Colombia’s leftwing President Gustavo Petro’s plans to end contracting for hydrocarbon exploration have unnerved participants in the Andean country’s economically vital energy patch. That, coupled with meager hydrocarbon reserves and production failing to return to pre-pandemic volumes, points to the growing potential for an energy crisis to emerge. Such an event will sharply impact the strife-torn Latin American nation’s petroleum-dependent economy, place Colombia’s energy security at risk and even jeopardize the planned energy transition. It is a shortage of natural gas, due to declining production from rapidly aging mature offshore fields coupled with steadily rising demand, which poses the greatest threat. Natural gas supply constraints were so severe in 2017 that Colombia was forced to start importing liquified natural gas. As such, there is growing apprehension Petro’s plans will endanger Colombia’s energy security triggering a crisis that could roil the economy derailing one of Latin America’s strongest post-pandemic recoveries.
Natural gas is regarded as a clean hydrocarbon with it emitting, when burnt, around half the carbon dioxide of thermal coal and 30% less than crude oil while fulfilling nearly all the roles played by coal and oil. For those reasons, it has been adopted as the transitional fossil fuel of choice in a world seeking to reduce carbon emissions, contain global warming and meet the emission targets established by the UN Framework Convention on Climate Change. The substitution of natural gas for coal in the U.S. as fuel for power plants, where it accounted for 38% of the electricity generated in 2021, has been a key factor in the reduction of emissions in the world’s second-largest consumer of fossil fuels. Since 2014 there has been a push by Colombia’s national government in Bogota to replace coal-fired powerplants with natural gas-fired facilities.
From 2014 to 2018, the El Niño climate phenomenon triggered severe droughts in Colombia, forcing water rationing, even in major cities, and a sharp decline in electricity generation from hydroelectric facilities because of a marked decline in water flows. Any decline in the power generated by Colombia’s hydro-plants will significantly impact the electric grid because they are responsible for around 80% of the electricity consumed, with the remainder generated by fossil fuel-fired facilities. As a result, climate phenomena such as El Niño as well as extreme droughts sharply impact electricity generation in Colombia and the stability of its grid. Weather forecasters have predicted El Niño’s return during 2022, with the climate pattern expected to remain until 2024. This will cause further droughts in Colombia, potentially leading to a marked decline in water levels which will once again impact hydroelectricity generation and will challenge the reliability of the Andean country’s electric grid.
Bogota’s concerns regarding the stability of Colombia’s electricity supply saw the government approve the construction of an LNG regasification plant, at Baru near the city of Cartagena, the capital of the Bolivar department, which came online in 2016. That established the crucial infrastructure required to begin LNG imports so as to boost natural gas supplies, with the first major cargoes received during late 2017. A second regasification facility is planned for the (Spanish) Pacific coast port of Buenaventura, with another in La Guajira and a fourth in the Gulf of Morrosquillo. On commencing operations, those facilities will bolster the capacity to receive LNG imports shoring up Colombia’s energy security. The only downside is that will expose Colombia’s resurgent economy to soaring international natural gas prices. Europe’s energy crisis, in the wake of Russia’s invasion of Ukraine, caused natural gas prices to skyrocket, with the fossil fuel rising by a whopping 50% for the year to date. Becoming reliant on international LNG imports represents a serious challenge for Colombia’s economy, which is experiencing a robust post-pandemic recovery, with 2021 GDP expanding by a notable 10.7%.
The risks posed by Petro’s goal of ending contracting for oil exploration are exacerbated by the Andean country’s meager proven natural gas reserves and weak production volumes. At the end of 2021, it was determined that Colombia had 3.16 trillion cubic feet of proven natural gas reserves which will last 8 years at the current production of 1,087 million cubic feet per day reported for August 2022. The latest production number, while 2.4% greater than August 2021, is still 1.6% lower than the 1,105 million cubic feet per day pumped during August 2019, highlighting that Colombia’s natural gas output has yet to return to pre-pandemic volumes. Weak production and growing demand for natural gas see domestic consumption of the fuel exceeding supply, which has been the case since 2016.
Source: U.S. EIA.
This is placing ever greater pressure on Colombia’s economy because Natural gas is an important part of Colombia’s overall energy mix, providing 28% of all energy consumed in the Andean country. Rising domestic demand for natural gas is being driven by it is an important fuel for Colombian households. Natural gas provides affordable heating and cooking in a country where 39% of the population lives in poverty, with another 12% mired in extreme poverty. Any sharp increase in domestic prices, because of increasing reliance on international imports as well as the constrained domestic supply, will impact already challenging economic and social conditions for Colombia’s households.
Petro’s plans to end contracting for oil exploration pose a very real risk to Colombia’s economic recovery, the stability of the Andean country’s electricity supply and the welfare of the country’s people. A shortage of domestic natural gas reserves and production coupled with the fallout from droughts challenges the stability of Colombia’s hydro-dependent electricity grid. While a growing dependence on LNG imports, at a time when international natural gas prices are at 14-year highs, will cause energy prices to spike sharply, impacting households in a country where poverty is a genuine problem. Boosting Colombia’s natural gas reserves while promoting the fuel’s role in the domestic energy mix will assist Petro with achieving a sustainable energy transition and reducing greenhouse gas emissions to the levels set out in the UN’s national climate plan for the Andean nation.
By Matthew Smith for Oilprice.com
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