After entering office on August 7th, 2023, Colombia's leftist President, Gustavo Petr, implemented his plan to cease issuing new hydrocarbon exploration contracts and ban the controversial extraction technique of hydraulic fracturing. It is feared those policies will destroy Colombia's energy security and spark a crisis that will roil the Anden country's hydrocarbon-dependent economy. In an effort to offset those risks, Petro secured a contract with Venezuela to import natural gas from Colombia's neighbor. While at face value, this appears to be a strategy for mitigating the risk of a natural gas shortage in Colombia, it will be almost impossible to complete. Indeed, while Venezuela possesses Latin America's largest natural gas reserves, totaling 203 trillion cubic feet, it has surprisingly never exported the fossil fuel.
Decades of economic mismanagement, malfeasance and corruption along with strict U.S. sanctions, caused Venezuela's economic backbone, its oil industry, to implode. That not only triggered the worst economic collapse of modern times to occur outside of war but saw economically vital petroleum output plunge to record lows. By 2020, oil production had plunged to a record low of 500,000 barrels per day, less than a sixth of the record 3.1 million barrels lifted for 1998 before Hugo Chavez assumed power in February 1999 and initiated his socialist Bolivarian revolution. Since then, with assistance from Russia, China and especially Iran, Caracas has rebuilt some key industry infrastructure, which allowed PDVSA to lift oil production to 730,000 barrels per day for August 2023, although it is still less than a quarter of Venezuela's 1998 output.
The gradual rebuilding of Venezuela's upstream oil infrastructure is also important for natural gas production because the fossil fuel is a byproduct of oil extraction. While Venezuela has never exported natural gas, production continues to expand, averaging 2.3 billion cubic feet per day for 2022, which was 3% higher than a year prior. There is considerable pressure on Caracas and the national oil company PDVSA to boost natural gas production because of a chronic shortage in Venezuela. PDVSA is producing less than half of the liquified petroleum gas (LPG) consumed in Venezuela, where it is a key household fuel used mainly for cooking. This is hitting everyday Venezuelans especially hard in a country where three-quarters of the population is believed to be living in extreme poverty.
By 2021, the shortage was so dire the Biden White House, on humanitarian grounds, authorized LPG exports to Venezuela. The license was extended earlier this year to July 2024, but the license reputedly remains unused because it prevents PDVSA from using oil to make payments to suppliers. Strict U.S. sanctions are preventing PDVSA from exporting, meaning the company is incapable of generating sufficient capital to perform the critical facility maintenance required to boost output. Iran's assistance only increased production by so much, meaning after recent infrastructure refits funded by Tehran and increases in production, PDVSA has no further spare capacity. Various industry experts estimate that it will take investments of between $110 billion and $250 billion over nearly a decade to rebuild vital petroleum infrastructure and revive hydrocarbon production. As a result, Venezuela still suffers from a natural gas shortage.
For these reasons, it is near impossible for Caracas to expand hydrocarbon output without access to the capital, technology, skilled labor and parts required to rebuild Venezuela's shattered petroleum infrastructure. That will not occur until Washington eases harsh sanctions, which prevent the authoritarian Maduro regime from accessing international capital markets and exporting crude oil onto world energy markets. For that to occur, Washington expects the autocratic regime to agree to a timetable for free elections in Venezuela and a restoration of democracy. That is unlikely to transpire for as long as the Department of Justice has arrest warrants for Maduro and key regime figures. Furthermore, the Venezuelan president's ability to eliminate any effective opposition, including U.S.-backed interim President Juan GuaidÃ³, and restart economic growth makes it extremely difficult to topple him.
For those reasons alone, it is difficult to see how Colombia can secure the importance of natural gas from Venezuela with constrained supply already impacting the OPEC member's economy. These factors are further complicated by the condition of the 480 million cubic feet per day Antonio Ricaurte natural gas pipeline, which was mothballed in 2015 and has been idle ever since. The 139-mile-long pipeline connects Colombia's Ballena natural gas field in the department of La Guajira to Maracaibo in the state of Zulia, which is at the heart of Venezuela's oil industry. Since being mothballed, the Antonio Ricaurte pipeline's condition has deteriorated considerably, with key parts being stolen or vandalized, to the point where the facility is no longer operable. It will take considerable investment and time to restore the Antonio Ricaurte pipeline to operational condition.
Estimates vary as to the investment required to bring the pipeline, which cost $335 million to build nearly a decade ago, back online, but it will take, at the very least, an investment of tens of millions of dollars. PDVSA doesn't have any capital available to invest, and Colombia is unable to loan Venezuela's national oil company the funds because of U.S. sanctions. It is also speculated that the rusting 16-year-old Antonio Ricaurte pipeline may have deteriorated so severely (Spanish) that it cannot be brought back to operational status. In that case, a new natural gas pipeline will have to be built, costing hundreds of millions of dollars, which is capital that PDVSA and Caracas are incapable of raising and Colombia is blocked from providing.
The considerable risks associated with importing natural gas from Venezuela don't end there. Industry insiders assert it will cause the price of the fuel in Colombia to spiral higher, not only because of the cost of reactivating the Antonio Ricaurte pipeline but also due to ongoing transportation expenses. Felipe Bayon, former CEO of Ecopetrol, cautioned during August 2022 (Spanish) that natural gas imported from Venezuela will cost three to four times more than that produced domestically, with Colombian consumers bear the brunt of that price rise. It is poorer Colombians, in a country where government statistics show that 39% of the population lives in poverty, who will be the hardest hit with natural gas being an important household fuel used primarily for cooking.
The potential for sharp price increases will cause the gap between rich and poor to widen in Colombia which during 2021 was ranked as the most unequal country in Latin America. This deep socioeconomic inequality is responsible for a soaring crime rate and rising violence in the strife-torn Andean nation. That won't be the only economic fallout. Importing natural gas from Venezuela will cause Colombia's balance of trade to worsen at a time when there is a ballooning deficit, placing greater pressure on a weak economy. There will also be significant fiscal pressures for Bogota, which is battling a hefty budget deficit, forecast to be 3.8% of gross domestic product for 2023, and a lack of tax revenue to fund urgently required social programs.
In a devastating blow for Petro's plan to import natural gas from Venezuela, Prodata Energy, the privately owned company that was to facilitate the trade, was caught up in a far-reaching corruption scandal (Spanish) that was initially focused on PDVSA. After Venezuelan authorities arrested Bernardo Arosio, a key Prodata shareholder, earlier this year, shareholders voted to liquidate the company, which was dissolved immediately. The investigation into PDVSA (Spanish) was initiated by President Maduro who claimed the scalp of Oil Minister Tareck El Aissami. This event, along with the potential for falling afoul of strict U.S. sanctions, highlights the considerable political risk and difficulties associated with conducting business with Venezuela as well as entities operating from within the OPEC member.
By Matthew Smith for Oilprice.com
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… More
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