Melbana Energy is a junior oil and gas company that has been listed on the Australian Securities Exchange for the last 20 years. Traditionally, the Melbourne-headquartered firm has regarded Australia’s offshore industry as the core of its portfolio, but in recent years it has looked to diversify into new markets outside of offshore Australia. “We got interested in Cuba in the early 2010s based on technical reports showing it as hydrocarbon rich, relatively underexplored region. With the US embargo we felt there was a limited application of Western techniques to the geology in Cuba,” says Melbana’s CEO Robert Zammit.
Melbana’s technical team is highly experienced in the type of geology underpinning Cuba’s existing oil and gas reserves according to Zammit, while the current board also possesses a deep reservoir of industry knowledge from previous experience with global companies such as ExxonMobil.
But crucially, as a small non-American company looking at Cuba as an investment destination, Melbana has been able to pursue opportunities that weren’t accessible to traditional players North of Key West, giving the firm an early mover advantage in an underexplored oilfield.
Cuba – open for investment
Having upheld a socialist political system since 1959, Cuba has long been regarded as an inward-looking nation with foreign investment opportunities few and far between, and out of the question altogether for companies from the US due to the US embargo.
However, things are changing on the Caribbean island. In 2018, after 42 years of Castro-led rule Cuba ushered in a new leader, and in the early days of his presidency Miguel Díaz-Canel began a campaign to attract greater foreign investment across several sectors, from tourism to infrastructure and oil and gas.
“From our perspective, we’ve had quite a positive experience in Cuba,” reveals Zammit. “Since we’ve been active in the country, Cuba has been looking for foreign investment. The general attitude, all the way from government to the people that we have been dealing with, has been very positive.
“They’ve established a pretty encouraging framework in terms of tax structure and a legislative framework, and that’s given us sufficient comfort to support the investment we’ve been making.”
The Cuban government has recognised the emerging potential of its oil and gas industry and has thrown its weight behind private investors in the sector by applying an attractive tax rate of 15-22.5% and an eight-year tax holiday for oil companies.
Almost all of Cuba’s current oil production is drilled from a 750 km² strip along the Northwestern coast which runs from the bustling capital city Havana to the resort town of Varadero, however much of Cuba’s Northern basins remain underexplored.
This notion is highlighted by a 2004 US Geological Survey which found that the total undiscovered technically recoverable reserves in the North Cuba Basin stood at 4.6 billion barrels of crude oil, 9.8 Tcf of natural gas and 900 million barrels of natural gas liquids.
Melbana’s challenge is to unlock a portion of the reserves that exist in Cuba’s Northern basins, and Zammit believes the company possesses the technical skills required to do just that. “It’s a different type of geology that applies to the Northern part of the Gulf of Mexico, but it’s certainly a hydrocarbon rich area.
“We know there is oil in the ground in our acreage. Oil has been produced within the boundary area of our Block 9 project and our other asset – Santa Cruz – is an existing oilfield.”
Block 9 is comprised of a 2,380 km² footprint along trend from the multi-billion barrel Varadero oil field, with the potential for large, Varadero type structures, which was borne out by an independent best estimate oil-in-place resource of 15.7 billion barrels.
Zammit explains that when Melbana first started scouting the country for opportunities, the national oil company – Cuba Oil Union (CUPET) – presented the company with a number of prospects and after a number of screening studies, Melbana decided that Block 9 was the most attractive.
“That was probably driven by the fact that Block 9 is part of Cuba’s Northern fold belt trend where there are currently multiple producing offshore fields. The trend continues onshore into Block 9 and that gives us a strategic advantage in terms of cost management for drilling.”
After a period of negotiation with CUPET, Melbana was awarded a 100% participating interest in the Block 9 area in 2015, on the basis of a production sharing contract (PSC) over a +20-year period.
More recently, Melbana signed a farmout agreement with Chinese oil services company Anhui Guangda Mining Investment Co (AGMI) on December 31st 2018, which will see latter commit to drilling a minimum of three wells in Block 9 by July 2020, with the former retaining a 12.5% share of the profit.
“Farming out is not 100% mandatory, but its almost something we needed to do as we don’t have a huge balance sheet and the opportunities we are seeking are really quite large for a company of our size,” Zammit adds.
Meanwhile, the Santa Cruz project – located approximately 150 km West of Block 9 – is a different type of asset for Melbana to manage, being an existing oilfield that currently produces in the region of 1,500 barrels per day.
Melbana finalised an incremental oil recovery (IOR) contract with CUPET for Santa Cruz in December 2018, which will see the parties share any increase in production that can be generated above an agreed baseline level.
Additional production will be pursued by Melbana from surface or downhole equipment or facility upgrades, from re-working existing wells, side tracking from existing wells and from drilling new wells to access new oil pools.
The contract is currently moving through the Cuban ratification process for regulatory approval, but this hasn’t stopped Melbana commencing two optimisation studies at Santa Cruz.
“One of the studies is based on facility optimisation, looking at what we can do with the equipment and any de-bottlenecking we can do. The other is more geoscience-based, which is where there is more upside for us, from what we’ve seen so far.
“Our geoscience team have been working full-time on the structural interpretation for Santa Cruz, based on the data that already exists. We have formed a view that this is an area with most promise in terms of incremental production potential,” Zammit claims.
The Beehive prospect
Returning to Australia, the company’s Beehive prospect is the largest undrilled offshore oil prospect in Australia, and so success there would dwarf any success in Cuba, according to Zammit.
The prospect, located near Darwin off the coast of the Northern Territory, is a very large isolated carbonate reef that is highly analogous to the Tengiz oil field in the Caspian Sea – a huge field with somewhere in the region of 6 to 9 billion barrels recoverable.
Melbana has partnered with two giants of the global oil and gas sector at the Beehive prospect, in the shape of French major Total and Australia’s Santos, who have fully funded a 3D seismic survey, in return for a further option to fully fund the Beehive-1 exploration well.
If either company exercises its option, Melbana would retain a 20% participating interest and be fully carried for the first well drilled in WA-488-P.
“The independent assessment provided a best estimate of 388 million barrels of oil equivalent at a 100% basis. From our perspective, it’s got enormous upside and its very exciting for our shareholders to have that opportunity.
“We actually think it has an 80% chance to be oil, but our partners are more leaning towards it being gas. Whatever it is, oil is upside and we are surrounded by LNG infrastructure in that area and domestic gas infrastructure, so we think we’ve got a pretty good opportunity to commercialise it.”
Melbana is also assessing an interesting opportunity to build a shallow offshore infrastructure hub encompassing one LNG plant and two methanol plants through the Tassie Shoal projects, although patience is the name of the game here after the company attained licences through to 2052.
With assets based in two disparate regions of the world in Cuba and Australia, Melbana has a difficult task ahead balancing progress between both jurisdictions.
However, the company’s new Havana office – led by Cuban oil and gas industry veteran Dr. Rafael Tenreyro – will help the company pursue its goals in the North Cuba Basin, while the Melbourne HQ continues to drive the general direction of the business.
After a busy end to 2018, Melbana is well positioned for an even more active next 12 months, which will include drilling at Block 9 in Cuba and preparations for the drilling of the Beehive prospect in Australia, if Total and/or Santos exercise their option to do so.