By Amy Myers Jaffe and Ronald Soligo
Rice University
A Report Commissioned by the Cuba Policy Foundation
December 2001
Cuba Policy Foundation
11 Dupont Circle, NW, Suite 900
Washington, DC 20036
Tel. (202) 835-0200 Fax (202) 835-0291
Web: www.cubafoundation.org Email: alexander@cubafoundation.org
Copyright
© 2001, Cuba Policy Foundation
Cuba is an island nation about the
size of the state of Pennsylvania, located in the Caribbean basin. It has a
population of 11 million of whom roughly 70% live in urban areas. Cuba’s GDP
was estimated at around US$18.6 billion in 1999 with a growth rate of about
6%. About 20% of its 4.5 million person
workforce is engaged in the agricultural sector where sugar, citrus, tobacco,
coffee and rum are key exports. Cuba’s key trading partners are Russia, Canada
and the Netherlands.
Cuba is strategically located
close to US markets but the United States maintains economic sanctions against
Cuba. The sanctions have resulted in
lost opportunities for both countries.
This report investigates the state of Cuba’s energy industry and the
impact on that industry --were US sanctions against Cuba to be lifted. In looking at future Cuban energy needs and
the Cuban energy industry, it can be clearly estimated that a lifting of
sanctions against participation in the Cuban energy sector could provide over
$2 to 3 billion annually in oil and gas trade business opportunities for U.S.
energy firms.
Cuba’s waters could also provide a
rich source of natural gas, potentially for export to Florida by pipeline. While it is hard to predict how much natural
gas might be discovered in the coming years were U.S. sanctions against Cuba to
be lifted, demand for the relatively clean fuel in Florida is expected to grow
substantially over the next decade. A 2 MM tons a year or 0.27 bcf/d pipeline
to Florida would represent a business opportunity of roughly $300 million a
year.
Though it is slowly moving in the
direction of a mixed economy, Cuba
continues to have a command, planned economy where the government owns and runs
the means of production. About 75% of
the work force is employed by the state.
The Cuban economy is still suffering from the aftermath of the collapse
of the Soviet Union, which provided generous economic subsidies including
energy supplies. To alleviate the economic downturn that began in the early
1990s, Cuba has introduced some market-oriented reforms including opening the
economy to tourism, decentralizing
agriculture and authorizing self-employment in 150 occupations. By the mid-1990s, tourism surpassed sugar as
the primary source of foreign exchange.
Roughly 1.6 million tourists visited Cuba in 2000 providing over $2
billion in gross revenues. Cuba has
also invited foreign investment, including its energy sector to private
international firms. Several firms have
explored for oil and gas off Cuba’s coastline but with only limited
success. Cuba’s refining sector is also
in need of investment and upgrading.
Almost all energy in Cuba derives
from oil and gas. Of the 373.1 trillion BTUs consumed in 1998, 357.2 or 95.7%
was in the form of petroleum products.
Natural gas accounted for 4% with coal taking up the remaining 0.3%.
Over 80% of the oil was imported as was all of the coal. According to the US
DOE, Cuba generated 13.309 quadrillion BTUs of electricity in 1998, of which
94% came from thermal powered generators. Hydroelectric power is miniscule,
accounting for less than 1%. These data are not fully consistent with claims
from the Cuban Society for the promotion of Renewable Energy sources
(CUBASOLAR) that non-fossil fuel, hydro and solar accounted for 30% of total
energy consumption in 1997 [1]. The
discrepancy may reflect the fact that energy production from renewable and
biomas sources are not as easily observable as that from larger commercial
scale generating units.
At the end of the 1970s, Cuba
began to pursue an ambitious program of building nuclear generating capacity.
Construction began in 1983 on the first of two planned nuclear reactors at
Juraguá in Cienfuegos province. In 1992, work was suspended with the cessation
of financing from Russia. The two 440 megawatt nuclear reactors are reportedly
75% and 30% respectively, completed. The USSR had paid for most of the US$ 1.1
billion invested in the project. A further US$ 750 is said to be needed to
complete the first reactor. Subsequent to 1992, Cuba and Russia have talked
about restarting construction but in 2000 they agreed to abandon the project. Each reactor when fully running would have
saved Cuba around 600,000 tons of oil annually.
Almost all Cuban households (95%)
have electricity, accounting for 35% to 40% of total energy consumption in
1997. Approximately 100 million cubic
meters (3.53 billion cubic feet) of natural gas was also consumed by households
(in Havana) in 1997.
