New Oil Investment Strategies

New Oil Investment Strategies: An Oil Play for the Next Five Years
A Taipan Publishing Group Strategy Report
by Irwin Greenstein, Senior Research Analyst, Taipan Publishing Group

Love him or hate him, the news is that Fidel Castro is sitting on a huge reserve of offshore oil -- and our research shows the best way for you cash in on it.

Until recently, oil companies from Russia, China, Canada, Spain, Italy, Norway, Malaysia and Venezuela had their way in Cuba’s deep waters. And now, with Brazil making its move, the door is flung open for you get in on the action.

And the action is hot and heavy in Cuba.

The U.S. Geological Survey pegs Cuba’s oil capacity at 4.6 billion barrels -- nearly two-thirds the amount in the Arctic National Wildlife Refuge -- plus 9.8 trillion cubic feet of natural gas.

New Oil Investment Strategies: Oil Fever in Cuba

Oil fever in Cuba has been deftly described by state oil President Fidel Rivero. "Important potential exists in this zone," he said.

That’s why U.S. oil companies are foaming at the mouth in frustration as America’s 44-year-old trade embargo bars them from Cuba’s offshore fields.

To rally support for American big oil in Cuba, U.S. politicians are taking a decidedly soft approach. Rather than bare their teeth, they’re waving the sacrosanct banner of Mother Nature.

But the big winner in this war of attrition may actually be Brazil -- and that’s where you probably want to put your money when it comes to this incredible oil discovery in Cuba.

New Oil Investment Strategies: The Brazilian Oil Connection

When it comes to Cuba, Brazil’s Petroleo Brasileiro (NYSE:PBR) has taken a page out of China’s playbook and could emerge as a top dog in this offshore playground.

What the Chinese have done in Africa, Brazil seems to be doing in Cuba to help solidify its position to all that oil.

You see, oil-starved China has gone into Africa and thrown everything at those banana republics from guns and money to hospitals and new roads in order to help secure drilling rights to the estimated 75.4 billion barrels of oil (7% of the world's total) that is up for grabs on the continent.

And while Brazil may (or may not) be providing arms to the Castro brothers, it recently cut a deal to help make life a lot easier for one of the most poverty-stricken nations in the Western Hemisphere.

New Oil Investment Strategies: Petrobras Oil Meets the Castro Brothers

On January 15, 2008, Brazil and Cuba inked an impressive 10 agreements covering oil exploration, biotechnology, pharmaceuticals and agriculture. It was a meeting of the minds and bank accounts among Brazilian President Luiz Inacio Lula da Silva (popularly known as simply Lula), Fidel Castro and the new Cuban president, Raul Castro.

Petrobras chief Jose Sergio Gabrielli accompanied Lula on this mission. Gabrielli, for all intents and purposes, was in the room, in the deal and in the money.

Like China’s strategy for Africa, Brazil moved in and promised to help make life a little better in general for Cuba. To get at Cuba’s oil, Brazil cut a whopper of a deal with the Castro brothers.

Brazil's Financing and Export Guarantee Committee approved lending for Cuban food purchases, the expansion of Cuba's Ernesto Guevara Nickel Plant and the purchase of Cuban fish farming equipment. The committee also agreed to look at a range of opportunities from hotels to pharmaceuticals.

In addition, the Brazilian Foreign Ministry is extending food credits worth as much as US$100 million. This is significant in a country where food rationing and ration cards are a way of life for nearly every Cuban citizen.

New Oil Investment Strategies: Brazil’s $1 Billion Price of Admission to Cuba’s Oil

Add it all up and Brazil’s aid package to Cuba could easily top $1 billion. This expensive, 24-hour diplomatic stopover is seen as an attempt by Lula to strengthen ties with Cuba, and overshadow the regional influence exerted by Venezuelan President Hugo Chavez.

Even if that proves to be true, oil analysts say production is at least three years away. “The potential for ultra-deep-water reserves looks quite promising,” says International Energy Agency analyst David Fyfe. “If oil prices stay high, it keeps the frontier areas in play.”

New Oil Investment Strategies: Blood and Oil

Brazil has a good chance of pulling off its magnificent geopolitical scheme. As it turns out, a number of Lula's most intimate allies were exiled to Cuba during Brazil's 1964-1985 military dictatorship. Historically, blood and oil have always made for strong compatriots, scoring another promising diplomatic triumph for Petrobras.

