Leftist Colombian President Gustavo Petro plans to end outsourcing for the exploration of hydrocarbons have disconcerted the actors of the economically vital energy zone of the Andean country. That, coupled with meager hydrocarbon reserves and production not returning to pre-pandemic volumes, points to the growing potential for an energy crisis to emerge. Such an event will have a huge impact on the strife-torn Latin American nation. economy dependent on oil, jeopardize Colombia’s energy security 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 ever-increasing demand, that poses the greatest threat. Natural gas supply constraints were so severe in 2017 that Colombia was forced start importing liquefied natural gas. As such, there are growing fears that Petro’s plans could jeopardize Colombia’s energy security, triggering a crisis that could derail the economy and derail one of the strongest post-pandemic recoveries. from Latin America.
Natural gas is considered clean hydrocarbon that emits, when burned, about half the carbon dioxide of thermal coal and 30% less than crude oil while fulfilling almost all the roles played by coal and oil. For these reasons, it has been embraced as the transitional fossil fuel of choice in a world seeking to reduce carbon emissions, contain global warming and meet emissions targets set by the United Nations Framework Convention on climatic changes. The substitution of natural gas for coal in the United States as fuel for power plants, where it counted 38% of the electricity produced in 2021, has been a key factor in reducing emissions from the world’s second largest consumer of fossil fuels. Since 2014, Colombia’s national government in Bogota has been pushing to replace coal-fired power plants with natural gas ones.
From 2014 to 2018, the El Niño climatic phenomenon caused severe droughts in Colombia, forcing water rationing, even in large cities, and a sharp drop in electricity production from hydroelectric installations in due to a marked drop in water flows. Any decline in electricity produced by Colombia’s hydroelectric plants will have a significant impact on the electricity grid, as they are responsible for around 80% of the electricity consumed, with the rest generated by facilities powered by fossil fuels. Consequently, climatic phenomena such as El Niño as well as extreme droughts have a strong impact on the production of electricity in Colombia and the stability of its network. Weather forecasters predicted The return of El Niño in 2022, with the climate pattern expected to continue through 2024. This will cause further droughts in Colombia, potentially leading to a marked drop in water levels which will once again impact the hydropower generation and will test the reliability of the Andean country’s power grid. Grid.
Bogotá’s concerns about the stability of Colombia’s electricity supply led the government to approve the construction of an LNG regasification plant, in Baru, near the city of Cartagena, the capital of the Bolivar department, which was commissioned in 2016. This established the crucial infrastructure needed to begin LNG imports to boost natural gas supply, with the first major shipments received end of 2017. A second regasification facility is planned for the (Spanish) Port on the Pacific coast of Buenaventura, with another in La Guajira and a fourth in the Gulf of Morrosquillo. Once commissioned, these facilities will increase the capacity to receive LNG imports, thereby strengthening Colombia’s energy security. The only downside is that it will expose Colombia’s resurgent economy to soaring international natural gas prices. The energy crisis in Europe, following Russia’s invasion of Ukraine, has caused natural gas prices will skyrocket, with fossil fuels up 50% since the start of the year. Becoming dependent on international LNG imports represents a significant challenge for the Colombian economy, which is enjoying a strong post-pandemic recovery, with a notable GDP growth of 10.7% in 2021.
The risks posed by Petro’s aim to end oil exploration contracts are exacerbated by the Andean country’s meager proven natural gas reserves and low production volumes. At the end of 2021, Colombia was determined to have 3.16 trillion cubic feet of proven natural gas reserves which will last 8 years at current production of 1,087 million cubic feet per day reported for August 2022. The latest production figure, although 2.4% higher than August 2021, is still 1.6% lower % to the 1,105 million cubic feet per day pumped in August 2019, highlighting that Colombia’s natural gas production has yet to return to pre-pandemic volumes. Low production and growing demand for natural gas means that domestic consumption of this fuel exceeds supply, which has been the case since 2016.
Source: US EIA.
This is putting increasing pressure on the Colombian economy as natural gas is an important part of Colombia’s overall energy mix, providing 28% of all energy consumed in the Andean country. Growing domestic demand for natural gas is driven by the fact that 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, and 12% in extreme poverty. Any sharp increase in domestic prices, due to growing dependence on international imports as well as limited domestic supply, will impact the already difficult economic and social conditions for Colombian households.
Petro’s plans to terminate oil exploration contracts represent a very real risk to Colombia’s economic recovery, the stability of the Andean country’s electricity supply and the well-being of the country’s people. A shortage of domestic natural gas reserves and production, coupled with the fallout from droughts, is calling into question the stability of Colombia’s hydroelectric-dependent power grid. While a growing reliance on LNG imports, at a time when international natural gas prices are at a 14-year high, will lead to a sharp spike in energy prices, impacting households in a countries where poverty is a real problem. Increasing Colombia’s natural gas reserves while promoting the role of fuel in the domestic energy mix will help Petro achieve a sustainable energy transition and reduce greenhouse gas emissions to levels set in the Nations National Climate Plan United for the Andean nation.
By Matthew Smith for Oilprice.com
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