Table 1 shows primary energy
consumption during the 1990s. Reflecting the collapse of the Soviet Union and
end of Soviet aid, energy consumption fell sharply from 1990 to 1991 and has
remained surprisingly constant thereafter. The consumption data are surprising
in light of the fact that GDP fell sharply, by almost 40%, during the “special
period” in the early 1990s and then rose in the second half of the decade. The
per cent change in GDP shown in Table 1 is measured in constant 1981 Cuban
prices.
|
TABLE 1: Primary Energy consumption and GDP
changes in Cuba |
||
|
Year |
Energy Consumption |
% Change in GDP |
|
|
Quadrillion BTUs |
(constant 1981 prices) |
|
1990 |
0.50 |
-3.0 |
|
1991 |
0.46 |
-10.7 |
|
1992 |
0.41 |
-11.6 |
|
1993 |
0.40 |
-14.9 |
|
1994 |
0.41 |
0.7 |
|
1995 |
0.42 |
2.5 |
|
1996 |
0.43 |
7.6 |
|
1997 |
0.39 |
2.5 |
|
1998 |
0.37 |
1.3 |
|
1999 |
0.39 |
6.2 |
|
Source: |
Primary energy consumption EIA, DOE. |
|
|
|
Change in GDP: Economic Commission for Latin |
|
|
|
America and the Caribbean (ECLAC) |
|
While total primary energy, shown
in Table 1, has remained fairly constant or fallen in the last part of the
1990s, net electricity consumption has shown a steady increase. Consumption
fell from 13.2 billion kilowatts (kw) in 1990 to 9 billion kw in 1993. But in
recent years, electricity consumption has increased to 13.4 billion kw in
1999. Consumption in 1999, although
roughly equal to that of 1990, does not reflect a return to the pattern of
usage that prevailed in the period before the collapse of the Soviet Union.
Electricity blackouts and shortages of fuel for transport services continue
from the “special period,” albeit at a reduced level of severity. Instead, at
least some of the increase in electricity consumption in the latter part on the
1990s is probably due to the rapid growth in tourism and tourists’ demand for
air conditioned rooms and restaurants and possibly better outdoor lighting as
well.
Medlock and Soligo [2] have examined the pattern of end sector
energy use as a function of the level of economic development as measured by
per capita GDP. The model permits the forecasting of end-use energy demand for
a country on the assumption that economies tend to follow a similar pattern of
development and of energy use, after allowing for country specific
characteristics. However, placing Cuba into this framework is difficult because
we do not have data on Cuba’s per capita income, even in current dollars. Data
are published in terms of Cuban pesos but there is no agreement as to how to
convert these data into US dollar terms. Furthermore, inter-country comparisons
are usually more accurate when country GDP is converted into US dollars using
purchasing power exchange rates that are not available for Cuba. The only
estimate available, from the U.S. Central Intelligence Agency (CIA), places
Cuban per capita income at $1700 for the year 2000 in 2000 PPP dollars.
Since the Medlock/Soligo model
uses 1985 PPP dollars as the measure of per capita income, it is necessary to
covert the CIA estimate into 1985 dollars. Unfortunately, a lack of data makes
this impossible. One alternative approach is to assume that the rate of
inflation was the same in Cuba as in the US. In this case, the per capita income
for Cuba in 2000 in terms of 1985 PPP dollars would be roughly $2400. For lack
of a better alternative, our analysis below is based on this assumption.
Figure 1 shows that typical
pattern, plotting per capita energy use against per capita income measured in
1985 PPP dollars. In the early stages of development, energy use by the
industrial sector rises rapidly as countries begin to industrialize. At some
stage of development, this process slows down and energy use in the industrial
sector levels off. However, per capita energy use in the transport and
commercial/residential sectors increases. In the long run, the demand for
energy is inelastic with respect to changes in per capita GDP. That is, the
demand for energy, per capita, rises at a slower rate than output. However, at
low levels of per capita income, this elasticity is greater that unity. Countries at specific levels of per capita
income will deviate from the predicted level of energy use to the extent that there
are differences in climate, population density, energy taxes or other policies
that affect energy prices, and so on.
This study assumes that, despite
data limitations and institutional differences, the model may be useful in
predicting energy consumption in Cuba. In fact, current energy usage in Cuba
falls fairly closely to the usage of the typical country having the same level
of per capita income. For a typical country having a per capita
income in 1985 PPP $US 2400 the model predicts a per capita energy use of
approximately 697 Kg (or 0.7 tonnes) of oil equivalent. This estimate is of
end-use energy, which will be lower than primary energy use because of losses
in the refining process and in conversion of fuels into electricity. These
conversion losses depend on the composition of energy use as well as the extent
to which a country imports refined products or domestically processes imported
crude. These losses typically amount to 15% of primary energy use for the US to
30% for some for developing economies. Applying an adjustment for conversion
losses of 20%, taking a midpoint in the range experienced by various countries,
yields an estimate of per capita primary energy use of 0.87 tonnes of oil
equivalent. This compares with the actual consumption in 1999 (the last year
for which we have data) of approximately 0.88 tonnes of oil equivalent.