So while Petrobas has won a world-class oil coup d'état, the U.S. oil majors can only drool through the window.

The Bush administration continues to oppose any relaxation of America’s embargo on Cuba, leaving anyone with a stake in Petrobras richer for it. Less competition translates into higher profits. How much, though, remains to be seen.

Initial test drilling results by a number of the oil companies active in the region show Cuba’s potential deep-water reserves to be promising. And the more expensive oil becomes, the more Cuba’s oil is coveted.

New Oil Investment Strategies: The Vital E&P Blocks of Cuban Oil

If Petrobras does indeed get its way, the company could easily turn into a significant player in the coveted E&P blocks of Cuba’s offshore reserves.

The political gears are certainly moving in the right direction for Petrobras.

As political compatriots, Lula and the brothers Castro are among the leading leftist politicians in Latin America. Lula has been thrown in with what is called Latin America’s “Pragmatic Left,” meaning perhaps that they still appreciate the influence of money.

Plus, Lula enjoys good relationships with all neighboring big oil producers, including the U.S., Venezuela and Mexico. And this is extremely important.

New Oil Investment Strategies: China in the Crosshairs

Some U.S. politicians are already grandstanding over Cuban oil, using Florida’s environment as a scapegoat. Legitimate or not, China is the villain they have in their crosshairs. The notion of China towing in oil rigs within 90 miles of the U.S. has become politically hot.

China drilling right across the line of American waters, at a time when oil has already hit $100 per barrel, has to be downright embarrassing for anyone who sits in the White House. With gas and heating oil reaching all-time highs, American consumers are on financial brink.

The irony of it all is that, while the U.S. wages war in the oil-rich Middle East, it can’t access a hefty offshore reserve a pleasure-boat ride away in Cuba.

Ratcheting up the jingoism, a cadre of American politicians are promoting a nightmare scenario that if China incurs an oil spill off Cuba, the U.S. will suffer an environmental catastrophe.

New Oil Investment Strategies: Why Bill Nelson Is Worried About Cuban Oil

Senator Bill Nelson of Florida will tell anyone who listens that a Cuban oil spill could destroy the state's environment and its $50 billion tourism industry. He wants to block drilling in Cuba's northern waters. His thinking is that the ocean currents that carried the rafts of Cuban refuges to Miami could also carry the crude from an oil spill onto Florida’s beaches.

“Any oil spill 45 miles from Key West is going to absolutely devastate all those delicate coral reefs, the fragile Florida Keys, and would endanger pristine beaches all the way up to Fort Pierce,” said Nelson.

Senator Nelson has floated a bill that would bar the Bush administration from renewing a 1977 agreement with Cuba unless it agrees not to drill near the Florida Keys.

New Oil Investment Strategies: Redrawing the Oil-Field Map

Under that existing agreement, the U.S and Cuba share control of the 90 miles of water between the Florida Keys and Castro’s communist haven. That put’s Cuba’s sovereignty within 45 miles of a U.S. marine sanctuary near the Florida Keys.

Nelson is taking it even further. His bill would discourage foreign companies from drilling anywhere off Cuba's northern coast by keeping company executives from entering the U.S.

Jumping on Nelson’s bandwagon, Senator Mel Martinez wants to block oil and gas exploration within 150 miles of Florida's southern coast. Senator Martinez is also worried about possible oil spills -- although he has not (yet) singled out China as the primary culprit.

The point of all this political wrangling is that Brazil is one of the best-positioned countries to get into Cuba’s oil without causing a ruckus. As mentioned, it has first-rate relations with the U.S., Venezuela and Mexico. Brazil can as both a conciliator and a driller.

New Oil Investment Strategies: Petrobras Up 15.7%

Wall Street has taken notice. Since Brazil offered its multi-faceted aid to Cuba on January 15, Petrobras has shot up from $105.50 to $121.75 on February 26 -- a gain of 15.7% in 29 trading days.

Our expectations are that this trend could continue. While it may not increase quite as quickly near-term, the next five years could be lucrative for investors getting into Petrobras today.

Originally published March 3, 2008.

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Copyright 2007-2008, The Taipan Publishing Group, Taipan Daily and Chart of the Day, 808 St. Paul St., Baltimore, MD 21202. All rights reserved. No part of this report may be reproduced or placed on any electronic medium without written permission from the publisher. Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed.

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