Cuba is in a deep energy crisis. A steep decline in tourism revenue following the Covid-19 pandemic, exacerbated by high global fuel prices caused by the war in Ukraine, have contributed to years of chronic fuel shortages, resulting in frequent blackouts and long queues at gasoline pumps in what analysts have described as “the worst financial position it has been in since the collapse of the Soviet Union.” Starting in February, the regime announced that gasoline prices will increase by over 500 percent due to the government’s inability to continue sales at current subsidized prices.
The
functioning of the Cuban economy hinges on imported petroleum. In the 1980s,
Cuba depended on the USSR to supply 98 percent of its crude oil needs.
Following the end of Soviet subsidies, Cuba’s so-called Special Period—a decade
of widespread food rationing, mass outward migration, and paralysis of the
country’s industrial and agricultural sectors—ended only after Hugo Chávez’s
Venezuela agreed to barter its crude oil in exchange for Cuban doctors,
teachers, and military advisors in the early 2000s.
Q1: Why
is Cuba facing such an acute energy crisis now?
A1: For
decades, Venezuelan oil has been the lifeblood of the Cuban economy: its
exports represent about three-quarters of energy shipments to the island. While
recent sanctions lifts on the Maduro regime may take a slight edge off Cuba’s
energy crunch, Venezuela is far from the energy partner that it once was.
Venezuelan oil exports to Cuba averaged almost 80,000 barrels per day (b/d) in
2020, compared to 55,000 b/d over the course of 2023—over a 30 percent
decrease. The Cuba-Venezuela energy relationship is also threatened by the
candidacy of former deputy and opposition leader María Corina Machado, who has
pledged to suspend oil donations to Cuba if elected.
The
growing opportunity costs associated with Venezuela’s provision of discounted
petroleum to Cuba have made the cash-strapped Maduro regime prioritize economic
relationships with countries capable of paying in hard currency. This has, in
turn, forced Cuba to forge relationships with new partners to fill gaps in
supply, most notably, Mexico.
Q2: What
is behind the rise in oil transfers from Mexico to Cuba?
A2: This
past year was a record for Mexican oil transfers to Cuba, according to analyses
carried out on ship monitoring data. Before last year, Mexico had only
sporadically delivered energy shipments, but over the course of 2023, Mexico
surpassed Russia as one of the island’s key oil suppliers. Yet, Petróleos
Mexicanos’ (Pemex) leadership under president Andrés Manuel López Obrador
(AMLO) has yet to disclose financial details regarding the exact nature of its
energy transfers to Cuba. This lack of transparency surrounding the country’s
dealings with Cuba may signal an attempt to obfuscate violations of U.S.
sanctions.
Since
the end of the first quarter of 2023, the Mexican government, through its
state-owned oil company Pemex, supplied at least 2.8 million barrels of oil to
Cuba in what the AMLO administration described as a humanitarian donation to “a
people who are suffering from an inhumane, unjust blockade.” Over the course of
2023, Mexico transferred an estimated $200 million worth of energy from Pemex.
Since the first quarter of 2023, Cuban tankers Vilma and Delsa—previously used
to ferry crude from Venezuela—were spotted making stops at Mexican terminals,
emblematic of Cuba’s pivot toward Mexico in the absence of Venezuelan fuel.
Amid
Cuba’s acute energy crisis, it is clear AMLO feels an ideological affinity
toward the Cuban president as a fellow leftist. Díaz-Canel was the guest of
honor at Mexico’s Independence Day celebrations in 2021, and AMLO has inveighed
frequently against U.S. policy toward Cuba. Mexican solidarity with Cuba during
one of its worst energy crises since the Special Period is indicative of the
two leaders’ close personal and ideological ties, and of a willingness on the
part of AMLO to pursue policies that can only be construed as open provocations
to the United States. While past Mexican governments have maintained cordial
relations with Cuba under the country’s longstanding policy of noninterference
according to the Estrada Doctrine, never before has Mexico stood with Cuba in
such an open manner, in defiance of U.S. policy.
Meanwhile,
the AMLO administration has deepened its energy relationship with Venezuela. In
the first week of 2024, Pemex CEO Octavio Romero met with both the Venezuelan
vice president Delcy Rodríguez and Petróleos de Venezuela, S.A (PDVSA)
president Pedro Rafael Tellechea with the goal of developing joint projects and
“advancing strategic alliances within the framework of both nations’ energy
development,” according to PDVSA social media. The increased involvement of
Pemex along the Cuba-Venezuela energy axis represents an economic lifeline for
both the Díaz-Canel and Maduro regimes.
Q3: What
has been the historic relationship between Cuba and its energy partners?
