CHAPTER 2 CROSS BORDER DISRUPTIONS OF NATURAL GAS AND OTHER ENERGY SOURCES IN CHILE AND ARGENTINA: IMPLICATIONS FOR LONG TERM CONTRACTS AND MINERAL PROJECTS

• Jurisdiction: Derecho Internacional

Mining and Oil and Gas Law, Development, and Investment - Book 1
(Apr 2007)
CHAPTER 2
CROSS BORDER DISRUPTIONS OF NATURAL GAS AND OTHER ENERGY SOURCES IN CHILE AND ARGENTINA: IMPLICATIONS FOR LONG TERM CONTRACTS AND MINERAL PROJECTS
Andrés Alonso
Energy Manager & Practice Leader
BHP Billiton Base Metals
Santiago, Chile
Omar Beretta
Beretta Kahale Godoy
Buenos Aires, Argentina
Carlos Pérez-Cotapos
Cariola, Diez, Pérez-Cotapos & Cia, Ltda.
Santiago, Chile

ANDRÉS ALONSO

Mr. Alonso is an Industrial Electrical Engineer from Universidad Técnica Federico Santa Maria, Chile, and has a Diploma in Finance from Catholic University of Chile, a M.A. in Physics from Columbia University, USA, and a M.Sc. in economic from London School of Economics, UK. Before becoming the Energy Manager & Practice Leader of BHP Billiton, Base Metals, Mr. Alonso worked in Chilquinta (utility company); the National Energy Commission of Chile and the National Economic Prosecutor Office (Competition Office) of Chile. He was Head of the Electric Area of the National Energy Commission for 5 years and Head of the Economic Department of the Competition Office for 6 years. Mr. Alonso has worked more than 15 years in matters related with energy, competition and economic regulation in the private and public sector. He has written several articles and participated as a panelist in several seminars on these topics.

OMAR BERETTA

Born in Buenos Aires, Argentina, on January 20 1965, he graduated from the School of Law of the University of Buenos Aires with a degree in law in 1988. He is a founding partner of the law firm Beretta Kahale Godoy and is in charge of the Energy & Natural Resources and Tax Departments, advising mining clients in purchase and finance transactions at local and regional level. He has written several articles on energy and natural resources, and is a regular contributor of the International Energy Law Review, the Latin American Law & Business Report and the International Bureau of Fiscal Documentation. Omar Beretta has participated as a panelist in several seminars on energy, taxes and finance, in Argentina and abroad. He is a member of the Bar Association of the City of Buenos Aires, the International Fiscal Association, the International Bar Association and the Argentine Association for Civil Rights.

CARLOS PÉREZ-COTAPOS

Born in Santiago, Chile, on April 26 1964, he graduated from the School of Law of Universidad Gabriela Mistral with a degree in law in 1987 and admitted to bar on 1989. Mr. Pérez-Cotapos is a partner of Cariola Diez Pérez-Cotapos & Cía., leading the Mining and Natural Resources Department, advising mining companies and foreign investors in all matters related to mining activities in Chile and cross mining activities in Argentina, Perú, Ecuador and Bolivia. He has participated in several mining projects in Chile such as Escondida; Cerro Colorado; Spence; Collahuasi; Pachón; Lomas Bayas; Fortuna de Cobre; West Wall; Morro; Cerro Casale; Refugio; Regalito; Challacoyo; Mina Ivan; Sierra Valenzuela; Alto Norte smelter; Pimentón; Vizcachitas, etc. He is a professor of Mining Law at the School of Law of Universidad Andrés Bello and has participated as speaker and panelist in several seminars related to mining and natural resources topics in Chile and overseas. He is a member of the Chilean Bar Association, the Spanish Chamber of Commerce, the Australian Chamber of Commerce, the Canadian Chamber of Commerce, and International Bar Association.

I. INTRODUCTION

The increasing globalization of the economy in general brought along a rising interdependence between exporters and importers of energy. Announcements have been made of large-scale projects in South America that will create cross-border energy chains and capital flows. In this scenario, energy is viewed as a strategic resource within a national energy policy and governments have taken steps towards playing a strategic role. Energy integration appears to be a relevant aspect of a common national policy to strengthen the relationship between South American nations. By the same token, any changes to the domestic energy regulatory framework will have repercussions across the border.

