[NGW Magazine] European firms Mull Cuban Energy

European energy companies are looking at ways of boosting energy supplies in Cuba, as the Communist-run island nation scrambles for new sources of supply following the implosion of Venezuelan oil production.

German industrial giant Siemens is one of several firms that are looking at developing an LNG power project in the country, as companies begin to take advantage of Cuba’s economy opening up to foreign investment. Siemens confirmed to NGW that the company is in the middle of “discussing projects in the field of power generation, transmission and distribution” in Cuba.

"This also includes the opportunity for Siemens to supply power generating technology to existing and future power plant projects in Cuba,” it said. 

In July 2016, the company signed a memorandum of understanding with the Cuban state-owned utility Union Electrica, with the aim of modernising the energy infrastructure of the country.

Siemens and Union Electrica signing ceremony in Havana (Credit: Siemens)

Siemens and French oil major Total are hoping to sign a deal soon with the Cuban government to build a 600-MW power plant run off regasified LNG, a Reuters report said last month citing diplomats and businessmen with knowledge of the talks. 

The two European firms are leading a consortium that has been in discussions with Cuban authorities since last year when they won a tender for the project, the sources said. The other members of the consortium are unknown, and Total would not confirm whether it is participating in talks, when asked by NGW.

However the company told Reuters that alongside some international partners, the company “is looking at a LNG power project in Cuba, one of several countries where Total is exploring similar LNG potentials.” The project would be called Matanzas Bay and would be 124 km east of the capital Havana. Total would procure the liquefied gas abroad and then store, process and supply it to the plant, they added. The plant itself would be built by Siemens.

However many details of the project are still being negotiated and Cuban bureaucracy, alongside sanctions imposed by the US, mean there is no guarantee the agreement will come to fruition, the Reuters sources cautioned. Total is an investor in US liquefaction.

Crisis-stricken Venezuela, an ideological ally of Cuba, has recently severely reduced oil shipments – which have traditionally helped Cuba to power its plants. 

These supply pressures, coupled with a rapidly changing Cuba following the death of former Communist leader Fidel Castro in 2016, are forcing the country to take steps to find new sources of energy. The country is undergoing significant change as tourist numbers increase since the end of the Castro era, and an increase in new businesses is driving higher energy demand. 

Total, which has a long history of involvement in Cuba, would be well placed among international energy companies to pursue work in the country. The French major was the first foreign company to drill for oil offshore Cuba in the 1990s, following the collapse of the Soviet Union – which had been the only oil supplier to the country – in 1991. However the wells were not commercial. It is also in a joint venture, called Elf Gas Cuba, with Cuba’s state-run energy firm Cubapetroleo.

Caribbean countries have traditionally used oil to generate electricity, with around 85% of primary energy usage coming from imported petroleum products. However this has led to high power costs, experts say.

Several Caribbean countries have shown an interest in taking advantage of innovations in small-scale LNG technology to develop oil-to-gas facilities. This is because the growth of small-scale LNG technology has lowered costs. Previously, the governments of small Caribbean countries were put off by the high costs of LNG development.

If small LNG projects do go ahead, a regional gas market is expected to develop in the Caribbean, but analysts say that a number of barriers still exist.

“Several challenges still remain, including ensuring a sufficiently high utilization rate of the LNG infrastructure, accounting for long-term market uncertainties, and raising the high level of front-end investment required for power plant conversions to gas,” said senior energy analyst at US consultancy McKinsey & Company, Yasmine Zhu, in a report published last November.

Power generators in the Caribbean that wish to convert to gas will also need to find a way of securing a low-cost Henry Hub-linked LNG supply source in the longer-term, said Zhu.

As well as LNG contract negotiation, that might be achieved through the development of seaborne compressed natural gas (CNG), which would be cost effective, she said. “Although not commercially ready yet, CNG is a promising technology that ties pricing to the regional Henry Hub-based market,” she said.

“Because it is most cost-effective within distances below 2,000 miles, the CNG price will be much less affected by a tightened global gas market,” she added. The Caribbean has fundamentally different characteristics to traditional LNG import countries, analysts at the Oxford Institute for Energy Studies said in a report published last November about the potential market for LNG in the region and Central America. 

Since Caribbean nations typically do not have existing gas infrastructure, an entire new value chain has to be created, normally through development of a gas-to-power project – rather than through creating an LNG import terminal – they noted.

The small size of markets in the Caribbean presents a commercial and logistical challenge for LNG supply and financing of projects, they added.

However it is because of this that the region is of interest to the energy industry more widely because some of the technical, logistical and commercial innovations being developed in the Caribbean may be used for small potential LNG markets elsewhere, they added.

For Cuba, the involvement of Total, Siemens and others – if a deal does go ahead – could herald a new era of small-scale LNG development. But a lot of uncertainty still exists as to the political and regulatory climate in the country as well as the specifics of how an LNG market would work, which could slow progress on any projects that follow. 

Sophie Davies