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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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A Natural Gas Crisis Looms Over Colombia

Colombia’s energy sector is caught in a series of crises. The prolonged slump in oil since the end of 2014 saw investment in the sector, which is critical to the economy, collapse. This sparked a sharp downturn in oil production, causing the Colombian peso to weaken sharply and economic growth to stall.

The twin threats of declining oil and gas reserves as well as production are weighing on the Andean nation’s economic outlook. In a surprise move, Colombia was forced to start regular imports of liquified natural gas (LNG) in late 2017 because it was facing a severe shortage of gas in a nation which until then had been self-sufficient.

Those imports were destined to address commercial shortages which were affecting businesses and homes, especially on Colombia’s Caribbean coast. Since then there has been no drastic improvement as the reserves and output from aging offshore gas fields continue to decline causing the shortage to worsen. Data from petroleum industry consultancy Wood Mackenzie indicates that production from the Department of Guajira, which produced most of Colombia’s natural gas until 2012, is at half of its 2010 peak.

According to the Colombian Petroleum Association there have been no major oil or natural gas discoveries booked since 1992. With no significant new discoveries in sight it is likely that LNG imports will comprise a large portion of the natural gas that Colombians consume. These imports are being received by a specially built terminal and related infrastructure established at the Caribbean port of Cartagena, which is controlled by the G-5 LNG distribution consortium.

Even after commencing importation of LNG a spokesman for G-5, a Bogota-based LPG consortium, claims that there is still a shortage of 243 million cubic feet (mmcf) to 292 mmcf of LNG monthly. This is despite Colombia’s March 2018 natural gas production expanding by 3.1 percent year over year to 937 billion cubic feet (bcf).  

This supply deficit is behind a sharp uptick in domestic natural gas prices. Even a major natural gas discovery won’t alleviate these issues because of the time and capital required to bring a major natural gas find to commercial production.

Related: A Natural Gas Giant Like No Other

A future driver of increased natural gas demand is Bogota’s view that gas fired power plants are a solution for the frequent brownouts triggered by growing electricity consumption. These outages have been magnified by a deterioration in the volume of electricity produced because of poor hydrology and Colombia’s reliance on hydro-plants, which make up 64 percent of its installed power generating capacity.

The government is seeking to add 3,841 megawatts of natural gas fired capacity by 2028, because unlike renewables it can provide a steady source of baseline power. This allows it to fill the gap created by reduced hydro output. Natural gas is also viewed as a transitional fuel of choice to reduce greenhouse emissions from electricity production. That increases the incentive for Bogota to bolster gas-fired electricity capacity because it is proceeding with ratifying the Paris Agreement on Climate Change. An increase in the volume of gas-fired power plants will expand demand for natural gas in a country which is already facing an acute shortage.

The combination of supply constraints and rising consumption has created a situation where gas produced locally by energy companies such as Canacol Energy Ltd. (TSX:CNE) sells at a significant premium to the North American market price. For 2018 Canacol, which produces most of its natural gas in parts of Colombia’s Magdalena basin located near the Caribbean coast, has secured an average price of $4.75 per million British thermal units (mmBtu) sold. This is almost double the Henry Hub price of $2.69 per mmBtu at the time of writing.

This has incentivized Canacol to heavily invest in expanding gas reserves, operations and infrastructure in Colombia. Natural gas makes up 86 percent of its petroleum reserves, 81 percent of the driller’s production and is the focus of the company’s exploration efforts. Recently, Canacol spudded an appraisal well at the VIM-5 block in the Lower Magdalena which delivered 90 vertical feet of net gas pay.

Local shortages combined with rising demand will buoy natural gas prices for the foreseeable future, contrary to the situation being witnessed in North America where they remain weak. That trend, for the reasons discussed will continue for the foreseeable future, highlight the opportunity that exists for natural gas explorers and producers in Colombia.

By Matthew Smith

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