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LUKoil's plans to purchase a refinery in Cuba are on hold because of the difficulty of investing in crude production in Venezuela.

Russian oil firm LUKoil’s plans to expand into Cuba have been put on hold. LUKoil wanted to buy a refinery in Cuba, supply it with crude oil produced in Venezuela and wait for the U.S. embargo on trade with Cuba eventually to end. This would give LUKoil the chance to squeeze into the highly competitive U.S. market.

However, this long-term project faces a major roadblock. Venezuelan President Hugo Chavez’s burdensome and investment-unfriendly tax laws make investing in Venezuelan crude production extremely difficult for foreign companies. The U.S. firms have all left Venezuela, but even the companies that came in to fill that void — such as LUKoil — are not finding investment conditions favorable. This means that LUKoil’s plan to ship crude from Venezuela to Cuba for refinement is not going to be feasible under current conditions — not even at $130-per-barrel cost of oil. LUKoil founder and CEO Vagit Alekperov said June 26 that the firm “cannot afford to take the risk of viewing these [Venezuelan] projects as a source of supply of the Cuban refinery. And to buy a refinery without having crude supply logistics does not make sense.”

In other words, Venezuela’s current investment environment is leaving LUKoil with no way to control both the upstream and the downstream assets for petroleum product exports to the United States. Thus, Chavez might have just made a new enemy: Alekperov.