Petro's Gas Gambit

Venezuelan gas exports to Colombia would make sense for both governments, at least in the short term

Last week I interviewed Colombian finance minister, Jose Antonio Ocampo. Here’s what he said when I brought up the spectre of Venezuelan gas imports:

“The policy of Colombia is self-sufficiency in gas. The president has stated that very clearly, so we’re not going to be importers of gas.”

Fair enough. Ocampo, the minister whose name did most to calm market fears following Gustavo Petro’s election, has a considerable reputation to maintain. As Europeans brace for a chilly winter of discontent, the folly of relying on an autocratic and temperamental neighbouring regime has become clear. But I think Petro will greenlight Venezuelan gas imports, because the benefits will fall to him and the costs will be borne by his opponents.

When Irene Vélez, the Minister of Mines & Energy, said that Venezuelan imports could be a future source of energy, the country’s economists scoffed. The anti-Maduro brigade were outraged. But then, following a trip full of bear hugs with the Venezuelan leaders accused of mass human rights violations by UN, Armando Benedetti contradicted her in an interview with Semana. “We have to do it now,” he said.

Venezuela’s gas is trapped. Without pipeline infrastructure or Liquid Natrual Gas export options, much of it is flared (burned off). According to Gas Energy Latin America, it burned 3.4 billion cubic feet per day (cfpd) in 2019, of which over 1 billion cubic feet comes from Cardon IV block off the coast of Maracaibo, near the Colombian border. Colombia’s daily consumption is about 1.2 billion cfpd.

The likelihood is that Colombia could secure a very cheap long-term price. One source estimates as low as $1.5 per MMbtu. In comparison, Canacol, a local Colombian producer of gas, sells long-term gas contracts at an average rate of $4.5 MMbtu. A gas pipeline from Venezuela to Colombia has been lying dormant for years. My source estimates it could cost $600m to bring back online. Chinese engineers no doubt lick their lips at the prospect.

Who would win from such a deal? Petro would keep his promise to deter further hydrocarbons exploration whilst simultaneously securing cheap energy for local industry as the country tries to diversify its manufacturing base. Maduro would gain a source of revenue and bind Venezuela’s economy to its neighbour’s in a way that would make future embargos more costly. Chinese engineering firms, one expects, would win a juicy pipeline contract.

Who would lose? International oil firms developing Colombia’s vast offshore, shale and coal bed methane gas reserves would find their projects priced out of the local market. Future (right-wing) governments would find dealings with Maduro much tougher when he has his hand on the gas tap.

To my eyes, that’s a trade-off Petro – uniquely for Colombian presidents – would be willing to make. And it makes economic sense. Taking the cheap gas on offer now won’t prevent Colombia developing its own reserves sometime in the future. In fact it would extend Colombia’s future energy security. Furthermore, the US are unlikely to meaningfully oppose such a deal. Chevron’s application to renew a Venezuelan oil license, suggests the private sector trust that Washington will soften its embargo stance.

Ocampo is right to fear for the political effects of such a deal. He wouldn’t want it to be his legacy. But in January, once the crucial tax reform is done, I suspect he and other market-friendly appointments will be out the door. A new, more radical set of ministers wait in the wings, it is rumoured in Bogota, and an economic future closely entwined with Venezuela, for better or worse, lies ahead.