BRAZIL-PETROBRAS AND CUBA-PETROLEO TO SIGN OIL DEAL, LOW

UNCLAS RIO DE JANEIRO 000302 SIPDIS STATE FOR WHA/BSC, WHA/CCA, WHA/EPSC, EEB/ESC E.O. 12958: N/A TAGS: EPET ENRG CU BR SUBJECT: BRAZIL-PETROBRAS AND CUBA-PETROLEO TO SIGN OIL DEAL, LOW OIL PRICES MAY AFFECT PRE-SALT PLANS REF: RIO DE JANEIRO 288 ¶1. Summary. Brazil's Petrobras will partner with its Cuban counterpart, Cuba-Petroleo (Cupet),for offshore oil exploration and production in Cuban waters, according to Brazilian officials. The agreement between Petrobras and Cuba-Petrol will be finalized and signed during the Brazilian President Lula's visit to Havana on October 30-31. Cuba's recent announcement of significant offshore oil reserves (varying estimates between 5-20 billion barrels) and the deal with Brazil may signal a shift in Petrobras' business strategy. The high cost of ultra-deepwater pre-salt exploration in domestic waters combined with the falling price of oil might have Petrobras executives rethinking their plan to draw-down international operations in order to focus on opportunities around Brazil's newly discovered pre-salt reserves. End Summary. ¶2. Several Petrobras executives are accompanying President Lula to Havana to finalize the joint venture arrangement between the Petrobras and Cupet. No details on the oil agreement have been made public. A Petrobras manager who deals with the company's North America business operations told EconOff that the Cuba-Petrol deal is not purely political motivated and that it shows excellent promise. The deal would be Petrobras' only venture in the Caribbean. He pointed to a recent Wall Street Journal article which reported that Cuban geologists estimate more than 20 billion barrels of oil equivalent off the country's northwest coast. (Note: The U.S. Geological Survey estimate of the reserve is somewhere between 5-10 billion barrels) ¶3. If the deal is concluded, Petrobras will join the following other international oil companies with a presence in Cuba: Repsol (Spain),StatoilHydro (Norway),Oil & Natural Gas Corp. (India),and PDVSA (Venezuela). China is also reportedly interested in offshore opportunities in Cuba, but so far is only involved in onshore activities there. Further details of the Cuba-Petrol deal and Petrobras' plans will be reported as they become available via septel. ¶4. The increasing seriousness of the financial market crisis is already affecting Petrobras' strategic investment plans, Petrobras CEO Jos Sergio Gabrielli hinted at an industry conference in Houston last week. The worsening global scenario will "strongly affect" the exploration of pre-salt oil, he said, and Petrobras' ambitious investment plan could be pushed back. ¶5. COMMENT: The falling price of oil also plays an important factor in Petrobras' pre-salt plans (reftel). The pre-salt reserves lie in ultra-deep waters, which are very expensive to explore. The unofficial estimate for the cost of drilling and producing in the pre-salt area is around USD 60 per barrel. Given the current price of oil at below USD70 per barrel, Petrobras may see Cuba's significant discovery and cheaper explorations costs there as an attractive alternative to hedge its domestic pre-salt gamble. ¶6. This message was cleared/coordinated with Embassy Brasilia. MARTINEZ