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Colombia is on the verge of a natural gas crisis

Conflict-torn Colombia is at risk of an energy crisis due to a sharp decline in energy sector investment and a lack of world-class hydrocarbon discoveries. The natural gas shortage emerged in 2015 when the Andean country faced severe drought and water shortages due to the El Niño weather phenomenon. A decline in natural gas supplies combined with rising demand for the fuel forced Colombia to begin importing large quantities of liquefied petroleum gas (LPG) in 2017, with inbound shipments expanding rapidly since then. Now that President Gustavo Petro has stopped awarding new hydrocarbon exploration contracts and halted fracking at a time when demand for natural gas is surging, an energy crisis is expected to loom in Colombia.

In late 2022, Colombia’s leftist President Gustavo Petro announced that a deal had been reached to import natural gas from Venezuela. The deal is a key part of the President’s plan to end the issuance of new hydrocarbon exploration licenses in Colombia while guaranteeing the Andean country’s energy security. You see, Petro’s plan to wean Colombia off its dependence on fossil fuels, of which oil is the country’s largest legal export, accounting for one-fifth of fiscal income and 3% of GDP, will ultimately shut down the domestic hydrocarbon sector. Can do. As a major petroleum producer, Colombia has extremely limited oil and natural gas reserves, the lowest of any oil producer in Latin America.

According to Colombia’s Ministry of Mines and Energy, proven oil reserves at the end of 2022 totaled 2.074 billion barrels, while natural gas stood at only 2.82 trillion cubic feet. Those proven reserves have an extremely limited production life of about seven years at the current rate of extraction. For this reason, Colombia’s energy security is at risk due to the Andean country’s excessive dependence on fossil fuel extraction. This is further complicated by the fact that there have been no major hydrocarbon discoveries in over a decade, with enhanced recovery techniques responsible for the modest 1.7% year-on-year increase of Colombia’s proven oil reserves.

Another threat to natural gas supplies in Colombia is that most of the fossil fuel produced in the country is a byproduct of oil extraction. This makes domestic natural gas supplies highly dependent on oil exploration, development and production. It also creates additional supply pressure as drillers in Colombia rely heavily on reserve replacement ratios and increased recoveries to boost oil production from older mature oil fields. Drillers typically use associated gas produced from oil wells as an agent to increase reservoir pressure through its re-injection. It is believed that 50% to 80% of the associated gas produced from oil extraction is reinjected to increase recovery.

Colombia’s top four onshore gas-producing operations are the onshore Pouto Sur, Cupiagua, Cupiagua Sur and Floreana fields, located in the Casanare Department in the Llanos Basin. Those fields produce associated gas, meaning it is a byproduct of oil extraction. The Chuchupa field, operated by Chevron on Colombia’s Atlantic coast, is Colombia’s major gas-producing operation. Chuchupa is an old, mature field where production peaked in 2010 and is now in decline, with the field expected to reach its economic limit in 2031. The mature Ballena offshore field, operated by Chevron, also produces non-associated gas and is located nearby. Ballena production peaked during 2014 and is expected to reach its economic limit in 2039.

A series of recent natural gas discoveries in Colombia have raised great hopes of boosting domestic reserves and production. The most significant discoveries were the 2017 Gorgon-1 and 2022 Gorgon-2 deepwater discoveries in the COL-5 block, located off the Caribbean coast of Colombia. The block is operated by Shell, which has a 50% working interest, while the remaining 50% is held by Ecopetrol. The COL-5 block also has the earlier 2015 Cronos and 2017 Purple Angel deepwater discoveries. Another promising discovery occurred in the Uchuva-1 exploratory well, drilled in the offshore Tayrona block by operator Petrobras, which has a 44.44% working interest, with the remaining 55.56% controlled by Ecopetrol. While those discoveries show that there is great potential in Colombia’s territorial waters, in the Caribbean, they will take many years to develop.

For the reasons discussed, Colombia has considerable supply side pressure when it comes to domestically produced natural gas. Fossil fuel consumption in Colombia has been growing at a steady pace, with demand now far exceeding supply. This first occurred in 2016 when a severe drought caused by the El Niño climate phenomenon saw water levels drop, reducing the amount of hydroelectric energy, which provides about 70% of Colombia’s electricity. This placed great strain on Colombia’s already fragile electric grid, forcing Bogotá to employ natural gas-fired power plants to increase electricity production at a critical time. This led to a growing fossil fuel supply shortage, which was solved by increasing LPG imports.

There are fears that the recent arrival of the El Niño weather phenomenon in Colombia will once again have a rapid impact on water levels and therefore the production of the country’s hydro plants. This would force Bogotá to expand power generation by employing gas-fired power plants to increase output, putting further pressure on already constrained natural gas supplies. LPG imports witnessed an increase in the first eight months of 2023 due to rapidly increasing demand for natural gas, including storage of fuel for use in thermal powerplants due to the threat posed by El Nino. Data presented by Bloomberg shows that Colombia imported 309,000 metric tons of the fuel for that period, representing a staggering 60% increase in the total volume of LPG shipped to the Andean country for 2022 and for 2021. That’s three times the annual volume.

The rate at which natural gas consumption is increasing in Colombia, as well as the decline in domestic production, which will be accelerated by Petro’s ban on hydrocarbon exploration, will accelerate imports of the fuel. This is increasing pressure on Bogotá to significantly increase the volume of LPG cargo received by Colombia, threatening the trade balance and energy security. It is estimated that the once energy-self-reliant country will become a net importer of natural gas by 2030. Even recent natural gas discoveries will do little to expand domestic supply and reduce the threat of an energy crisis, as well as alleviate the current economic weakness. Increasing trade deficit.

By Matthew Smith for OilPrice.com

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