Colombia's gas challenge [NGW Magazine]
Natural gas has been fuelling debates within Colombia`s energy segment. Dealing with a decline in its gas reserves and facing the risk of not meeting natural gas demand over the next few years, the South American country is racing against the time to maintain its promise of offering cleaner energy sources, where gas can play an important role.
In January 2020 the energy ministry announced an energy transition plan through which the use of fossil fuels will be gradually replaced by cleaner energy sources. As part of this transition, natural gas will help reduce coal and oil products. Natural gas generates 8% of Colombian energy, while coal and oil products account for a half. In 2050, natural gas is expected to generate 30% of the country's energy, according to Colombia's government estimates.
It is an ambitious goal. In October, Colombian gas production increased slightly, according to the energy ministry, to 1.091bn ft3/day in October, a rise of 1.9% compared to September (1.070bn ft3/d). But it was down 1.8% on the year prior figure (1.112bn ft3/d). From January to October last year, the average production of natural gas in Colombia dropped 3.3%.
"The government needs to develop a policy, which is becoming increasingly urgent as proven natural gas reserves dwindle, to the point that it fails to meet expected demand," says Charle Gamba, CEO at Canacol Energy, an independent onshore conventional natural gas exploration and production company in Colombia.
In fact, according to the country’s major energy users’ group Asoenergia, although natural gas demand will be reduced in 2020 by 12% compared with 2019, owing to the Covid-19 pandemic, it will grow in the coming years, perhaps by 8% this year and 2%/yr until 2026.
"The problem lies in the fact that the country's natural gas self-sufficiency is at risk, since the oil and gas reserves indicate that the country might begin to import gas in 2028 if there is an absence of new discoveries. So, the gas supply will depend on the improved recovery of the wells, the intensification of the offshore and the viability of exploiting unconventional resources," said Gamba.
For Norwegian consultancy Rystad Energy’s vice-president for Latin America Schreiner Parker, mature gas producing fields like onshore Cusiana and offshore Chuchupa demonstrate considerable decline curves over the next decade, and in the case of Chuchupa, this is as high as 20%/year.
Apart from the Gorgon cluster and some smaller finds by Canacol, exploration success in the natural gas space has been limited and the biggest challenge in the short to mid-term will be to find reasonably-priced supplies. He said: "The forecast volume of imported LNG for 2030 stands at 6.48bn m3 and will continue to climb until 2035 reaching a peak volume of 7.65bn m3. For comparison, the total amount of imported LNG in last year was a bare 1.04bn m3. Although spot LNG cargoes from the US are cheap today, the need to lock in long term contracted volumes at set prices will be fundamental to avoid spot price fluctuation over the next 15 years."
Opportunities in shale gas
Parker points out that all eyes will be on the development of Colombian shale in the mid- to long-term. Among the prospects is the La Luna Formation, in the Middle Magdalena Valley Basin.
"It could provide a sorely needed new source of production in terms of both liquids and natural gas. [State-owned] Ecopetrol, through a 2019 deal with its partner Occidental, now has exposure to Midland Basin shale development in the Permian. The decision to take hard money and human talent to the US shale space is indicative of a desire to learn shale development first-hand before trying 'in country'," Parker said.
Transfers of Permian shale know-how and technology will be invaluable for future development of the La Luna and other shale formations. But "outside technical expertise, there are several other challenges that must be confronted concerning shale development in Colombia, such as the lack of infrastructure from both a road and pipeline standpoint. Colombia will have to work diligently to avoid problems that have stymied shale production in other countries such as Poland," he said.
Yet Colombia's shale gas can provide not only opportunities for the natural gas industry in the country. For project manager Joao Bastos at Brazilian consultancy company PSR, Colombia's power sector might maintain its position as a natural gas buyer as it can support both hydroelectricity during dry seasons as well as renewable energy plants, which are expected to grow at a fast pace in the next years.
"The fact that the security of electricity supply must be backed up by energy certificates ensures the need for thermal plants in the hydroelectric system. In addition, there is a potential for freight transport and public transport systems, as well as in the industrial energy conversion," Bastos said.
Another challenge he identified is related to the country's infrastructure for natural gas distribution. Colombia's natural gas network expansion has been timid during the last decade, owing to the uncertainty with respect to gas availability and specific rules of tariff calculation, among other reasons. However, he believes that in the coming years, investments will be made to interconnect the two main gas pipeline systems in order to make gas supply more reliable.
