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Chile faces energy shortages

By GONZALO BAEZA, UPI Business Correspondent

SANTIAGO, Chile, April 1 (UPI) -- Chile is risking major power shortages as neighboring Argentina has decided to lower its gas exports. Chile buys all of its gas from Argentinean producers, with the commodity accounting for nearly 40 percent of Chilean electricity generation.

The scenario, which had been threatening to unfold for several years, has triggered an intense debate in Chile over the government's flawed energy planning.

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Chile's Economy Minister Jorge Rodriguez confirmed Wednesday that Argentinean authorities will begin curbing down gas exports April 1 to northern Chile. Rodriguez made the statement in an emergency meeting with a cross-party Congressional committee to discuss the potential risk of shortages.

As on several other occasions, the minister ruled out "any possibility of electric rationing due to the absence of part of the Argentinean natural gas," pointing to the existence of comprehensive contingency plans.

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Chile buys nearly 90 percent of the 7 billion cubic meters of gas that Argentina exports every year.

Argentina's decision to cap monthly gas exports through September stems from a lack of investment within the country's gas industry. Ever since the Argentinean economy collapsed in late 2001 including the drastic devaluation of the local currency, the peso, the authorities resolved to impose a freeze on utility rates. Even though the artificially low tariffs for gas and electricity prevented a major impact on the average Argentinean's budget, it nonetheless discouraged new investments in the industry.

The effects of this policy are now being felt as energy demand both in Argentina and its main clients for gas, Chile and Uruguay, continued to grow over the past two years. Argentina is presently facing a deficit of 5 million cubic meters of gas a day, a shortage which the country is planning to compensate by curbing exports as well as resorting to other energy sources.

The Chilean government's lack of provision has not escaped prominent players within the domestic energy industry, who have leveled harsh criticism against the authorities. Their main point of contention has been the government's decision to prioritize the development of gas-fueled electricity plants instead of tapping onto Chile's vast hydroelectric reserves.

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Endesa Chile, the country's largest electricity generator company, has been one of the main opponents of this policy. The company is a subsidiary of Spanish energy giant Endesa.

"In a country like Chile, which has important hydraulic resources, the construction of hydroelectric plants has not been protected enough," Endesa Chile general manager Hector Lopez told local newspaper La Tercera. The executive added that the authorities should have known that there were risks associated to the country's reliance on an exclusive gas supplier.

According to government regulator the National Energy Commission (CNE), during the next decade Chile's central electricity grid should add some 3,700 megawatts to its installed capacity of 6,700 megawatts. The energy will be supplied by eight new natural gas-fueled plants as well as one hydroelectric and one geothermic facility to be built by Chilean generator companies.

The Chilean government's rationale for promoting the use of gas-fueled electricity plants is that they are considerably less expensive to build as well as more environmentally-friendly in their operation. The CNE's decision to promote the use of gas for electricity generation stems from the '90s, when the authorities resolved to put an end to the country's historic reliance on hydroelectric power as its exposure to droughts and lack of rainfalls could potentially affect the energy supply.

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The effects of this policy are reflected on the investment decisions of Chile's largest power generator companies. According to a report from Fitch Ratings, nearly 25 percent of Endesa Chile's generation capacity is based on gas. The country's second largest generator company, the Belgian Tractebel's subsidiary Colbun, relies on gas for 40 percent of its generation capacity. The dependency on gas rises sharply with the third largest industry player, the United States AES Corp.'s subsidiary AES Gener, as the commodity accounts for 90 percent of its generation capacity.

At the Chilean government's behest, generator companies will have to burn diesel in the event of potential gas shortages. According to industry estimates, however, resorting to diesel will triple the companies' generation costs.

Although there is a consensus that a gas shortage could be a heavy blow for the Chilean electricity industry, a lack of information coming from the Argentinean government still has Economy Minister Rodriguez and the CNE in the dark as to what measures to adopt. Over the last few days, Rodriguez has met with a number of Argentinean government authorities, including secretary of Energy Daniel Cameron.

The Chilean government's position is that Argentina's gas supply to Chile is based on long-standing contracts, most of which contain clauses stating that they can not be interrupted under any circumstances. Furthermore, selling gas to Chile is not only a matter of honoring agreements but plain good business.

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"The exports are generating an important revenue for Argentinean companies because the exported gas is sold [to Chile] at three times the price of the one placed in the domestic market," Rodriguez said.

To make matters worse, Bolivia, renowned for its vast gas reserves, has acquiesced to come to Argentina's rescue and increase its gas exports to the country. The only condition set forth by the Bolivian government is, however, that none of its gas must be sent to Chile due to a centennial animosity between both nations.

Historical antipathy between Bolivia and Chile has existed ever since the former country lost its coastal territory to the Chileans in the 19th century. The lack of access to the sea has always been deemed by the Bolivians as a major deterrent in their economic growth as well as a source for enmity with Chile, which annexed the territories after defeating Peru and Bolivia in the "War of the Pacific" of 1879.

Not even an attractive business such as selling gas has been able to get in the way of this rivalry, as was seen in Bolivia's so-called "gas war" that ended in October with the ousting of former President Gonzalo Sanchez de Lozada. A $5 billion project to export gas from Bolivia to California and Mexico was aborted when Bolivians rioted at the prospect of having the commodity shipped through a Chilean port.

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