While it is possible to fit Cuba
into the Medlock/Soligo framework, the model may still not be reliable in
estimating future energy demand for Cuba, because of the “command” nature of
the Cuban economic system. The model has been estimated using data from more
market-oriented economies. Since the
current trend in Cuba is toward a more open, mixed economy, this is a
reasonable hypothesis from which to proceed.

Because Cuba is not a typical
developing economy in the sense that it remains a planned economy, the level
and composition of energy use that will emerge over time may not follow the
pattern of development experienced by more market-oriented economies. In
particular, private motor vehicle ownership is substantially lower in Cuba than
in other countries with comparable per capita incomes, reflecting the different
priorities of the planning authorities as well as the more equal distribution
of income. Cuba’s energy mix shows a surprisingly low use of motor gasoline,
with Cubans relying mainly on buses fueled by road diesel or on bicycle
travel. Similarly, the extent to which
the public has and uses modern consumer durables such as air conditioning has
been determined by government decisions to produce or import these goods rather
than by the preferences of households.
The uniqueness of Cuba can be seen
in comparisons with other Central American and Caribbean countries. Table 2 gives some relevant comparisons.
Despite having a much lower per
capita income (as estimated by the CIA) than other countries, Cuba uses only
slightly less energy per capita than Costa Rica. Electricity consumption is
about three-quarters of the Costa Rican level. By contrast, both energy and
electricity use are higher than that for the Dominican Republic, Guatemala,
Honduras and Nicaragua all of which have a higher per capita income level. On the other hand, per capita consumption of
gasoline is lower than that of all countries except Nicaragua.
These data reflect the special
characteristics of the Cuban economy, including especially its egalitarian
distribution policies. Most households have access to electricity but private
transportation is more limited than in other countries.
|
TABLE 2. Energy Use Comparisons |
|
|
|||
|
Country |
1998 |
1999 ppp$ |
Per capita |
Per Capita |
Per Capita |
|
|
Population |
Per Capita |
Energy Use |
Electricity Use |
Gasoline Use |
|
|
millions |
Income |
Quads (1998) |
kwh/yr (1998) |
b/year (1998) |
|
Cuba* |
11.12 |
1700 |
0.035 |
1113 |
0.31 |
|
Dominican Rep. |
8.21 |
4653 |
0.024 |
813 |
0.66 |
|
Costa Rica |
3.53 |
5770 |
0.037 |
1456 |
1.20 |
|
Guatemala |
11.52 |
3517 |
0.012 |
240 |
0.49 |
|
Honduras |
6.18 |
2254 |
0.013 |
513 |
0.39 |
|
Jamaica |
2.64 |
3276 |
0.059 |
2148 |
1.43 |
|
Nicaragua |
4.81 |
2154 |
0.006 |
498 |
0.24 |
|
*Per
capita income for Cuba is for year 2000 |
|||||
Given these realities, how do we
estimate future Cuban energy consumption? Will Cuba be able to hold per capita
primary energy consumption relatively constant as GDP continues to grow? In our opinion, this latter possibility is
unlikely. Energy consumption has been severely repressed during the past
decade. As per capita income grows, the public will demand better public, if
not increasing access to private, transportation and fewer black-outs. Also, as
tourism, the primary engine of growth, continues to increase, demand for
transportation fuels and electricity will similarly grow. Tourists will demand
access to air conditioned hotels and restaurants (especially important given
Cuba’s climate) and rental cars or transportation by private taxi.
Tourism to Cuba has been growing
rapidly as appropriate infrastructure has been built. The number of hotel rooms
increased from 5,000 in 1987 to over 30,000 in 1999. In nominal terms, revenues
from tourism have grown fromUS$243 million in 1990 to US$2 billion in 2000, an
increase of over 700%.
During 1999-2000, gross income
from tourism to Cuba grew by 8.1% [3] despite the restriction on travel by US
citizens. In 1998, US tourists accounted for 60% [4] of all tourists to other
Caribbean islands. Without the embargo, ordinary Americans would be free to
travel to Cuba possibly adding an addition $1 billion to Cuban tourist earnings
within a few years [5].
