Bogotá — The El Niño climatic phenomenon could benefit Colombia’s Ecopetrol and Canada’s Canacol Energy due to an expected increase in demand for natural gas as drier weather conditions reduce hydroelectric production and divert part of the electricity production to gas-fired plants, according to Moody’s Investors Service.
In a recent report on how prepared Latin America is to face the climatic event, Moody’s assures that, in Colombia and Peru, El Niño will increase the demand for natural gas, which will benefit producers.
The report posits that the weather disruptions that stress the gas market may also increase the prices of raw materials, which benefits Canacol Energy, whose main activity is the exploration and production of natural gas.
Canacol is the largest independent natural gas explorer and producer in Colombia’s onshore E&P sector.
Likewise, Ecopetrol, which obtained around 3% of its 2022 revenues from natural gas, will also benefit from higher sales and revenues.
On the other hand, it warns that in Colombia, where hydropower accounted for about 80% of electricity generation during 2017-2022, reduced hydroelectricity generation due to drier weather or droughts would lead to spikes in electricity prices.
Despite this, Moody’s believes that the country’s electricity sector has taken substantial steps to mitigate the impact of El Niño, with more gas generation capacity, gas import capacity, and mechanisms to increase thermal generation even if it is not profitable.
In addition, it believes that the sector also has more hydroelectric generation capacity, including the Hidrotuango turbine project, and has new non-hydroelectric renewable energy capacity in its early stages.
It highlights that Hidrotuango is now operating at 600 MW capacity, with a reservoir sized to service a 2,400 MW facility. The reduction in hydropower would benefit thermal power producer EnfraGen Finance Holdings.
According to Moody’s, rising electricity prices in the spot market pose problems for distribution companies and merchant buyers that have committed to supply electricity but have not fully hedged their purchases.
Moody’s says Grupo Energía de Bogotá and Empresas Públicas de Medellín (EPM) have the means to cover any working capital needs, but, EPM, which supplies around 24% of Colombia’s power demand with 37 hydroelectric plants, would be especially susceptible to any loss of hydroelectric generation and revenues.
EPM’s costs soared 148% in 2015 and 9% in 2016 during an earlier El Niño episode, before conditions normalized in 2017 and costs fell 92%.
EPM has had insurance against climate change since it deferred energy price increases for its customers in early 2016, cutting its cash generation.
On the other hand, Moody’s says that in Colombia, Chile, Peru and Panama, banks have very little exposure to borrowers in sectors such as agriculture, and the quality of their loan portfolios would not change much if a moderate El Niño Phenomenon were to occur in 2023-2024.
In Colombia, banks’ direct exposure to agricultural lending is also low at 1.7% in 1Q2023, partly reflecting low awareness of lending opportunities in rural areas.
However, Colombian banks have gradually increased their agribusiness loan originations based on the segments’ high growth potential and likely subsidies.
In March 2023, Colombia announced a 23% annual increase to 150 billion pesos ($37.8 million) in special lines of credit for small and medium-sized rural producers.