For more than a decade, the need to increase the reliability and security of natural gas supply have been discussed in Colombia. The Ministry of Mines and Energy agenda has prioritized the development of different projects to the expansion of the existing gas transportation infrastructure and the construction of new projects.
Pacific Gas Import Infrastructure
The development of Pacific Gas Import Infrastructure has been among these new projects, which consisted of (i) a regasification plant in Buenaventura in the department of Valle del Cauca, with a regasification capacity of no less than 400 MCFD and a gas storage capacity of liquefied natural gas (LNG) of not less than 170,000 m3, and (ii) of a gas pipeline that has the purpose of connecting that plant to the National Transportation System with a transportation capacity of not less than 400 MPCD.
The Colombian Mining and Energy Planning Unit (UPME) was entrusted with the design of a process for the selection of the investor who would be in charge of the construction and execution of the project, as well as all the services associated, such as unloading, receipt, and storage of LNG, regasification, loading of LNG tankers, transfer of LNG to methane tankers and cold storage, and delivery of natural gas in the National Transportation System.
After several years of waiting, last year Colombia finally launched the selection process; however, despite there being approximately 7 interested parties, the process was declared deserted in October 2021.
In an exclusive interview, GNL GLOBAL spoke with Mónica Torres, a lawyer and advisor to projects and companies in the Colombian energy sector, who highlighted the characteristics of this import project, its objectives, regulatory issues, the factors behind the past process, as well as the interests of the Colombian government in reopening the selection process this year.
Possible factors that affected the investor selection process
According to Torres, one of the main factors associated with the lack of proposals in the past bidding process is linked to the risks associated with the project.
“This is a project that has social, environmental, technical, and regulatory risks associated. The area might face environmental issues due to the impact on the mangroves, the local fauna, on the quality of the water, among others. Likewise, technically, the project faces the probable need to increase the depth of the main access channel to the Port of Buenaventura to dock the FSRU, there are also geotechnical conditions that are unknown in the sector, and there is also seismic threat potential.
In legal terms, the project has had resistance and some actions have been presented against the project and the regulatory framework that supports it, as well as some regulatory gaps.
Let us remember that this project will be executed at the risk of the investor. In other words, as a result of the selection process, there will be no contractual link with the Colombian State that allows the investor to distribute these risks, the Investor is the only incumbent to maneuvering them.”
Colombia’s interest in having a second LNG terminal
Talking about the Colombian government’s interest in putting out to tender the development of this infrastructure, Torres emphasized that there is only one interest, and it is secure the country’s natural gas supply in the medium term.
“Colombian natural gas reserves have been declining over the last decade, and it is necessary to meet the demand for natural gas. As of December 2021, there are more than 10.6 million users connected to the National Transportation System, who are served with natural gas among residential, industrial, and commercial users. To give you an idea, Colombia sector is approximately 80% represented by residential users, there are more than 190,000 commercial users represented in small businesses and more than 5,000 industrial users who use this energy source as raw material for its production processes.
In addition, Colombia is a leader in the region in the implementation of policies aimed at achieving the objectives of the energy transition. In this sense, the integration of generation projects with renewable energies (sun, wind, hydrogen, others) requires the support of natural gas in order to provide sufficient reliability to the supply of electrical energy.
Currently, Colombia has enough gas reserves to cover its energy needs over the next 8 years; However, the uncertainty about the possibility that as of May 2026 there will be a deficit and a period of loss of self-sufficiency will begin, led the entities in charge to review and identify the shortcomings of the investor selection process, to promote it again.
It is also important to highlight that it is projected that Colombia has a potential of probable and possible offshore reserves, as well as those derived from the development of unconventional deposits through hydraulic fracturing. Despite this, these reserves will only become viable in the medium and long term (after 2027), so the National Government may consider that the import infrastructure is a short-term lifesaver.”
New actions are taken to re-launch the selection process this year
Despite the results of the process in 2021, the Colombian Government has launched some actions this year, which have been those actions?
” On the one hand, the Energy and Gas Regulatory Commission (CREG) has proposed some modifications to the regulation that supports the selection process and that makes regulated income viable through which the return on the investment made by the investor selected. On the other hand, UPME reviewed the selection documents, and their content, and has proposed some changes to the selection process that, it could be said, reflects a greater alignment with the CREG regulation, as well as offers greater clarity about the project. These documents have been published for interested parties to submit comments until next August 5. And, finally, the Ministry of Mines and Energy is reviewing the Start-up dates (FPO) of all the projects that we mentioned above, which seek to expand the existing gas transportation infrastructure and the construction of new projects such as the Pacific import infrastructure.”