Table 3 compares total revenue and
per capita revenue from tourism for several countries in 1998. Per capita
tourist income in Cuba is fourth, behind Jamaica, Dominican Republic and Costa
Rica. Given its proximity to the US and the combination of both historic and
natural beauty, Cuba has great potential for future growth in this sector
|
TABLE 3: Tourist Income (1998) |
|
|
|
Country |
Tourism Income |
Per Capita |
|
|
$million |
Tourist Income |
|
Cuba |
1816.00 |
163.31 |
|
Dominican Rep. |
2141.70 |
260.86 |
|
Costa Rica |
901.50 |
255.38 |
|
Guatemala |
314.40 |
27.29 |
|
Honduras |
164.40 |
26.60 |
|
Jamaica |
1197.00 |
453.41 |
|
Nicaragua |
100.10 |
20.81 |
Source: Association of Caribbean States, web site: http://www.acs-aec.org/ |
||
In generating some estimates of
future energy demand in Cuba, we use a number of different approaches. First, we assume that per capita energy
demand will follow the pattern of the Medlock/Soligo model. Second, we assume
that demand will grow at the same rate as per capita income. This is equivalent
to assuming a demand elasticity of unity. Finally, we assume that the per
capita energy demand in Cuba in 2015 will become similar to that of other
“comparable” countries in the region in 1998.
As Table 1 showed, Cuban GDP
growth has recently averaged about 4 per cent per annum. If per capita income were to grow at this
rate, per capita income will increase from year 2000 levels by 48% by 2010 and
80% by 2015. By 2015, Cuban per capita income in US PPP dollars would be
slightly below the 1999 level for Jamaica.
Clearly, the future growth rate
for Cuba will depend on a number of factors including future US policy towards
the island. Removal of sanctions will
increase the rate of growth, more so if the Cuban government encourages trade
and investment with the US. Growth prospects are higher if sanctions are
removed and foreign relations are normalized within the context of the current
political regime so that property claims and other contentious issues can be
dealt with in a stable and orderly manner. A chaotic transition accompanied by
civil strife and a struggle to assert old property claims could seriously set
back growth and development.
Table 4 shows projections for
total energy use, electric generating capacity and gasoline demand for Cuba in
2015 under various estimating methods.
The first assumption is that that Cuban per capita energy consumption will
increase according to the pattern estimated by Medlock/Soligo. Second, the
assumption is that per capita energy demand as well as per capita electric
generating capacity and gasoline consumption will grow by the same 4% growth as
per capita GDP. The remaining scenarios assume that by 2015, Cuba’s per capita
energy use will be the same as each of the other countries in the comparison.
That is, we present scenarios assuming that the pattern and level of energy use
in Cuba, circa 2015, will look very much like that of Dominican Republic, Costa
Rica and Jamaica in 1998. In the “Like Jamaica” scenario, we apply the Jamaican
per capita energy use, electric generating capacity and gasoline use as given
in Table X above to Cuba. A similar procedure is followed for the other “country”
scenarios. The Dominican Republic has a population comparable to Cuba’s and an
important tourist industry. Jamaica is a smaller country but represents a
country with a highly developed tourist industry that could typify a future
Cuba. Costa Rica is also small but
represents a country that, albeit on a smaller scale, shares Cuba’s focus on
human development with high literacy rates and universal health provision. Its
tourist industry is smaller that that of Jamaica and features eco-tourism where
per diem expenditures of tourists are lower than the resort oriented tourism of
Jamaica.
For all of these scenarios, it is
assumed that the Cuban population will increase by a total of 8% between 1998
and 2015, roughly the same rate of growth (about .5% per annum) as experienced
in the 1990s. Calculations in the Table below assume that Cuba’s population
will be roughly 12 million by 2015.
|
TABLE
4: Projections for Cuba (2015) |
|
|
|
|
|
|
|
||
|
|
Total
Energy Use: |
Total
Electric Capacity |
Total
Gasoline |
|
|||||
|
|
Thousands
b/d oil equiv. |
in
thousands Megawatts |
Consumption
in b/d |
||||||
|
|
1998 |
2015 |
Change |
1998 |
2015 |
Change |
1998 |
2015 |
Change |
|
Medlock/Soligo |
179 |
363 |
184 |
4.33 |
|
|
|
|
|
|
Growth
at 4% |
179 |
349 |
170 |
4.33 |
9.11 |
4.78 |
9.32 |
19.61 |
10.29 |
|
Like
Jamaica |
179 |
327 |
148 |
4.33 |
5.40 |
1.07 |
9.32 |
46.90 |
37.58 |
|
Like
Costa Rica |
179 |
206 |
27 |
4.33 |
4.81 |
0.48 |
9.32 |
39.43 |
30.11 |
|
Like
Dominican Rep |
179 |
132 |
-47 |
4.33 |
3.40 |
-0.93 |
9.32 |
21.61 |
12.29 |
|
|
|||||||||
Projections based on the
Medlock/Soligo model yield the highest estimates for 2015 at 363 thousand
barrels a day of oil equivalent, an increase in consumption over 1998 levels of
184 thousands of b/d of oil equivalent. As noted earlier, the income elasticity
of energy demand is typically greater than one at low per capita income levels
and this is the case for Cuba under this scenario.
