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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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Colombia’s Risky Plan To Import Gas From Venezuela

  • A looming natural gas crisis has existed in Colombia for nearly a decade.
  • Colombian President Petro has improved relations with neighboring Venezuela and is looking to start importing gas through the Antonio Ricaurte Trans-Caribbean gas pipeline.
  • Washington’s strict sanctions will potentially prevent Colombia, a key regional U.S. ally, from successfully importing natural gas from Venezuela.
Gas

Leftist Colombian President Gustavo Petro’s controversial plan to end hydrocarbon exploration sparked fears it will roil the oil dependent economy and endanger the strife-torn country’s energy security. While there was speculation that Petro would soften his approach, the president’s commitment to ceasing issuing new exploration contracts was reiterated by energy minister, Irene Vélez, at the Davos World Economic Forum. This further compounded existing fears of an energy crisis occurring because of Colombia’s dependence on natural gas. To assuage mounting disquiet and curtail the risks the policy poses, Petro secured an agreement with neighboring oil-rich Venezuela, where diplomatic relations were only recently reestablished, to supply natural gas. While Venezuela has natural gas reserves of nearly 200 trillion cubic feet the plan is fraught with considerable risk which could prevent its successful execution.

A looming natural gas crisis has existed in Colombia for nearly a decade. Ailing supply due to declining production at mature aging gas fields coupled with scant proven reserves because of a lack of exploration and rising consumption saw a supply shortfall emerge during 2016. Since then, the supply gap has widened not only forcing Colombia to import greater volumes of liquified natural gas but to enact policies aimed at incentivizing natural gas exploration and production. The situation was so dire that compared to 2021, when Colombia was importing around 5,000 metric tons per month, the Andean country was planning to quadruple 2022 imports to nearly 21,000 metric tons. This is because LPG is a popular industrial and household fuel which is experiencing strong demand growth. 

The threat posed by diminishing production will be compounded by Petro’s plan to end issuing hydrocarbon exploration contracts. This will weigh heavily on already meagre proven natural gas reserves of 3.1 trillion cubic feet which are only sufficient for another eight years of production. A large proportion of those reserves are from associated gas reservoirs where the extracted fuel is a byproduct of petroleum production. A considerable portion of that natural gas is consumed by oil companies for a variety of purposes including for gas injected enhanced recovery, as a fuel for the gas-fired electric plants which power operations and as a diluent mixed with heavy oil so that it flows. If Petro proceeds with his plan analysts believe Colombia will no longer be energy self-sufficient by as early as 2024 forcing the fiscally fragile country to ramp-up natural gas imports.

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While an agreement with Venezuela, in theory, can address many of the risks faced by Colombia due to dwindling natural gas reserves, declining production from mature fields and rising consumption it also comes with significant risk. After Velez reiterated at Davos (Spanish) that Colombia will cease issuing new contracts for hydrocarbon exploration Finance Minister José Antonio Ocampo confirmed the Andean country (Spanish) will import natural gas from Venezuela, 25 million cubic feet of natural gas per day from Venezuela’s national oil company PDVSA. That volume is miniscule in comparison to Colombia’s current output of around 1,100 million cubic feet per day.  

A privately controlled Venezuelan owned company Prodata, which was granted a 30-year export license by the Maduro regime, will ship the natural gas to Colombia. The plan is to utilize the PDVSA owned 500 million cubic feet per day capacity Antonio Ricaurte Trans-Caribbean gas pipeline to transport the gas. The 139-mile-long pipeline connects the municipality of Bajo Grande in Venezuela’s western state of Zulia, the historic heart of the OPEC member’s petroleum industry, to Riohacha the capital of Colombia’s northeastern department of Guajira. Incidentally, it is Guajira where Colombia’s largest non-associated gas fields, the offshore Chuchupa and onshore Ballena fields, are located.

The Antonio Ricaurte pipeline was inaugurated in 2009 and initially used to export Colombian gas from the Chevron operated Ballena field to Zulia. There was a plan to reverse the pipeline’s flow by 2011 and for Colombia to import gas to Venezuela, which never occurred., primarily because of PDVSA’s parlous finances, corroding infrastructure and U.S. sanctions, all of which have worsened since then. By 2015, the Antonio Ricaurte pipeline had fallen into disuse because of deteriorating relations between the two countries, the Obama White House’s declaration Venezuela is a threat to national security and PDVSA’s deteriorating finances. In early June 2015 the national oil company announced it would not renew the natural gas importation contract.

