# Presentation: 730931

## Natural Gas Trade – Argentina and Chile

- Greg Priddy
- June 2004
- South Asian Regional Initiative – Energy
- Kathmandu, Nepal

## Rationale for Imports - Chile

-  In the 1970s and 1980s, Chile experienced increased energy demand due to economic growth.
-  Natural gas reserves, however, had always been modest, and were falling as fields matured and new finds were scarce.

## Rationale for Exports - Argentina

- Argentine natural gas reserves have more than tripled since the 1970s – currently about 27 Tcf.
- Much of the natural gas reserves are remote from Argentina’s population centers, in the far south or along the foothills of the Andes.  These are close to demand centers in Chile.

## Obstacles to Trade

- Strong geopolitical rivalry through the 1980s between the two countries.
- Unstable political climate in Argentina limited interest in investment.
- Very small amount of natural gas exports to Uruguay and Brazil, and imports from Bolivia.  No natural gas trade with Chile.  Argentina remains a net importer through 1998.

## Hydrocarbons Sector Reform - Argentina

- 1992-1993 – Privatization of state-owned YPF and Gas del Estado.
- The privatized firms and new entrants are free to sell their natural gas as they choose, including development of export projects.
- Unbundling – separation of transmission and distribution of natural gas.  Eight regional distributors.

## Argentina–Chile Natural Gas Protocol

- The two countries signed an agreement to facilitate natural gas trade in 1995,
- Freed companies to negotiate terms, volumes, etc, without government intervention.
- Removed obligations to guarantee domestic supply first.
- Made possible largely by the changed political situation in both countries.

## Natural Gas Reserves – Argentina

- Highlighted states are locations of natural gas reserves.
- Nequina accounts for slightly over half of the country’s production.

## Tierra Del Fuego Pipelines

- First Argentina-Chile natural gas pipeline, began operation in 1996.
- Connects reserves in Tierra del Fuego to chemical plants in Chile.
- Two additional pipelines from Tierra del Fuego completed in 1999.
- Reserves in remote sparsely-populated area with little local domestic market.

## GasAndes Pipeline

- Began operation in mid-1997, with a 307 Mmcf/d capacity.
- Connects Argentine reserves in the Nequina Basin with the Santiago area.
- Main consumers are electric power utilities.
- Helps reduce Chile’s dependence on oil for power generation.  (Oil was nearly half of Chile’s total primary energy consumption at that point.)
- Argentine, Chilean, and Canadian ownership.

## GasAtacama Pipeline

- Began operation in mid-1999, with a 300 Mmcf/d capacity.
- Connects Argentine reserves in the Noroeste Basin (Salta province) with northern Chile.
- Main consumers copper smelting plants, and power plants serving mainly industrial demand.
- Again, helped to reduce Chile’s dependence on oil, mitigate price risk.
- Owned by CMS Energy of the U.S. and Chile’s ENDESA.

## NorAndino Pipeline

- Began operation in late 1999, with a 250 Mmcf/d capacity.
- Also serves mining demand for natural gas and electricity in northern Chile.

## Gasoducto del Pacifico

- Began operation in late 1999, with a 343 Mmcf/d capacity.
- Connects reserves in the Nequina Basin to the Bio-Bio region south of Santiago.
- Consumers include both power generators and smelting plants.
- Ownership includes AES of the U.S., along with Chilean and Argentine firms.

## Gasoducto del Pacifico – cont’d

- Underutilized due to cancellation of gas-fired power plants to have been served by the pipeline.
- Situation may eventually be rectified by finding new financial backers for the plants.

## Benefits of Trade

- Allowed Chile to produce metals at a lower cost by giving them access to a cheaper energy source.  (As low as $1.40 per MMBtu.)
- Helped Chile to reduce its dependency on imported oil, and mitigate the cost and foreign exchange risks associated with such heavy reliance on imported oil.
- Environmental benefits for Chile, due to reduced need for coal-burning power plants.

## Benefits of Trade

- Allowed Chile to produce metals at a lower cost by giving them access to a cheaper energy source.
- Helped Chile to reduce its dependency on imported oil, and mitigate the cost and foreign exchange risks associated with such heavy reliance on imported oil.
- Environmental benefits for Chile, due to reduced need for coal-burning power plants.

## Benefits of Trade – cont’d

- Allowed Argentina to monetize natural gas reserves.
- More optimal utilization – imports from Bolivia, but exports from the gas-rich Nequina Basin to nearby Santiago.
- Allowed commercial development of what was essentially “stranded gas” in Tierra del Fuego.

## Recent problems

- Financial crisis of 2001-2002 in Argentina.
- Default on international debt in December 2001 severely limited Argentina’s access to foreign capital.
- Freeze on electricity and natural gas prices in Argentina, despite high inflation rate, creates major distortions in market.  Artificially low prices lead to large increases in Argentine natural gas consumption.

## Recent problems – cont’d

- Argentine producers can’t meet demand, as the Argentine economy makes a partial recovery, and can’t get capital to expand production capacity.
- Imposition of taxes on natural gas exports to ensure supply for domestic market.
- Tax revenues used to provide start-up capital for new state-owned upstream natural gas company.

## Recent problems – cont’d

- Highly uncertain regulatory climate as “emergency measures” supercede the 1995 Argentina-Chile agreement.
- The net effect of these problems has been a reduction of supplies committed to Chile.
- Some talk recently of raising domestic prices in Argentina a bit, which might begin to reverse this trend.

## Chilean Response

- With as much as 40% reductions in supply on some pipelines, deliveries to industrial consumers have been curtailed.
- Increased interest in investment in hydroelectric and coal-fired generating capacity, as well as LNG imports.
- LNG option is of questionable feasibility for a number of reasons.

## Chilean Response – cont’d

- Even with the problems of the last three years, most serious Chilean observers take a long-term view.
- The underlying economic rationality of natural gas trade between Argentina and Chile is likely to lead to a restoration of normal supplies once Argentina recovers.