"The country has two main gas transportation systems, which are independent. Initiatives to incentivise a robust expansion, such as a demand-centred planning process with a long-term horizon, the identification of imports opportunities to support domestic production, and the prioritisation of strategic projects to be auctioned, are being evaluated as part of the country’s drive to modernise the country,'' Bastos concluded.
NGW magazine (Vol 5, Issue 16) featured the intention of Colombia's government to avoid a domestic gas crisis. In order to diminish this issue, the South America country is relaunching a bidding process to design, construct and operate a new LNG facility and a pipeline in Buenaventura, on the Colombian Pacific Coast. The project could offset the domestic gas deficit, as natural gas reserves dwindle in the country, according to the article.
Schreiner Parker points out that Colombia will have to obtain outside sources of natural gas to cover the demand deficit in the short to mid-term, and with piped gas from Venezuela not a realistic option the most likely source will come from LNG. "To that end, the country has been attempting to expand its LNG regasification capacity from its initial project near Cartagena to a complementary FSRU project on the Pacific coast in Buenaventura," Parker said.
Bastos agrees. For him, the ongoing depletion of domestic natural gas fields, including the main fields of La Guajira and Cuisiana, might cause problems that will lead the country to import natural gas. "To tackle the projected domestic shortage, initiatives for the imports of natural gas have taken place in the country, starting with the Cartagena LNG regasification unit exclusive to the power sector supply since 2016, and more recently with the planned Buenaventura LNG regasification unit (in the Pacific), expected to be concluded over the coming years," he said.
Canacol CEO Charle Gamba, on the other hand, warns that importing natural gas will frustrate Colombia's intention of achieving its energy self-sufficiency. "Consumers will pay a higher price for natural gas and Colombia will become a captive of foreign interests and markets. Maintaining energy self-sufficiency through the exploration and development of Colombia's natural gas resources also provides significant tax and royalty revenues to the government, which can be used to finance infrastructure and social development," he commented.
Gamba said that the upstream gas industry also provides tens of thousands of permanent and well-paying jobs to Colombian citizens, while the import of gas exports those same jobs to foreign nationals in the countries where the gas is produced. "Importing natural gas will be expensive and will have none of the economic benefits that domestic production provides. To achieve this, in turn, it [the government] must consult and work together with national and international natural gas producers currently working in Colombia to gain a better understanding of how the nation's vast natural gas resources can be developed more quickly, thus avoiding the need to import gas." Gamba explained.
Ecopetrol to increase investments in natural gas
Ecopetrol is optimistic about the operator's gas business in the Latin American country. During a webinar on the company's results presentation in November, its vice president for gas Yeimy Baez said that the company will invest about $800mn in 2020-22 period in projects related to exploit potential in the Colombian foothills, Caribbean, onshore and offshore and unconventional basins. "Natural gas has a strategic priority position within the Ecopetrol business plan, being an essential fuel in the energy and economy transition. To be consistent with our strategic intent, we are actively looking for opportunities to create optionality and deliver growth," he said.
According to Baez, the company is working on three sources of opportunities to increase our investment outlook. "First, in the foothills, we are in the process of debottlenecking projects to maximise the production and deliver the full potential of that basin. Second, if we are successful in exploring the foothills and Caribbean plains, the investment will significantly increase to develop those resources. Also, we continue pursuing new exploration opportunities by mapping new prospects within our current portfolio. And finally, I would say that we are committed also with a sustainable business and therefore, we are planning also to increase the investments in social projects to provide access to gas and LPG to the most vulnerable communities in Colombia."
During the third quarter 2020, Ecopetrol's gas and NGL production reached 141,000 barrels of oil equivalent, an increase when compared to the same period of the previous year. This result is mainly due to the effect of the acquisition of Chevron's interest in the Guajira fields and the commercial management for gas surpluses due to the decrease in demand, according to the company's official statement.
In the same quarter, Ecopetrol completed the marketing process from the major gas fields. "Our commercial strategy allowed us to contract 100% of the clients' needs in contracts with a duration ranging from one to seven years. Our gas operations posted a pre-tax (Ebitda) margin of 55% and contributed close to 34% of the upstream segment's Ebitda," said CEO Felipe Bayon.