Natural gas in Venezuela, like Colombia, is an indispensable fuel for Venezuelan industry and households. The reliance upon the gas has grown exponentially since the OPEC member’s economy collapsed with it becoming a crucial source of household energy. OPEC data shows Venezuela produced 2.3 billion cubic feet of natural gas per day during 2021 which while 32% greater than 2020, when the pandemic disrupted operations, was less than the 2.4 billion cubic feet per day pumped during 2018. By 2022 supply constraints were so acute PDVSA’s LPG production of 20,000 barrels per day was less than half of the 55,000 barrels per day required to meet domestic demand. That massive shortfall, which emerged after the Trump White House ratcheted-up sanctions during January 2019, is aggravating the country’s economic and humanitarian crises. It is for this reason that the Biden administration granted a waiver permitting LPG exports and re-exports to Venezuela, which is valid until July 2023.

PDVSA’s badly corroded energy infrastructure is blocking efforts to bolster hydrocarbon production. This will not improve until U.S. sanctions are eased to where foreign energy majors can invest profitably in Venezuela. Energy companies are fleeing the OPEC member with eight having exited during the last five years, among them supermajors TotalEnergies and Equinor which quit their joint venture with PDVSA during 2021. The Biden administration authorized Chevron, which is now the only western driller with a significant presence in Venezuela, to recommence lifting petroleum and export it to the U.S. but the company is prevented from expanding operations in the pariah state. This sees Chevron limiting its activities to rehabilitating exist wells and infrastructure. 

Those developments don’t bode well for PDVSA being able to obtain the substantial investment required to rebuild shattered energy infrastructure which is imperative to expanding Venezuela’s hydrocarbon production. Even when U.S.sanctions are significantly relaxed it will take at least a decade and a massive amount of capital, estimated to be greater than $110 billion, to restore hydrocarbon sector operations to pre-Chavez levels. This creates serious doubts as to whether PDVSA can expand natural gas production which is a crucial requirement for successfully supplying the fossil fuel to Colombia. 

Washington’s strict sanctions will potentially prevent Colombia, a key regional U.S. ally, from successfully importing natural gas from Venezuela. Those measures essentially block U.S. companies and persons from conducting transactions and working with the Maduro regime as well as national oil company PDVSA. It is the potential impact of Washington’s sanctions, which can cripple a business’s access to financial markets and operations, that is a pivotal deterrent for foreign companies considering operating in Venezuela or conducting transactions with the Maduro regime. The U.S. has sanctioned foreign entities for facilitating the sale of crude oil PDVSA’s crude oil. For these reasons, along with rising concerns over diminished energy security, that Trinidad and Tobago sought a license from the U.S. Treasury, which was granted in January 2023, to develop a Venezuelan gas field. It is difficult to see how the Petro administration can receive and pay for Venezuelan gas imports without falling afoul of U.S. sanctions.

Then there are the issues relating to the appalling state of the PDVSA owned Antonio Ricaurte pipeline. Since falling into disuse in 2015 the pipeline’s condition has deteriorated so badly that it is currently inoperable. Economist Mauricio Cárdenas who was Finance Minister for President Juan Manuel Santos, who secured the peace deal with the Revolutionary Armed Forces of Colombia (FARC – Spanish initials), warned that the deal is riddled with obstacles. He was quoted in Venezuelan industry journal Petroguia as stating:

"The problem now is that the pipeline has deteriorated because it has not been used for many years, equipment, valves and segments of the pipeline have been stolen and that is why the first thing to do is recover the pipeline, but that costs hundreds of millions of dollars,"

U.S. sanctions prevent Venezuela’s national oil company and Caracas from accessing international capital markets while discouraging foreign energy companies from doing business in Venezuela. For those reasons PDVSA will struggle to obtain the required skilled labor, parts and funding to bring the Antonio Ricaurte pipeline back online which is the primary prerequisite for shipping natural gas to Colombia.

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Aside from these fundamental barriers to importing Venezuelan natural gas into Colombia, there are further concerns relating to the cost. Ecopetrol President Felipe Bayon asserted the cost of (Spanish) Venezuelan gas for consumers could be five times higher than domestically sourced natural gas. When that is considered in conjunction with the political unreliability of the Maduro regime and U.S. sanctions on Venezuela it is difficult to see any agreement to import Venezuelan natural gas being successfully executed. This means the agreement appears to be a political ploy aimed at cementing newly re-established diplomatic relations with Caracas rather than a genuine attempt to guarantee Colombia’s energy security and ward off a crisis.

By Matthew Smith for Oilprice.com

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