through indigenous sources and has had to rely on imports of oil to make up the shortfall. Such imports place a heavy burden on the financial resources of the country. Understandably, the Government is anxious to develop fully the countrys oil and gas potential thereby reducing (and hopefully eventually eliminating) the shortfall between domestic energy supply and demand. After the Cuban Revolution in 1959 and until 1990, oil exploration and production in Cuba was dominated by the Russians. During this period, several large heavy oil fields and some small light oil fields were discovered, mainly along the northern coast of the Island. In 1990, following the collapse of the Soviet Union, the Cuban Government decided to open the country to foreign oil companies. Since then, the Cuban state oil company CUBAPETROLEO (CUPET) in partnership with western oil companies has employed modern technology in oil and gas exploration and production. As a result of the change in government policy and the activities of foreign companies, a number of discoveries were made and by 2000 production of oil and gas had increased to 47,000 BOPD and 57 MMCFPD respectively. While these production volumes are small by Canadian standards, they are very important to Cuba in its quest to reduce the shortfall between domestic oil production and consumption. Increasing attention is also being given to the development of the gas reserves associated with the oil in order to generate heavy industrial electrical power and to displace diesel fuel with considerable cost savings to the Cuban economy. In Cuba, oil and gas resources belong to the state. However, the state oil company CUPET is authorised to enter into exploration and production contracts with foreign companies. The type of oil and gas contract used in Cuba is a Production Sharing Agreement (PSA). Each PSA is individually negotiated within the framework of a model agreement and, following signature, is approved by Government Resolution and protected by Cubas Constitution and laws.

Under the terms of each PSA, the foreign company works as a contractor to CUPET. For onshore and shallow water blocks, each PSA has a term of 20 years. The foreign company is not required to pay a cash bonus in order for a PSA to be awarded. Instead, the foreign company commits to a work program to be carried out during the first four years of the agreement term at the companys sole risk and expense. In common with other PSAs around the world, in the event of success the foreign company is allowed to recover its costs from a percentage of production (cost oil) and to share in a percentage of the remaining production (profit oil). Both cost oil and profit oil are negotiable. No royalties are payable by the foreign company but the foreign company does pay a 30% corporate tax on net profits. The foreign company is free to dispose of its share of the produced hydrocarbons either within Cuba at international market prices or outside of Cuba. In the event the foreign company exports its oil, no export taxes are payable. Furthermore, no additional taxes are levied on any profits which may be repatriated to the foreign companys home country. In the event of a dispute between CUPET and the foreign company which cannot be settled amicably, Cubas PSA does allow for international arbitration according to the rules of the International Chamber of Commerce in Paris. The Cuban Government has recently decided to offer the deepwater Cuban sector of the Gulf of Mexico to foreign companies. CUPET has made 59 Blocks available for negotiation. Each Block has an area of approximately 2,000 km2 and 2/3 of the Blocks have water depths less than 2,000 m. A separate set of special fiscal and contractual terms are being offered for these Blocks. Since changing its policies towards foreign investment in 1990, Cuba has been successful in attracting international oil and gas exploration and production companies. U.S companies are prevented by their Government from working in Cuba and Canadian, European and Latin American companies have enjoyed an open field as a result. At the present time, in co-operation with foreign companies, CUPET carries out exploration and production activities in 19 blocks (16 onshore and 3 offshore) and in 5 oil fields (using enhanced production techniques). Cubas principal producing oilfields are located just offshore along the northern coast of Cuba between the capital of Havana and the popular tourist destination of Varadero 140 km to the east. The fields have been developed in an environmentally sensitive way using directional wells drilled from onshore. As a result, tourists visiting Varadero are usually unaware that the hotel complex is located on top of Cubas largest oilfield with more than 2 billion barrels of oil in place. The hydrocarbons in these northern fields are reservoired most commonly in carbonates of Jurassic to Cretaceous age which can exhibit excellent porosity and permeability. The carbonate reservoirs are thrusted and fractured and the oils trapped within them are heavy with gravities ranging from 10API to 20API. Canadian companies have been particularly active with Sherritt International Corporation being by far the most important. In the third quarter of 2001, Sherritt reported gross operated production of more than 37,000 BOPD from Cuba. Sherritt is

also involved in a US$ 150 million project to provide gas for electricity generation in Cuba. Other Canadian companies which are, or which have recently been, active in Cuba include Alturas Resources Ltd., Cubacan Exploration Inc., Kroes Energy Inc., and Pebercan Inc. The Republic of Cuba is a proven hydrocarbon province which has been only lightly explored with an exploration drilling density of approximately 1 well per 3.5 Canadian Townships. Although the country is a small producer by global standards, the potential for discovering economic accumulations of oil and gas is large. Cuba recognises that it does not have the financial resources to realise the full potential of its oil and gas reserves alone. Consequently, since 1990 the Government has worked very hard to create an enabling environment for international oil and gas companies. The cornerstone of this enabling environment is the Cuban Production Sharing Agreement, the terms of which are considered to be favourable by the international oil industry. The number of foreign oil and gas companies working successfully in Cuba provides further evidence that a Production Sharing Agreement offers no impediment to success in the international oil and gas exploration and production industry.