• Submitted by: manso
• Business and Economy
• 02 / 25 / 2011

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Crude oil. Crude oil prices reached this week a 30-month high of nearly $100 per barrel, with industrial residual fuel oil prices close behind at a 28-month high of $80. These price increases are reflected in Sherritt’s year-end 2010 financial reports released today.

Cuba’s onshore and coastal 2010 crude oil production is estimated at approximately 50,000 barrels per day, of which 11,128 barrels per day represents Sherritt’s net working interest (equity) production. This is an 11-percent decrease from 2009 levels of 12,489 barrels per day.  Sherritt sells this production to state oil company Cupet at a discounted U.S. Gulf Coast residual fuel oil price.

Sherritt and Cuba do not realize the true value of the island’s crude oil production — based on its refined products yield — because Cuban crude is used directly as industrial fuel for electric power plants, instead of optimizing its inherent value by processing it into high-value refined products such as gasoline, diesel and jet fuel.

Cuba’s realized crude oil value could substantially rise if it was able to market its crude oil to U.S. Gulf Coast refining companies.Realized prices should also rise once Cuba is able to monetize its heavy-oil production in planned conversion facilities at Cienfuegos and Matanzas.

High oil prices negatively impact Cuba’s balance of payments in two ways: Not only as the value of its crude oil imports from Venezuela under the 2000 Convenio Integral de Cooperación services for oil barter agreement increases, but also as it has to purchase part of its domestic crude oil production from Sherritt. We estimate that the total value of Venezuelan petroleum imports and the purchase of Sherritt equity production for 2010 will be approximately $2.894 billion.

Nickel

The good news is that nickel prices also reached this week a 24-month high of $13 per pound, an increase of 177 percent from a low of $4.50 in February 2009. However, this is still far from the contract record high of $24 a pound in May 2007.

Canada’s Sherritt reported nickel and cobalt revenues for 2010 of $453.1 million, reflecting a 29-percent improvement over 2009 revenues of $350.7 million. The reported figures only reflect Sherritt’s 50-percent interest in the Moa/Saskatchewan nickel joint venture with Cubaníquel; therefore a similar improvement should mirror its Cuban partner operations.

Cuba and Sherritt offset receivables between Sherritt’s nickel and crude oil operations, therefore alleviating Cuba’s crude oil negative cash flow impact on the national balance of payments.

Natural Gas

Cuba’s natural gas production is all associated natural gas found within crude oil reservoirs. The island’s geology to date has not proven to be a major source of dry, non-associated natural gas reservoirs.

Annual production is averaging 43 billion cubic feet (bcf), or 21,000 barrels of oil per day equivalent (boe) (16), with estimated reserves of 2,500 trillion cubic feet (tcf) according to the U.S. Energy Information Administration, and a recovery rate of approximately 94 percent.

Cuba’s associated gas production is a true success story.  Cupet flared the gas for many years, creating considerable air and visual pollution in the tourist-sensitive area along the Via Blanca highway as it approaches the beach resort area of Varadero.

Power

Economic incentives allowed Cupet to develop a business solution with Canada’s Sherritt. Locally produced associated natural gas from the Varadero, Boca de Jaruco and Puerto Escondido fields is now being used as fuel for onsite power generating plants of 400 mw total capacity.

The power plants and related sour gas processing units are owned and operated by Energas, a joint venture in which Sherritt has a one-third indirect interest, along with Cupet, which supplies gas at no cost to the joint venture, and Unión Eléctrica, which buys all the power from the plants. Each has a one-third interest in Energas.

Sherrit reported Energas electric production for 2010 was 2,067 GWh, 5 percent lower than 2009 as a result of natural gas shortages from declining crude oil production.

Outlook  

Sherrit’s financial report reflects a plateau period in Cuba’s domestic crude oil and natural gas operations.

Cuba’s heavy oil recovery rates are around 7 percent of proven reserves; estimated by the U.S. Energy Information Administration to be at 750 million barrels. These low recovery factors are due to the viscous quality of the crude oil and the nature of the geology.

Sherritt and Cupet are working on future secondary enhanced recovery and production projects, which could substantially increase current production levels.

Heavy oil reservoirs are generally characterized by low primary recovery rates of less than 10 percent.  However, long field life, stable and predictable production, along with new enhanced recovery technologies makes heavy oil development an attractive investment today, at world oil prices of over $55 per barrel.

Secondary and tertiary enhanced oil recovery (EOR) technologies such as water or steam injection, natural gas reinjection and carbon dioxide injection can increase recovery rates to about 20 to 30 percent, depending on the permeability of the rocks and the viscosity of the oil.

We estimate that if Cuba was allowed to access United States-based investments and technology, it could increase its onshore and coastal production to over 80,000 barrels per day.

Source: www.cubastandard.com/2011/02/23/pinon-on-energy-analyzing-sherritt/