Chile has two Liquefied Natural Gas (LNG) regasification terminals. One is operating since September, 2009. It is located in Quintero Bay, close to the capital city of Santiago. The $1.1 billion project is designed to satisfy all the gas demand for residential, commercial, industrial and electric generation purposes in the central part of Chile. This amounts to about 40 percent of the nation’s demand. The owners and primary gas off-takers are ENAP, Metrogas, BG Group and Endesa Chile.

The second terminal was inaugurated in July, 2010. It is located in Mejillones Bay, in northern Chile. This project is designed to provide natural gas for electric generation, primarily in support of the massive mining industry in that part of the nation. The owners are GDF Suez and Codelco.

Chile was not supposed to need these LNG projects.

Back in 1995, Chile was facing major economic and environmental challenges in determining how to meet rapidly increasing energy needs while it lacked domestic and competitive sources of energy. Energy consumption was growing at high annual rates and new energy needs were being met primarily by importing more oil and coal. Simultaneously, Chile faced increasing economic and environmental constraints in expanding its hydroelectric capacity.

To solve its energy needs, Chile turned to its neighbor, Argentina, which at the time was benefiting from new government energy policies begun in 1989. These policies broke up and privatized state-owned monopolist enterprises, deregulated wholesale prices, brought market-based regulation to retail prices and encouraged investment in the exploration and production of hydrocarbons. Based on the success of its reforms, Argentina was turning itself into an exporter of oil, gas and electricity.

Between 1996 and 2000, five natural gas pipelines were constructed to transport Argentine gas into Chile. One was built to supply the Magallanes region in the far south; another (Gasoducto del Pacifico) to supply the industrial region of Concepción; and a third (GasAndes) to deliver Argentine gas to the Santiago metropolitan area. Two more pipelines (Gas Atacama and Nor Andino) were built in the north of the country for residential purposes and to support the mining industry. Overall investment in international pipeline projects between Argentina and Chile in the 1996-2000 period was more than $1.5 billion. Together with the gas pipeline from Bolivia to Brazil that was built around the same time, these were the largest energy integration projects in Latin America.

Chile was able to add natural gas to its fuel mix and mitigate economic costs and adverse environmental impact. Billions of dollars were also invested in domestic gas transportation and distribution networks and gas-fueled power plants.

Unfortunately for Chile, Argentina did not live up to the bargain for too long. As a result of serious macroeconomic and monetary dislocations, Argentina began experiencing an economic crisis in 1998 that reached its boiling point in early 2002.

In response to its economic crisis, the Argentine government stopped supporting its currency, which devalued from a fixed one-to-one exchange with the US dollar to almost four-to-one. The government then decreed that gas tariffs for end users would remain denominated in the local currency at nominal value, without adjustment on account of the devaluation. The same was done with electricity rates. Producers and suppliers were also hit by the fact that they remained obligated to service foreign debt denominated in US dollars.

Regulators in Argentina froze the tariffs and, by and large, they still remain at those levels. Gas producers and electric generators in Argentina were not compensated for the reduction in their real revenue. The effects of these policies started showing in 2004. Due to low prices and lack of conservation measures, gas demand in Argentina shot up. Argentine gas producers with export contracts with Chilean buyers were ordered to curtail export sales in order to satisfy all domestic demand. With gas net-back prices at the wellhead among the lowest in the world, oil and gas companies had no economic incentive to risk new capital in exploration. Between 2004 and 2009, Argentine gas exports declined consistently to a small fraction of the originally contracted volumes. Argentina is now estimated to have gas reserves for less than 10 years.

Argentina ceased to be a reliable supplier and Chile’s continued long-term economic growth could not wait for Argentina to get it affairs back in order. The policies in Argentina in response to the economic crisis forced Chile to develop its LNG terminals.  Chile reacted quickly to Argentina’s supply reductions after being forced to import diesel to run power plants to mitigate the cuts in Argentine gas exports. The problems clearly were not going to be fixed in short order. Argentina and Chile are interconnected with gas transportation infrastructure, but there is no longer energy integration. And because integration is based on trust and requires policy coordination and political commitment to maintain agreed upon rules, Chile had to turn elsewhere to obtain a secure supply.

In an interesting twist, it is not inconceivable that pipeline flow may be reversed and Chile may export gas to Argentina in the future.