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May 13, 2005 | 03:05 GMT

6 mins read

Argentina's Cutbacks and Chile's Energy Future

Summary
Argentina has slashed natural-gas exports to Chile, leaving Santiago with a significant deficit in its energy supplies. Chile will need to scramble to cover the difference, but in the end, Argentina may be doing Chile a great favor by further convincing Santiago that it cannot depend on its neighbors for its energy security.
Chilean media reported May 10 that Buenos Aires cut its natural gas deliveries to Chile down to 310 million cubic feet per day (mmcf/d) May 7 as a cold winter and rising demand in Argentina caused supplies to plummet. This constitutes an instant crisis for Chile — which covers just 25 percent of its own energy needs from its only real domestic source of energy, hydropower. But in the end, Santiago may thank Buenos Aires for being an economic deadbeat. In 1996, Chile hitched its energy fortunes to Argentina and began importing natural gas under a contract calling for deliveries of close to 780 mmcf/d. Natural gas now accounts for approximately one quarter of Chilean energy needs. And because of shrinking Chilean production, close to 90 percent of natural gas demand — or 22.5 percent of total Chilean energy demand — depends on Argentine gas imports, as Chile does not import gas from any other country. Argentina, Latin America's largest natural-gas producer, holds 21 trillion cubic feet of reserves, which constitutes more than enough to satisfy both Argentine and Chilean demand. Over the course of the last decade, Argentina has become increasingly dependent on natural gas, which now accounts for close to 50 percent of its energy needs. However, an artificially low domestic price ceiling on natural-gas prices — set in 2002 after the country's economic collapse — has discouraged producers from increasing output beyond minimum requirements, exploring and developing untapped reserves, or investing in new infrastructure. With Argentina's return to rapid economic growth, those low prices have fueled a considerable increase in consumption. These twin effects led to the start of Argentina's energy crisis in 2004, which saw the country ration energy, begin importing gas from Bolivia and break supply contracts with Chile, where deliveries fell to as low as 47 percent of the contracted amount. In response to the crisis, Buenos Aires created a new state-owned energy company, Enarsa. It also promised to provide incentives for investment in downstream infrastructure and liberalize prices (though without specifying a time frame). However, investment incentives will take time to have any effect, and the price ceiling remains in place. The energy crisis has only deepened. The Chilean power sector depends on Argentine gas for more than 30 percent of its generating capacity, and Chilean industry depends heavily on Argentine imports. Currently, 500 industries around Santiago and in two surrounding regions are suffering energy shortages because of the cutoff, as power generators scramble for alternative fuels. However, while most of Chile's gas-powered electricity plants can switch to other fuels, some cannot. Chile has faced this type of situation before, when Argentina first cut supplies without warning in April 2004. Most industrial consumers managed to switch to diesel and coal to make up for the lack of Argentine gas. This solution, however, drives costs up significantly — not only because the prices of those individual fuels rise, but because those of all other fuels rise as well. In March, the deficit of gas from Argentina stood at 212 mmcf/d, which increased costs for thermal power generators to $160 million — up from $45 million in March 2004, before the restrictions came into effect. With relations between the two countries already frosty, the deeper gas cuts will only make things worse. In the end, however, neither side can do much to address the problem — Argentina's structural problems will take time to fix, if they get fixed at all. This new crisis, however, will further push Chile to look for a more permanent solution: liquefied natural gas (LNG). Chile has sought to build LNG infrastructure since the 2004 gas crisis with Argentina began. State-oil firm ENAP plans to offer a tender in 2005 to build an LNG terminal at Quintero, in central Chile, with a capacity of 105 mmcf/d by 2008; in April, it lined up a couple of domestic buyers willing to buy a bit more than that. ENAP has had a difficult time finding more domestic buyers, due to concerns that LNG prices could become unfavorable. But with Argentina turning out to be so unreliable, and with the resulting increased costs, Chilean producers will be convinced soon enough of the need for LNG — if the latest cutoffs have not convinced them already. Chile has said that it wants LNG as a complement to Argentine gas. However, this statement is not credible at this point as Argentina's crisis worsens, so Santiago is most likely lying. To spare the inconvenience of dealing with rants from Argentine President Nestor Kirchner, Chile will not announce its intention to wean itself off Argentine gas if it does not have to. That, however, represents the best plan for Chile in the long run, as Santiago well knows. LNG-receiving terminals — particularly onshore ones — are relatively simple, affordable structures. They take one to two years to build, can accept deliveries from anywhere in the world, and fit easily into existing infrastructure. Also, they can easily expand to handle increase capacity, provided land is available. Chile will most likely not stop at 105 mmcf/d; that will represent a test case. If it works out well — which it should — Chile will likely go further. For Chile, nothing could be better than switching its gas consumption fully to LNG. By freeing itself from dependence on South American energy supplies, Santiago would bring significantly more stability to its growing economy and relieve some major political headaches. For some time now, Chile has been the most un-Latin of Latin American countries, as the only country in the region that has a consistent record of social, political and economic stability in recent years. Its membership in the Asian-Pacific Economic Cooperation group also makes it unique in the region, as does its free trade agreement with the United States. Argentina is Chile's only major trading partner in South America — and without imports of gas, Argentina's importance to Chile lags behind that of the United States, China and Japan in terms of trade. Chile's open economy and ties to North America and East Asia make it an exception in Latin America and have spared it much of the trouble that has afflicted its neighbors in recent years. By dealing Santiago a bad hand with respect to energy, Argentina has likely convinced Chile to sever the only remaining major economic tie it has with South America. Chile will still trade with its neighbors and have to deal with the political problems it has with Argentina, Bolivia and Peru, but the more independent it becomes politically and economically, the better placed it will be to handle the constant bursts of turbulence characterizing South American politics.

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