Australian energy company finds oil in Cuba, stock skyrockets, but Cuban dictatorship likely to ignore extraction and profit agreements

From our Bureau of Deals With the Devil with some assistance from our Ali Baba Bureau

Aussie oil drillers are thrilled by the results of their explorations on the northern shore of Cuba, near all of the island’s major apartheid tourist resorts, but they are also a bit worried, as are investors.

At issue is the trustworthiness of Castro, Inc. Will they abide by the contracts they signed, or will they stiff the Australians who invested millions of dollars in their drilling venture?

Oddly enough, foreign firms who do business with Castro, Inc. know that they are signing pacts with the devil when they draw up contracts, but they still go ahead with their deals, hoping the Cuban military junta will act fairly and honestly.

Canadian firms such as Sheritt International have been stiffed many a time, yet continue partnering up with these Cuban thieves. It seems Castro, Inc. always lets them have enough of a profit to keep them satisfied.

This case might be different. Castro, Inc. will most probably conclude that petroleum is way too valuable to leave in anyone else’s hands. Plus, Russians now own Cuba. Chances are Vlad the Invader could send the Aussies packing without a dime in their pocket.

Stay tuned. This story is sure to be full of surprises.

Abridged from Dhakah Tribune

Melbana Energy (ASX: MAY) (OTCPK: MEOAF) shares are up 40%. MAY shares rose on the back of results from their Cuban oil exploration. These results are good and logically deserve to push the share price up. The problem is as it always is in doing business in a dictatorship – especially a communist one. Which is that it is less than certain that the contractual terms will be adhered to. Having actual experience of this, North Korea very rarely does, while the Soviet Union adhered to its foreign contracts religiously. Cuba has been known to wander a bit. This produces something of a valuation problem.

The results announcement: “Peak flow to surface 1,903 barrels of oil per day from Unit 1B (stabilised average flow rate 1,235 barrels of oil per day). Significantly lighter (19° API) and lower viscosity (30 cP) oil compared to other units in the Amistad Formation. Over 1,000 barrels of oil produced and trucked away during testing.” Well, OK, that’s great. There’s further information on the basic idea and area here.

But here’s the thing. Resource extraction, by definition, depends upon the goodwill of the jurisdiction in which the resources are being extracted. If the government decides to vary the terms, well, there are always those international courts, ISDS procedures and so on. But they’re expensive, take years and there’s no certainty to them. So the value of any such resource – oil, gas, other minerals, a mine and so on – does depend upon the government of the place living up to the contract it has signed. There are parts of the world where this is less than a certainty. 

So we need to weight the value of oil in Cuba by how confident we are that Cuba will pay for all the oil. We have experience of this too. For Sherrit International has been producing in the next block over for decades now. And they have had problems at times:

We recall discussions in Sherrit’s accounts about how difficult it was to get actual money for the oil they were producing. Leading to complicated offset agreements against their nickel production on the island and so on. Matters have been, in recent years, satisfactorarliy conclude but there’s a certain variable meaning to the word “satisfactory” there. 

We’re not trying to insist that Melbana is going to get stiffed having now found oil. Rather, that the value of that oil in terms of the impact on the corporate valuation is going to be less than if the oil had been found in a more legally stable jurisdiction.

We’d also suggest that American citizens take a very good look at the Helms Burton Act before thinking about any position here.