Natural Gas Trade

1
Natural Gas Trade Argentina and Chile

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

2
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.

3
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
  Argentinas population centers, in the far south
  or along the foothills of the Andes. These are
  close to demand centers in Chile.

4
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.

5
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.

6
ArgentinaChile 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.

7
Natural Gas Reserves Argentina

• Highlighted states are locations of natural gas
  reserves.
• Nequina accounts for slightly over half of the
  countrys production.

8
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.

9
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 Chiles dependence on oil for power
  generation. (Oil was nearly half of Chiles
  total primary energy consumption at that point.)
• Argentine, Chilean, and Canadian ownership.

10
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 Chiles dependence on
  oil, mitigate price risk.
• Owned by CMS Energy of the U.S. and Chiles
  ENDESA.

11
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.

12
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.

13
Gasoducto del Pacifico contd

• 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.

14
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.

15
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.

16
Benefits of Trade contd

• 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.

17
Recent problems

• Financial crisis of 2001-2002 in Argentina.
• Default on international debt in December 2001
  severely limited Argentinas 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.

18
Recent problems contd

• Argentine producers cant meet demand, as the
  Argentine economy makes a partial recovery, and
  cant 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.

19
Recent problems contd

• 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.

20
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.

21
Chilean Response contd

• 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.