Changes in the new selection process
Regarding the changes or differences between this year’s process and last year’s, Torres explained: “Several changes were made, among which we can highlight the following:
- The storage capacity of the terminal will no longer be 100,000 m3, but 200,000 m3 instead.
- The infrastructure start-up date will continue to be 58 months from the selection made by UPME of the investor in charge of the project, but it has been proposed that the maximum date for the start-up is no longer December 2024, but in April 2026.
- Some aspects were missed in the previous call and in the regulation, related to the heel gas necessary for the safe operation of the infrastructure, as well as with the gas necessary to operate the infrastructure, for packaging, for the tests of commissioning, and to replace losses by evaporation (boil-off gas). In this regard, UPME made it clear that the responsibility for the acquisition of this gas will be at the expense and risk of the Investor selected by UPME, who must take charge of the acquisition of this gas, at his own expense and risk, and must be acquired until 90 days before the start-up of the infrastructure. The cost of this acquisition will be recognized in the regulated income approved for the investor.
- For the monitoring and verification of compliance with the construction stage by the Auditor assigned to do so, a project schedule was established, indicating each of the milestones or events that comprise it and which are defined by UPME (not by the investor). For this, in the Selection Documents, different milestones were established with maximum compliance dates that have to do with all the aspects that are necessary to carry out the construction, such as obtaining insurance, signing contracts, obtaining permits, prior consultation, and land use rights, among others.
- Before the proponent had to accredit the required experience with one or two infrastructure projects that had been executed by him and whose added values would result in US$700,000,000. This value is maintained and so is the number of projects, but now, this experience may be accredited by the bidder, or by its subsidiaries, parent companies, or any member of the bidder’s economic group.
- The value of the seriousness guarantee as a requirement to participate in the selection process increased from US$49,000,000 to US$2,000,000.
The incentives that had been created to put the infrastructure into full or partial operation in advance are still in force, although a procedure was created in the selection documents that provide greater clarity on how the Investor must request recognition of the partial payment. of the investment due to the partial early entry into operation of the infrastructure.
The assignment of the rights and obligations derived from the Project were allowed, but the rules and procedures for this purpose were not clearly known. UPME has included rules in this regard in the selection documents.”
Who will pay for the infrastructure?
One of the aspects that have generated the most resistance and doubt about the project has been the lack of an answer to the question, Who will pay for the infrastructure?
In this regard, Torres said, “The investor will be recognized a regulated income that will guarantee the return on his investment, so he will not assume the risk of demand. Now, the payment of this income will be made by the beneficiaries of the project that are defined by the UPME, that is, for all the demand for natural gas in the country, and will be charged through the natural gas service bill through the component that remunerates the transport activity. And the payment burden of these beneficiaries will be reduced in proportion to the purchases made by the capacity market agents, called “short-term income”.
However, the beneficiaries of the projects will be the end users or marketers who serve end users, who are identified by UPME as such (beneficiaries), and will pay for the infrastructure in proportion to the volume of natural gas they use; however, that proportion by region or market is still not officially known.
Likewise, it is still not clear how wholesale gas market agents interested in importing gas and using the regasification and transportation capacity to market said gas in the domestic market will be able to participate. The regulation related to how the allocation or purchase of services associated with the infrastructure will be carried out has not been issued.”
Taking into account the current scenario of the international LNG market, how could this situation affect the project?
Torres pointed out, “The high prices of LNG can be a determining factor in the process of importing natural gas in Colombia, both for the entry into operation of the infrastructure and for the operation itself. When the project in the Pacific has conceived 5 years ago, the prices of LNG in the international market were much more favorable. Therefore, it was stated that, although imported gas would be more expensive than local gas, it would bring important benefits, especially to regions of the Colombian Pacific that currently pay for the most expensive gas in the country.
Currently, there is no public analysis of the economic impact that the current price of LNG in the international market would have on the price of gas services in Colombia. However, as I mentioned earlier, this infrastructure has the purpose of ensuring supply in the medium term. For this reason, UPME and the National Government concluded that it is more expensive not to have the infrastructure when shortages occur than to have it when, instead of shortages, the potential for natural gas production materializes.
In any case, it cannot be denied that LNG during the current energy crisis, caused by the war between Russia and Ukraine, has played a decisive role in guaranteeing the reliable and secure of energy supply in many countries. We hope that the upward trend in prices subsides and the LNG Project will benefit to Colombia”
When will the selection process be formally opened?
According to the information published by UPME on Friday, July 15, UPME plans to publish the final and definitive version of the investor selection documents on August 17, 2022.