Chile is currently undergoing an energy crisis as natural gas imports have been curtailed. The current events in Chile may cause mid to long-term effects on the economy if not dealt with in a timely manner. Most industrial and post-industrial economies have energy policies that attempt to offer their investors, businesses, and citizens some form of energy security, that is, reliable energy supplies at affordable prices. The success or failure of such policies depends upon energy supply and the associated energy infrastructure. Ideally, a jurisdiction has adequate energy supplies with an infrastructure that allows the supplies to be distributed so that energy demand is met. However, the loss of supply, the loss of infrastructure, or the simple lack of infrastructure can jeopardize energy security (source).
Chilly in Chile
On Monday, May 28, 2007, Argentina, who supplies almost all of Chile’s gas, halted natural gas exports to Chile, forcing energy and government officials to allocate the use backup fuel stored in a pipeline between the two countries to provide heating and cooking fuel to Chilean homes, but lacked enough reserve to provide complete residential heating throughout the nation. This cut was the latest in a string of reduced shipments by Argentina in order to meet their own domestic demand. The halt was brought on by the severe cold wave that affected both countries. The severe cold forced Argentine authorities to redirect the gas towards Buenos Aires where demand for residential heating had increased. Though supplies, via the trans-Andean natural gas duct, were quickly re-established to Chile, the country may still face widespread, long-term residential cuts as a result of the continued reductions and halts in Argentine natural gas exports.
Argentine gas exports to Chile are tightly controlled and have been since the late 1990s. Prior to natural gas trade began between the two countries, Chile’s power plants ran on diesel gas generators, whose output of pollutants contributed significantly to winter-time smog. Once natural gas replaced diesel as the fuel of choice for these generators, smog levels noticeably decreased. Since 2004, halts in natural gas importation have caused Chile, mainly Santiago, to revert to the use of diesel gas generators, creating increasingly smoggy skies and subsequent high levels of air contamination, which has become a significant public health concern.
Argentinian Needs First
In 2004, Argentine President Nestor Kirchner publicly stated that he would not export gas to Chile unless the needs of Argentines were met first. Thus far, he has kept his word, consistently cutting off or reducing energy supply to Chile during severe changes in weather in winter and summer months. These gas cuts have consequently contributed to what has become a simmering energy crisis in Chile, occurring consistently for the past three years.
Chile is almost fully dependent on Argentina for its natural gas supplies requiring about 1.5 million cubic meters of natural gas per day to supply its homes and businesses. In the face of an Argentine gas cut off, only 800,000 cubic meters would be available even if all government contingency plans were activated.
Economically, this is a recipe for disaster. Gas shortages could severely dampen a rebound of South America’s fifth-largest economy, which experienced unexpected slowdowns in 2006. Chile’s economy grew 5.8 percent in the first quarter, its fastest pace in almost two years, but if forced to switch to more expensive diesel fuel this year, losses in the hundred millions could be incurred by some companies.
Securing Energy
On June 4, 2007, BG Group announced that it signed an agreement to supply Chile’s first Liquefied Natural Gas (LNG) import terminal. The 2.5 million tons per annum terminal in Quintero Bay, which lies approximately 110 kilometers northwest of Santiago, will have the capacity to meet up to 40 percent of the country’s demand for natural gas, thereby decreasing the dependence on Argentinean supply. The one problem is that operation won’t commence until the second quarter of 2009.
Until then, Chile will remain on the brink of crisis unless other accords are brokered with neighboring countries to create short-term solutions. Because Argentina insists on meeting domestic demand before honoring its energy agreement, Chile must turn to other South American nations to fill the importation gap. Chile could, for example, purchase unused natural gas contracts that Uruguay holds with Argentina. Uruguay has already signaled that it is open to such negotiations, but convincing President Kirchner to reroute Argentine gas from Uruguay back through Argentina and into Chile may prove to be a considerable problem.
Programs to build domestic infrastructure and conserve energy are also in the works. A plan for a $350 million liquefied natural gas plant in northern Chile has crossed the drawing boards of energy producers in recent months, as have consumer incentives for saving energy. The most recent and perhaps most compelling initiative concerns the use of alternative fuels. Diversification of fuels may be the key to keeping Chile’s homes warm and their economy growing. In response to the potential energy shortage, the government is considering the possibility of moving up the start date for the Ralco hydroelectric dam on the upper Bío-bío River, which crosses the central part of Chile. Additionally, legislation to promote the use of renewable energy sources, such as wind, solar, biomass and ocean waves, as well as small, low-impact hydroelectric plants is currently being debated.
Innovative Solutions Needed Quickly
With choppy delivery by Argentina throughout the foreseeable future, Chile will need innovative solutions to meet the energy demands in the country.
Chile will likely pursue agreements with South American countries currently experiencing a surplus of natural gas or unused contracts in order to immediately increase the amount of natural gas imports as a near-term solution.
Chile’s long-term energy security, however, rests on the ability of Chile to diversify fuels and add additional domestic infrastructure. Combining new, renewable energy sources in accordance with infrastructure development and new sources of importation will help sustain the long-term energy security of the country allowing Chile to call itself energy independent and decrease the possibility of a long-term crisis.
