Politics and Energy Crisis in South America

(International Relations and Security Network, 30/09/2005)


The president of the Peruvian Congressional Energy Committee, Juan Valdiva, rejected on 21 September the possibility of developing a multi-billion dollar energy project with Chile. Valdiva claimed that before Peru could explore the possibility of providing natural gas to Chile and other South American neighbors, the country had to meet its domestic commitments as well as current international agreements with Mexico.


Valdiva's rejection of a natural gas project that would link the Peruvian southern Camisea gas fields with Chile's northern gas network is the latest in a series of setbacks for regional energy integration. Peru's recent move highlights the changing landscape of energy security in South America and how regional integration is increasingly an unpopular proposition where political realities outweigh economic necessities.


Regional shortage of natural gas


Chile has a looming energy crisis. It uses natural gas rather than diesel to run a significant number of Santiago's energy turbines. Expectations for energy demand growth and current power projects under development dictate that the country is looking at a possible power shortage as early as 2007. Energy security is a real concern in Chile, and its number one provider, Argentina, has cut off a large percentage of supply.


Argentina is facing its own energy crisis. In late May, temperatures dropped to five degrees Celsius in Buenos Aires. Demand for natural gas to heat homes surged, which denied some 300 service stations the gas they need to service customers, mainly taxi drivers, who use compressed gas to fuel their vehicles. Reports claimed that 30 service stations threatened law suits after they were left dry.


During the 2001-2002 economic crisis here, many international energy companies cut their losses and left the country because frozen tariffs on the price of gas, coupled with the currency devaluation, left no room for profitable business practice. Since then, demand has increased, while ability to increase production has remained stagnant. What's more, there is no money available for gas exploration or pipeline maintenance.


Argentina struggles with a poorly maintained pipeline network. Demand for natural gas in Argentina has off-set the amount the gas sector here exports to Chile and Uruguay, two countries almost completely dependent on their neighbor. Argentina's president, Nestor Kirchner, has stated repeatedly that Argentines would have all the gas they needed before he exported anything. He has kept that promise.


The Argentine gas bottleneck has artificially constricted supply, despite politics. Argentina is number three in the region for natural gas reserves, behind Bolivia and Venezuela. Yet the country does not have the capacity to tap its reserves, service domestic demand, and meet the needs of neighbors at the same time. Investors are less likely to put money in natural gas when populist measures in this country, such as a tariff freeze on the price of natural gas, stifle business in that sector.


Prices will remain fixed until after the presidential elections in 2006.


Kirchner also favors domestic household demand over Argentine industry. "Firm supply contracts [with industries] are not systematically being honored, and gas [is] being supplied on an interrupted basis because residential consumers are prioritized over industries," Cambridge Energy Research Associates' Southern Cone Assistant Director Sophie Aldebert told ISN Security Watch.


With a populist in the presidential office, households will be favored over industry. As Argentina's gas reserves are depleted, so will the amount of gas available for heating houses and running cars. From 2000 to 2003, Kirchner's government oversaw a 21 per cent drop in natural gas reserves.


Additionally, "the country's natural gas reserves fell ten percent from 31 December, 2004, compared to the same time last year", Argentine independent energy expert, Ricardo Molina, told ISN Security Watch. Gas reserves have fallen by some 31 per cent from 2000 to 2004.


Last year, Argentina paid US$700 million to purchase gas from abroad to meet domestic demand. Most of that money went to Bolivia.


Politics in Bolivia threaten to rip the country apart. By the upcoming 4 December elections, the government will have gone through three presidents in as many years. And there is no guarantee that the next president will preside over peace. In fact, he's more likely to spark a new round of conflict. The source of this political contention is over natural gas reserves and the amount awarded to the state in the form of taxes and revenue sharing. International companies are eager for access to Bolivia's gas reserves, but the increasing price of that access has led many to rethink their presence there.


A number of international energy countries have brought the Bolivian government to international courts for what they perceive as unjust treatment and illegal changes to business contracts. It is perhaps the only country on this continent where it is more difficult to make money selling natural gas than in Argentina.


Bolivia is not a reliable source of natural gas for anyone, nor will it be for years to come. It has the region's second highest level of proven energy reserves, but cannot monetize these reserves or increase the amount of natural gas it exports. Political instability plagues access to this highly prized - and contested - natural resource.


Bolivian ambivalence


Considering the added price for transporting gas, Bolivia's large amount of proven reserves, and the country's central location, it is a logical pick for the region's number one source of natural gas. Yet political turmoil and an uncertain future - not a future of favorable gas contracts - is the reality.


"Bolivia is currently in no condition to negotiate new [gas] contracts with any country," Aldebert argued, adding, "the solution might come from Bolivia but it will take time."


Ironically, the region has plenty of natural gas and little time, and it reacts to the growing regional crisis with ambivalence, not action.


"Bolivia has remained an observer in the multilateral meetings to discuss regional gas projects," Chilean energy market analyst, Andres Benavente, told ISN Security Watch. "With the decision to remain silent, Bolivia is indirectly signaling that as a major provider of natural gas in the region it can make its own decisions."


Additionally, Bolivia's internal gas infrastructure, mostly run and maintained by international corporations, has suffered from Bolivian government decisions to increase royalties and operating taxes. Benavente notes that the Bolivian government officially acknowledges that any domestic energy crisis is because international company workers are on strike. Yet, he argues that "any domestic energy problem [in Bolivia] has just as much to do with a lack of necessary infrastructure as it does with aggravated international corporations."


