Colombia’s first-ever leftist president emerged victorious from the July 2022 election run-off after running a broad reform-based campaign with a focus on transitioning the Andean country away from a reliance on fossil fuels. This includes plans to ban hydraulic fracturing and end awarding new contracts for oil and natural gas exploration. That sparked considerable concern because Colombia is highly reliant upon petroleum which is the largest export by value while natural gas is a key source of energy domestically. Colombia was already battling a natural gas shortage with aging mature fields, low proven reserves, and a lack of hydrocarbon exploration success all weighing on supply at a time when demand for the fossil fuel is expanding at a solid clip. Those developments coupled with Petro’s plans to ban fracking and end hydrocarbon exploration have sparked fears that Colombia’s energy security is at risk.
Natural gas is a key source of energy in Colombia’s energy mix. According to the U.S. EIA, the fuel was responsible for 28% of all energy consumed in the Andean country in 2021, and that portion is expanding. That makes natural gas the second largest source of energy consumed in the Andean country behind crude oil, at 31%, and ahead of hydroelectricity which is responsible for 22%. Consumption of natural gas in Colombia has been rising at a steady clip over the last decade. By 2017, the Andean country was consuming more natural gas than it was producing with growing demand for gas-fired electricity the key driver of soaring demand domestically. As a result, later that year Colombia started receiving the first bulk LPG imports at a specialized LPG import terminal in the Caribbean port city of Cartagena. Related: U.S. Shale Production Is Set For A Rapid Decline
Colombia is highly reliant on hydroelectric plants for electricity production and a series of droughts saw water levels at those facilities decline sharply causing electricity output to plunge and leading to power shortages. In order to combat the risks posed by droughts and the impact they have on electricity production due to Colombia’s reliance upon hydroelectric plants, the national government in Bogota boosted the number of gas-fired power plants. The volume of gas-fired plants also grew because the previous administration of Ivan Duque viewed natural gas as a necessary transitional fuel for Colombia’s progression to utilizing clean renewable sources of energy.
It is not only the rising use of natural gas for electricity generation that is driving surging consumption of the fossil fuel in Colombia. Natural gas is also a main source of energy for Colombian industry and households, which are responsible for 29% and 15% of domestic consumption respectively. Rising manufacturing activity and a growing young population are responsible for the increased demand for natural gas in Colombia. Household consumption of the fuel is expanding at a steady pace because it is an important affordable source of energy in a country where 39% of the population lives in poverty. There is a public policy push to transition those households burning wood, coal, and even garbage for cooking as well as heating, which has expanded significantly since the sharp rise in poverty, to natural gas, but that can only occur if supply expands, and prices fall.
It isn’t only the rapidly rising consumption of natural gas that is responsible for an emerging energy crisis in Colombia. Meagern proven gas reserves and declining domestic production are weighing on domestic natural gas supply and have done so for some time. At the end of 2022, Colombia’s proven gas reserves (Spanish) were 2.82 trillion cubic feet, which was not only 11% lower than the 3.16 trillion cubic feet reported a year earlier but also the lowest level in 17 years. The fuels proven reserves are only sufficient for another 7.5 years at the current rate of production. By March 2023 Colombia’s natural gas production averaged 1.065 billion cubic feet per day which was 1.5% less than a month prior and 1.2% lower year over year.
There is a very real risk that Colombia’s natural gas reserves and production will continue declining. The strife-torn country’s current reserves are predominantly composed of minor reservoirs making them difficult to efficiently extract and leading to greater wastage when being exploited. Colombia is not enjoying a high rate of exploration success like neighboring Ecuador and Venezuela, despite claims that the Andean country possesses considerable hydrocarbon potential. There have been no world-class or significant oil or natural gas discoveries in Colombia since the 1990s.
The Chuchupa Ballena Riohacha complex, located in the Guajira offshore and onshore basins, which are the principal natural gas-producing fields in Colombia, were the last significant discoveries. Chuchupa and Ballena are mature fields that have been pumping natural gas for decades. As aging fields pass peak production they are nearing the end of their productive life with their output impacted by high decline rates. Chuchupa delivered first gas in late-1979 with output peaking in 2010 at over 100,000 barrels of oil equivalent per day. Since then, production has been in terminal decline falling to around 17,600 barrels of oil equivalent per day during 2022 with output expected to plummet to 9,588 barrels of oil equivalent daily by 2029 when commercial production will end. Production at the Ballena field commenced in 1977 and peaked in 2014 at just over 10,000 barrels of oil equivalent per day. By 2022, output had fallen to around 4,000 barrels of oil equivalent daily and will continue declining with commercial production expected to end during 2039. With the Chuchupa and Ballena fields responsible for a significant portion of Colombia’s natural gas production their declining output is sharply impacting domestic supply.
It is for this reason that over the last decade, successive Colombian governments have enacted policies and industry reforms aimed at attracting foreign investment in the hydrocarbon sector, especially for natural gas exploration and development. These included tax as well as other regulatory concessions and paying a wellhead price that is significantly higher than the North American Henry Hub benchmark. This attracted a flurry of investment, especially after the industry regulator the National Hydrocarbon Authority (ANH – Spanish initials) opened-up blocks off Colombia’s Caribbean coast. As a result, a series of offshore gas discoveries were made including the Kronos, Gorgon-1 and Purple Angel finds between 2015 and 2017. The latest are Shell’s August 2022 find with the Gorgon-2 exploration well on the COL-5 Block and Petrobras’ September 2022 discovery with the Uchuva-1 wildcat well on the Tayrona Block.
As production and reserves decline Colombia is at risk of facing a natural gas crisis with the country’s energy security being compromised. That risk is magnified by Petro’s pledge to cease issuing new hydrocarbon exploration contracts as part of Colombia’s clean energy transition and reducing the country’s dependence on fossil fuels. While there was considerable speculation Bogota would not proceed with such a controversial plan, particularly after increasing its dependence on oil revenue by hiking industry taxes, the latest announcements indicate otherwise. In the Energy Ministry's declaration on hydrocarbon reserves (Spanish) Minister Irene Velez stated, "From the Government of Change we will continue with the policy of greater efficiency in existing contracts and we will continue working with the hydrocarbon sector so that offshore projects materialize.” Velez went on to tell journalists at the Natural Gas conference in the northern port city of Barranquilla, "This is a clear demonstration that higher efficiency at existing contracts is the route,". Nonetheless, according to Colombian newspaper El Tiempo Velez avoided answering whether or not new exploration contracts will be awarded.
While Petro’s government is committed to respecting those exploration and production agreements already in place, they are likely incapable of ensuring that Colombia’s proven gas reserves and production will meet growing domestic demand. Indeed, the country’s peak oil industry body the Colombian Petroleum Association (ACP – Spanish initials) estimates that as a result of Petro’s energy policy Colombia will be forced this decade to import up to 30% of fuel (Spanish) to cover consumption. Liquefied petroleum gas imports quadrupled during 2022 to make up for an ever-wider shortfall between domestic gas production and demand. This not only causes prices to rise impacting impoverished households but also affects a sensitive balance of payments for a fiscally stretched national government. Petro’s contentious plan to import gas from Venezuela to compensate for any shortfall in production appears unachievable.
By Matthew Smith for Oilprice.com
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