The 4%/annum growth scenario
(which assumes an elasticity equal to one) produces a slightly smaller increase
in demand than the Medlock/Soligo model.
However, this scenario produces a much greater increase in total energy
consumption and electric generating capacity than the other “country specific”
scenarios. The relatively modest increase predicted under these last scenarios
reflects the fact that per capita energy and electricity consumption in Cuba
already compares favorably with the other countries in the comparison. Hence,
if consumption and generating capacity grow at 4% per annum, they will be
significantly above the per capita levels prevailing in the comparison
countries in 1998.
On the other hand, the predicted
growth in gasoline consumption is much lower under the 4%/annum scenario than
in the “country specific” scenarios. This
reflects the current very low per capita gasoline consumption in Cuba.
Even at a 4% per annum growth rate, Cuban per capita consumption of gasoline in
2015 would be below the 1998 levels prevailing in the comparison countries.
Note that the negative number for electric generating capacity under the
Dominican Republic scenario reflects the fact that electricity generating
capacity in that country is below the current Cuban level. The Dominican
Republic has been experiencing severe electricity shortages indicating that per
capita capacity is currently below demand. Current construction projects are
designed to raise capacity in the Dominica Republic and eliminate the severe
shortages in electricity.
An important factor in these
projections is that we have assumed that Cuban population growth will continue
at the very modest growth rates of the past, roughly 0.5% per annum. This low
rate reflects, to some extent, the higher education standards and better access
to health care in Cuba. To the extent that current birth rates reflect other
factors such as limited and crowded living space or pessimism about the future,
population growth rates may increase. Indeed, the 1990s was a period of severe
economic contraction. The estimates of future energy use would be markedly
affected if higher population growth rates were to occur. For example, an
increase in annual population growth rates to 1% would, under the Medlock/Soligo
model generate an energy demand for 2015 of 408 thousand b/d, an additional 45
thousand b/d.
To summarize, we project that
Cuban energy needs will increase by 148-184 thousand b/d by 2015. This increase
will have to be met by additional imports or increases in domestic production
of crude or natural gas. Using the modest population growth rate and the
experience of Costa Rica and Jamaica, it would appear that Cuba would require
additional electric generating capacity of 48-107 megawatts by 2015. That would
bring Cuban per capita usage to the levels prevailing in those countries today.
However, if electricity demand grows at 4% per annum, Cuba will need to install
an additional 478 megawatts of capacity by 2015. Additional refining capacity for
gasoline would have to increase by 30-38,000 b/d to bring Cuban usage in 2015
to current Jamaican and Costa Rican levels. These estimates should be regarded
as a lower bound. Higher population growth rates or GDP growth rates will
increase these investment requirements.
Cuba has proven crude oil reserves
of about 283.5 million barrels, while its proven natural gas reserves total 636
billion cubic feet. Due to its limited
natural resources, the Caribbean island nation currently is dependent upon oil
imports to meet about two-thirds of its 190,000 b/d domestic needs. In 2000,
Cuba produced about 46,500 barrels a day (b/d) of crude oil, mostly from the
north central coast in the state of Matanzas, and 600 million cubic meters of natural
gas. State oil firm Cubapetroleo
(Cupet) has also recently suggested that it plans to boost output from output
from 52,000 b/d in 2001 to 120,000 b/d in 2005, though those figures appear
speculative in light of recent exploration disappointments.
Approximately half of Cuba’s crude output is produced from wells operated by Canadian mining firm Sherritt International Corp., with most of the remaining accounted for by Cupet. Toronto-based Sherritt holds an indirect interest in seven exploration/production-sharing contracts with the Cuban government that encompass most of the island’s existing crude fields, totaling 3.55 million acres. Increases in oil output over the past two years have come primarily from new wells in the Puerto Escondido and Varadero West blocks east of Havana, as well as exploratory wells in the Yumuri, Canasi and Seboruco fields along the island’s north coast. Because approximately 90% of the crude