A3:
Cuba’s decades-long isolation from the global economy has forced it into
unorthodox arrangements outside of international financial architecture to
secure resources and hard currency from abroad. For instance, more than 30,000
Cuban doctors and nurses are leased to about 60 foreign governments, providing
the Cuban government more than $11 billion per year—more than the island’s
tourism industry. In the cases of Venezuela,Russia, and Algeria, Cuban doctors
are sent abroad in exchange for discounted oil exports. In exchange for
Venezuelan oil, Cuba has also provided the country with teachers, sports
trainers, and military advisers. In June 2023, Cuban prime minister Manuel
Marrero announced that Russia was ready to supply the island with “1.64 million
tonnes of oil and oil products annually” as part of a deal that would boost
Cuban sugar and rum exports to Russia. As part of the agreement, Russia would
send 1,200 employees of Russian state-run oil firm Rosneft to the island to
receive medical check-ups.
This
type of agreement—where energy goods are exchanged for Cuban services—is
particularly useful for a government that has been excluded from traditional
international payment systems. Whether such an arrangement was made between
Cuba and Mexico involving their recent energy transfers remains unclear, but
possible, given the historical precedent. Because of Cuba's lack of access to
hard currency, it is unlikely that the island has compensated Mexico anywhere
near the estimated $200 million value in energy that it has provided and is
more likely part of an oil-for-services scheme, like the medical agreement
extended in September 2023 by the AMLO government.
However,
these arrangements are not immune to sanctions, either. Vessels are always
susceptible to sanctions, as are the companies that insure the oil cargo. For
instance, Reuters reported that in 2019, “an oil-for-services arrangement
between Venezuela and Cuba ran afoul of U.S. sanctions on the South American
oil producer when the U.S. Department of Treasury blacklisted a group of tanker
owners and vessels involved in the shipments, at the Venezuelan opposition’s
request.” In April 2023, a U.S. State Department spokesperson told Reuters that
Washington was, "aware that Cuba purchases oil from a variety of
countries, both sanctioned and non-sanctioned."
Q4: How
has Mexico explained its shipments of oil to Cuba?
A4:
Compounded by rising global oil prices, the AMLO administration has faced
mounting pressure from opposition lawmakers to end their petro-donations to the
Cuban regime. While Mexican foreign minister Alicia Barcena said in September
that the transfers to Cuba were made as a donation through the Agency of
International Cooperation for Development, her claim was later contradicted by
Pemex CEO Romero while testifying before the Mexican senate. Romero claimed
that the company, “has not made any fuel donations to any foreign government,”
adding, “I’m not lying.”
According
to longstanding U.S.-Cuba sanctions policy, U.S. persons and non-U.S. entities
owned or controlled by U.S. persons are “authorized to donate to Cuba items for
basic human needs that are subject to the EAR [export administration
regulations], including most medicine, medical devices and food.” However, the
selling of such goods remains strictly prohibited. This possible sale has
raised eyebrows among sanctions and export compliance experts who have alleged
that the transfers may violate the longstanding U.S. embargo which has banned
all trade and financial transactions with the island since 1959, unless
licensed by the U.S. Department of Treasury. Moreover, Minister Bárcena
recently indicated that the Mexican government is considering ways to begin
charging Cuba for the fuel it provides, noting that, “We [Pemex] have a
financial situation, of course. It’s not easy to donate.”
Considering
that Pemex makes use of loans from the U.S. Export and Import Bank (EXIM) to
finance its operations, it is imperative that the United States seek greater
clarity from its Mexican counterparts regarding the nature of Mexico-Cuba oil
transfers. Yet, Pemex leadership under AMLO has yet to disclose financial
details regarding the exact nature of the transfers. This lack of transparency
surrounding the country’s dealings with Cuba may signal an attempt to obfuscate
violations of U.S. sanctions.
Q5: Is
Pemex in a financial state to donate oil to Cuba?
A5: At a
time when Pemex is ranked as the most indebted oil company in the world, one
would think that Pemex would not have the capacity to gift oil to anyone. Yet,
considerable uncertainty remains surrounding the exact nature of the energy
transfers. Despite its current financial woes, Pemex has long been a point of
national pride for many Mexicans. In fact, the anniversary of Mexico’s
expropriation of oil assets which established Petróleos Mexicanos—and prompted
an international boycott of Mexican products led by the United States—is
celebrated as a civil holiday each year on March 18. In the 1970s, Pemex’s
discovery of huge oil reserves in Tabasco, Chiapas, and offshore in the Gulf of
Mexico made Mexico a major player in the global petroleum markets and energy
self-sufficient for the first time. Total crude oil production in the country
tripled between 1976 to 1982 as Pemex expanded its extraction and processing
capabilities.
