Could Cuba become oil-rich?

Vast untapped oil reserves off the coast of Cuba could spell an oil bonanza for the Caribbean island. It's high risk, says Tom Bulford - but for plucky investors, the rewards could be massive.

Cuba is a country known mainlyfor two things: communism and tourism. Oh, and cigars.

But the possible discovery of as much as 4.6bn barrels of oil lying within its reach means Cuba could soon become oil-rich.

All red-blooded penny share fans love a good oil story. It's high-risk stuff. But if a small company finds oil, its shares can rocket. And this is another big story I can see gaining a following in the months ahead.

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Another big oil story for 2012

2012 is already going to be another busy year for oil exploration. Drilling is now under way in the deeper waters of the Falklands southern basin. And there is also activity in Somalia, Uganda and Kurdistan to name a few off the top of my head.

But the drilling campaign that is really ruffling feathers in Washington DC has commenced just 60 miles off the precious Florida Keys.

This finger of coastline cradles the Gulf of Mexico, where the USA has total authority as BP has found out to its cost. To the south and east of the Florida Keys, beyond the prescribed offshore boundary, the USA has no jurisdiction. But when did that ever stop it from throwing its weight around?

Drilling has begun for oil reserves which could lead to new found prosperity for the communist country. That is Cuba's affair, you might suppose. But this has raised the temperature in Washington. William Reilly, co-chair of the National Commission on the BP Deepwater Horizon Oil Spill, spluttered: "The fact that Cuba is about to drill six wells in the next two years, some of them very deep, deeper than Macondo, in places we wouldn't allow if it were in our waters you better believe that the United States has an important interest in that."

What's really bothering the US

Florida's Lieutenant Governor, Jennifer Carroll, reckons that Cuba cannot be trusted to protect regional waters from an oil spill. Furthermore, Ileana Ros-Lehtinen, Chairwoman of the House Foreign Affairs Committee, wants to deny a US visa to anyone helping the Cuban government with their offshore ambitions. And even more forcefully, Senator Bill Nelson of Florida wants to rip up the agreement that determined the respective maritime zones of the USA and attempt to prevent Cuba from drilling at all.

None of these threats is likely to make much difference to members of the drilling consortium that include Spain's Repsol, Norway's Statoil and the Indian State National Oil Corporation. But there are two prospects bothering the United States. First, another tide of spilled oil could threaten its beaches once again. Another $40bn in damages would be disastrous for the Florida tourist industry. And secondly, the thought that poor communist Cuba could quickly become oil-rich communist Cuba

How Latin America could benefit from this oil discovery

BP's Macondo blow-out has left a deep scar and shaken up the insular US oil services industry. But the demand for energy is such that deep water drilling in the Gulf of Mexico has resumed, which hardly gives the US the high moral ground here.

Furthermore, it can hardly make dark threats about the fitness of the appointed Chinese Scarabeo oil rig given that its trade embargo has denied Cuba the oil drilling expertise of the USA. Besides, the only major US made component of this rig is reportedly the same blowout preventer that failed BP. So, assuming that the USA has learned its lessons and fixed this chancy device, there should not be anything to worry about.

A US delegation has been sent to Cuba, presumably to discuss contingency plans in the event of an accident, but while the USA frets about that, it is also anxious that a Cuban oil strike could swing the political balance of the Central American and Caribbean region.

Cuba is already receiving cheap oil from Venezuela in return for providing medical and educational services to the anti-US regime of Hugo Chavez and an oil bonanza in Cuba could bolster the resolve of other Central American states to spurn the USA in favour of Latin America.

What could this mean for penny shares?

So there is plenty riding upon Cuban oil, and we will soon find out just how much it might possess. At present Cuba's known on-shore oil reserves amount to a paltry 0.1 billion barrels of heavy, sour crude. But the US Geological Survey estimates that there could be 4.6bn barrels of better quality oil in the North Cuba Basin, a figure thought to be far too conservative by Cuban and other observers.

The first well will be on the Jagey prospect, a deep-water play just 55 to 60 miles south of Key West. Repsol and its partners are prepared to risk the wrath of the USA to participate in this campaign. Other oil companies have also taken exploration rights over some of Cuba's 59 off-shore blocks; these have come from Vietnam, Malaysia, Russia and Angola. The involvement of these countries could raise the political stakes even higher. But while the USA huffs and puffs there is not much that it can do to prevent Cuba from seeing what it might find beneath its coastal waters.

I'm watching this space. The importance for Red Hot readers is that Cuba's northern waters are very close to where of course BPC (BPC) holds extensive license areas. I will be keeping a close eye on developments here.

This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.

Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.

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