Bolivia, like Argentina, has squeezed out international corporations with unfavorable business conditions supported by the state. Government coffers are not enough to make the investments required to maintain a supply source and piping infrastructure that can keep up with demand. Political instability exacerbates this problem to the point where no investor sees Bolivia as a secure source of natural gas in the near future. Both Argentina and Bolivia, traditionally dependable sources of natural gas, are no longer trustworthy.


The situation forces countries to look elsewhere.


Budding projects secure supply but pressure politics


Countries here have begun to look at costly alternatives to meet increasing demand and secure their supply of natural gas. Of the various ideas under discussion, there are two projects under serious consideration. They promise to secure supply at the cost of raising prices and put pressure on domestic politics and age-old strains in bilateral relations.


The first project hopes to unite the region with sources of natural gas found in Peru's southern Camisea gas fields. The proposed 1,200-kilometer pipeline would connect Pisco, Peru to Tocopilla, Chile, at the receiving end of the Chile-Argentina Cornejo pipeline. The pipeline would carry gas into Argentina and Brazil.


The project's total cost has reached US$2.5 billion, which would be covered by a number of international companies that have voiced interest. Peru, however, is reticent to open its fields to Chile and other countries because it claims the need to meet domestic demand as well as current contracts with other countries.


An LNG project planned for Peru's Pisco gas plant would tap the same reserves targeted by the Pisco-Tocopilla pipeline project. This domestic LNG project competes directly with international use of the gas and could deplete Peru's gas reserves in just over a year.


Additionally, a history of political difference between Chile and Peru has limited bilateral relations between the two countries since Chile blockaded Peruvian ports at Lima during the War of the Pacific in the late 1800s. Chile won that war against Peru and Bolivia, taking what is roughly the top third of Chile from Peru and Bolivia. The latter is now a land-locked country thanks to Chile. Peru and Bolivia are still licking wounds. Modern-day politics between these three countries continues to raise the specter of that war.


If this project were to go through, Chile would offer to export gas to Argentina from its northern grid in exchange for an increase in gas coming into its central grid near Santiago, where most of Chile's power needs lie. The gas coming from Peru, through Chile, into Argentina would then be used to serve both Argentine and Braizlian domestic needs.


Yet, Argentina is unlikely to accept this offer because any gas coming from Chile would be much more expensive than domestically produced gas in Argentina, or gas imported from Bolivia. Chile would most likely sell gas to Argentina at the same rates charged for the gas that Argentina has sold Chile.


This is where Argentina's sensitivity to price enters the equation. Kirchner's populist measures to cap the price of gas in Argentine households force his government to subsidize the difference between gas prices and what Argentines are used to paying. Any increase in the price of natural gas puts pressure on Kirchner's coffers. It is pressure he would rather not have considering his election aspirations for another term as president.


Another winter must pass before Kirchner's planned presidential election, and a spike in gas prices, doubled with limited supply, could be just enough to topple his presidential campaign. Kirchner would much rather rely on domestic gas production, but in the face of current demand, he must import. His only real option is to continue purchasing gas from Bolivia, which is why he's more supportive of project number two.


The second project, called the Gasoduto de Noroeste Argentario (GNEA), has been on the table for some time. It would connect Tarija, Bolivia with Santa Fe, Argentina with a 1,400-km pipeline. But the project has stagnated because of Bolivian political instability and poor record of meeting supply contracts. The question of price has also stalled negotiations as, again, Argentina is sensitive to any price hikes for imported natural gas.


Going at it alone


Bolivia remains at the center of this conundrum, yet the country's priority is stabilizing the government, not providing cheap gas to its neighbors. That fact alone has hung Argentina on its own gallows constructed by a lack of attention to domestic needs for pipeline maintenance. Argentina will be forced to look abroad for significantly more gas in the very near future. It has no other alternative for securing gas supply in time to thwart a very serious energy crisis.


Peru's Camisea gas field will take care of Peru. As Peruvian Senator Valdiva stated, Peru will look after itself before helping neighbors. Connecting to Chile would put a serious strain on Peruvian supply. This project is not likely to go through for reasons more political than economical.


Politics in Bolivia are grim. Any future Bolivia has as a stable source of supply is long off. Argentina may well have to look toward Chile to import gas, a country that may soon become the latest source of natural gas in the Southern Cone.


Chile is considering installing a deep-water liquid natural gas (LNG) re-gasification facility in the Region V, port of Quintero. While there are two competing projects on the table, the one proposed by Chile's Empresa Nacional de Petroleo (ENAP) expects to begin construction of the facility and connecting pipeline in October. Planners have set the operational starting date for the 2007-2008 fiscal year. Some 14 companies have expressed interest in this project. LNG suppliers under consideration are Indonesia, Trinidad & Tobago, Algeria, and Peru.


There are some hurdles to this project's eventual implementation. Real natural gas needs and project costs top the list. Nevertheless, all those involved in Chile's ambitious LNG project agree that a LNG plant in Chile is inevitable. Given the strained relations Chile maintains with both Peru and Argentina, Chile's need for a secure supply of natural gas question is when, not if. And if it does install this port, Chile will have the ability to produce more natural gas than it needs, making the country a regional exporter.


If this plant is up and running before Bolivia stabilizes, it is possible that Argentina will soon be looking west, not north, for its stable supply of natural gas. If Argentina purchases gas from Chile, it will be at a premium price that reflects the added costs of re-gasification as well as international market prices.


Argentina's gas crisis will force the government to abandon its demand of lower prices. In the end, Kirchner will happily buy gas from Chile at a premium rather than face the consequences of a widening supply gap that interrupts gas piped to households in Buenos Aires.


Ironically, the country now in the most need for natural gas could become the region's only stable source of natural gas. And the country with the region's third-largest amount of natural gas reserves will become a net importer.

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