Strife-torn Latin American country Colombia is facing an energy crisis which is being amplified by the economic fallout from the COVID-19 pandemic and sharply weaker oil prices. In recent days, the international benchmark Brent has tumbled sharply to be trading at around $42 per barrel after a string of bearish news emerged, although natural gas prices have spiked since hitting a multiyear low in July 2020. Oil’s protracted price slump is weighing heavily on Colombia’s petroleum industry causing investment and production to fall. That, coupled with growing domestic demand for natural gas, forced Colombia to start importing liquified natural gas in 2016.  It was estimated that if domestic consumption kept growing, Colombia would be forced to substantially increase liquified natural gas imports. According to the U.S. EIA Colombia’s LNG imports during the first half of 2018 exceeded those for the previous two years. By May 2020 Colombia had received nine LNG shipments compared to a total of six during 2019, with further shipments expected. Rapid growth in LNG imports underscores the headwinds facing Colombia’s natural gas industry and growing energy insecurity for a country facing a range of developmental issues.

Natural gas has become the transitional fuel to replace high carbon emission coal. Colombia’s lack of reserves, declining production and weak infrastructure are all adding to growing uncertainty over energy security. In April 2020, the country’s ministry of mines and energy announced that Colombia’s proven natural gas reserves at the end of 2019 were 3.1 trillion cubic feet, representing eight years of production at current output. That represented a 17% decline in comparison to a year earlier where proven reserves totaled 3.8 trillion cubic feet with a production life of almost 10 years. 

Related: Colombia’s Security Crisis Deals Another Blow To Its Oil Industry

This highlights Colombia’s key problem when domestic consumption of natural gas keeps growing. According to Canacol Energy, Colombia’s largest independent natural gas producer, demand for the fossil fuel is expanding at 3% annually. This demand growth will increase as the central government introduces measures which will see natural gas become the transitional fuel of choice as it focuses on meeting its Paris Agreement emission targets. Colombia’s government is focused on reducing air pollution which has become a major problem in many major Colombian cities, notably Medellin and Bogota. The government seeks to replace coal and petroleum fired electricity with the fossil fuel. Natural gas has become an important source of power generation, particularly on the Caribbean coast. Rising electricity consumption combined with low hydro reservoirs is amplifying demand for natural gas fired electricity in Colombia. These factors will cause natural gas demand to keep rising, placing greater pressure on Colombia’s limited natural gas reserves and production, causing those reserves to decline faster. There have been no significant oil or natural gas finds in the Andean country since 2009. 

After declining up until mid-2019, Colombia’s natural gas production started to grow reaching a one year higher of 1.141 million cubic feet per day in September of that year. By January 2020, the Andean country’s natural gas output started falling again, hitting a multi-year low of 827 mmcfpd in April as the coronavirus lockdown and sharply weaker oil prices sharply impacted operations in Colombia’s energy patch. Since then it started increasing, reaching 1,096 mmcfpd in June before falling by a worrying 15% to 933 mmcfpd for July 2020.

Source: Colombia Ministry of Mines and Energy.

READ ALSO  Global Oil Production Costs Continue To Fall

The recent decline can be attributed to maintenance programs being conducted at the Floreña and Floreña Mirador fields, and unexpected equipment outages at the Pauto Sur Floreña fields.

A key headwind impacting Colombia’s energy security is that production from its primary source of natural gas, the complex of mature fields located in the Guajira Basin, is steadily declining.

Source: Ecopetrol.

It has been estimated the Chuchupa and Ballena natural gas fields, located in the eastern department of Guajira, have decline rates of up to 20% annually which will rise as they age, causing production to deteriorate further. That is impacting profitability, explaining why Chevron sold its 43% interest in the Guajira Association Contract, including the Chuchupa and Ballena fields as well as a processing plant to Hocol a subsidiary of Colombian national oil company Ecopetrol.

While optimism is emerging in Colombia’s natural gas industry that reserve and production declines will slow, the government’s UPME Mining and Energy Planning Unit expects domestic natural gas supply to decline by around 40% between now and 2026. That will occur in an environment where demand is rising and forecast to eclipse supply before the end of 2023, emphasizing the need for Colombia to boost its natural gas reserves and production. It is this growing shortage of natural gas which is responsible for spot prices in Colombia being significantly higher than the North American Henry Hub Benchmark. During the first three months of 2020 the Guajira benchmark price averaged $4.39 per thousand cubic feet of natural gas, 2% greater than the same period a year earlier and more than double the average Henry Hub price for that period.

Related: How Saudi Arabia Put OPEC’s Future At Stake

READ ALSO  Trump Blasts Biden's Fracking Plans At Rally

Natural gas producers in Colombia have been able to contractually lock-in prices which are significantly higher than North American price benchmarks. Canacol in its 2020 guidance claimed to have locked-in an average well-head sales price, net of transportation costs, of $4.80 per Mcf for the year. For the second quarter 2020 Canacol reported an average sales price of $4.53 per Mcf net of transportation expenses. Those numbers are significantly higher than the prices most North American natural gas producers are receiving, highlighting the considerable appeal of operating in Colombia.

The central government, along with its regulator the National Hydrocarbons Agency (ANP – Spanish acronym) and industry body the Colombian Natural Gas Association (Naturgas) hope this will attract substantial investment in the exploration and development of the Andean country’s natural gas resources. Naturgas expects production to swell during 2024 and 2025 as Canacol and Ecopetrol expand their natural gas output. Several key projects under development, notably Ecopetrol’s offshore Guajira Orca discovery, which should come on-line by 2025, will help to offset production declines in the mature Chuchupa and Ballena fields. 

Source: Colombia National Hydrocarbons Agency (ANH).

In an important June 2020 press release president of Naturgas Orlando Cabrales Segovia stated:

“The production statements show that year by year we can increase the availability of natural gas with local sources and thus guarantee energy safety. With the appropriate incentives to increase production, plus the support of imports, the country can maintain the peace of mind of having the necessary supply to meet the demand.” 

This reflects the growing optimism surrounding Colombia’s natural gas industry and the ability to eventually boost reserves and production to ensure energy security. It will also reduce the need for LNG imports, further enhancing energy security and bolster the national government’s ability to meet its clean energy targets. While there is a long way to go yet, there are signs that the worst of Colombia’s natural gas crisis is over and the outlook is becoming more positive.

By Matthew Smith for Oilprice.com 

More Top Reads From Oilprice.com:

READ ALSO  Global stocks hold tight ranges as U.S. election caution sets in


Via Oilprice.com