However,
the depletion of once productive oil reserves, coupled with a constitutional
ban on granting production rights to foreign companies in the 2000s, meant that
Pemex lacked the technical expertise to carry out deepwater drilling, as well
as the access to large pools of capital needed to explore new reserves. Crude
oil production declined by almost one-third between 2004 and 2010, leading to a
series of reforms that introduced competition from foreign private oil
companies and culminated in a constitutional reform in 2013. This effectively
ended Pemex’s monopoly and plunged the state-run firm into debt. In 2023, the
company’s debt ballooned past $100 billion, equal to 8 percent of Mexico’s GDP.
Total oil production has fallen by roughly half since its peak in 2004, and a
leaked letter in September revealed that the company was recently unable to pay
back over $500 million to three suppliers.
As he
approaches the end of his term, AMLO will leave Pemex in a more precarious
position than when he entered office in 2018. The administration’s attempts to
remedy the situation by granting preferential treatment to state-owned firms,
significantly decreasing the company’s tax burden, and implementing frequent
cash injections financed by Mexican taxpayers have amounted to more than $49
billion in capitalizations, tax breaks and other forms of assistance during
AMLO’s sexenio. Even company executives admit that they cannot dig themselves
out. Moreover, the long-awaited new Olmeca refining facility at the port of Dos
Bocas—financed in part by the PRC—is running over budget by roughly double its
initial price tag of $8.9 billion and is still not operating at full capacity.
With a mindset frozen in the statist development model of the uninterrupted
years of Institutional Revolutionary Party rule, the responsibility of rescuing
or restructuring Pemex will inevitably fall to AMLO’s successor.
Q6: Does
Pemex risk running afoul of U.S. sanctions?
A6:
During AMLO’s daily mañanera press conference on October 21, the Mexican
president claimed that the provision of more than 2.8 million barrels of oil to
Cuba in the last year have not caused any problems for Mexico’s relationship
with the United States. “The United States government and President Biden are
very respectful of us. They don’t bring up these issues with us,” he said.
Indeed, tensions within the U.S.-Mexico bilateral relationship under AMLO have
often been sidelined in favor of achieving closer cooperation in combating
fentanyl and migrant flows across their shared border. In late December, AMLO
stated that increased cooperation with U.S. border authorities will depend on
the Biden administration’s willingness to reopen dialogue with and revise
sanctions policy toward Cuba and Venezuela.
While
the Biden administration has yet to comment, several congressmen have voiced
their concerns, including U.S. senator Marco Rubio and Representative María
Elvira Salazar. The EXIM Bank has purportedly canceled an $800 million loan to
Pemex due to the company’s oil transfers to Cuba. However, this report was
denied by Pemex CEO Romero, who later clarified that EXIM had “neither imposed
fines on PEMEX nor canceled any credits” and that the decision to cancel a
credit request had been made by mutual agreement with EXIM.
While
Pemex is financed in part by the U.S. government, this does not necessarily
preclude the company from donating or selling oil to Cuba. EXIM is required to
ensure that “businesses that Ex-Im Bank helps finance are not doing prohibited
business with Iran,” but has no such specific provision that prohibits
transaction participants from engaging in business with Cuba.
However,
Pemex could risk sanctions if its engagement with Cuba is found to violate the
Helms-Burton Act, which penalizes foreign companies and persons that traffic in
property confiscated by the Cuban government on or after January 1, 1959. For
the first time in 2019, the Trump administration reversed the suspension of
Title III—allowing for U.S. nationals to “sue any persons or entities that
‘traffic’ in property confiscated by the Castro regime.”
In 2022,
under this law, a federal judge ordered four cruise lines to pay over $400
million in damages for docking in ports formerly owned by Havana Docks
Corporation, a U.S. company expropriated by Castro during the revolution.
Applying similar logic, Mexican tankers that offload their energy cargoes into
ports expropriated by the Castro regime could face similar risk exposure.
The AMLO
administration’s lack of transparency regarding the exact nature of its
transfers to Cuba makes it complicated to ascertain whether Pemex has committed
technical violations of U.S. sanctions. However, oil to Cuba under opaque
conditions could be construed as a “spirit of the law” violation, and worse
yet, a diversion of U.S. taxpayer dollars to indirectly support Cuba’s
sanctioned authoritarian regime. Regardless of Biden’s appetite to escalate
tensions in the already fraught bilateral relationship with Mexico, it is a
matter of international credibility for longstanding U.S. sanctions policy to
be enforced as long as they remain in place.
***Ryan
C. Berg is director of the Americas Program and head of the Future of Venezuela
Initiative at the Center for Strategic and International Studies (CSIS) in
Washington, D.C. Nate Laske is an intern with the CSIS Americas Program.
*****Critical
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https://www.csis.org/analysis/2023-year-mexican-oil-cuba