The purpose of this paper is to focus on cross border disruptions of natural gas between Chile and Argentina its implications to both the mining and the oil/gas industries and how this issue is being addressed by the governments and by the private sector. A description of the legal rules related to cross border disruption is presented.

An exhaustive review of the Chilean and Argentine natural gas legal framework is not attempted. The legal implications of cross border disruptions for long-term contracts are addressed to draw conclusions to promote a favorable framework for regional integration. Issues specific to potential country or private party responsibility associated with disruption is not to be part of this paper.

Taking the case of Chile and Argentina as an example, this paper reflects on the implications for long term contracts, and on the opportunity to create a stable cross border environment that should protect both the necessary investment flow as well as the energy security policy.

II. CHILEAN APPROACH

Development of Mining Projects in Chile has been tightly associated with the existence of energy allowing the construction and operation of such projects, very often located just in the middle of the desert and away from cities.

As expected, each of these projects represents a major-long-term goal involving not only extraordinary efforts in term of human capacities and engineering, but also the investment of billions, made with the aim of getting a profitable rate of return.

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These projects also demand a huge consumption of energy and therefore mining business is very focused on the different sources of energy available for its development.

This development also requires the existence of a clear and stable legal framework giving the confidence that the investments to be made are well protected.

Until 1995 the composition of the Chilean Primary Energy Matrix was based mostly on the use of crude oil, hydroelectricity, wood & others and coal. The use of natural gas was in the last place.

On 2005 the composition of the Chilean Primary Energy Matrix varied having natural gas as a key supply source, increasing its participation from 8,7% in 1995 up to 23,8% in 2005.

Chile: Primary Energy Matrix 1995 & 2005

Annual growth of energy consumption 1995-2005: 4.5% (GDP growth: 3.6%)

Likewise, until 1995 the Chilean Electricity Matrix was composed mainly by hydro, coal, dieselfuel and others, but no natural gas at all, while on 2005 the composition of the Chilean Electricity Matrix varied having natural gas as a key supply source, increasing its participation from 0% in 1995 up to 36% in 2005.

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Chile: Electricity Matrix 1995 & 2005

Source: Balance Energético 1995 y 2005, CNE. CDEC-SIC and CDEC-SING

The above was not only the result of the lower costs attached to the use of natural gas and the viability to import natural gas from Argentina to Chile, but also it was the result of several agreements and protocols signed between Argentina and Chile, which defined a common market between these countries related to export/import of natural gas.

The execution of these agreements and protocols and the legal framework they created was an encouragement for the construction of gas pipelines, electricity generating plants, distribution nets along other significant cross border investments made between these countries.

Likewise the execution of these agreements and protocols lead, during the late 90s, to the negotiation of new long term energy supply agreements among, and almost, all Chilean mining operations with the energy producers and gas importers.

1. Highlights of the Chilean Electric System

Nowadays, Chile imports nearly 72% of the resources necessary to produce the energy it consumes and its electric matrix is divided into 3 systems, which are:

a) Sistema Interconectado del Norte Grande (SING): This system represents 30,01% of the national capacity, with a generating potential of 3.595,8 MW.

It applies to the North region of Chile and 90% approx. of this energy is destined to the mining and industrial sectors and the remaining 10% to regulated or residential costumers.

Its service area is primarily rural northern Chile which accounts for approximately 6.2 per cent of the country's population. Its main energy source is gas.

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SING: A Thermoelectric System

Of the 2,100 MW gas-fired installed capacity in the SING, 1,120 MW have dual systems and can operate with diesel in case of gas cuts

Energy Matrix of the SING, 2005

Source Balance Energético 2005, CNE. CDEC-SIC and CDEC-SING.

b) Sistema Interconectado Central (SIC): This system represents 69,17% of the country's energetic capacity, with a generating capacity of 8.288,3 MW. It applies to most part of the territory, from regions III to X and its main energy source is hydro electrical energy (58,6%).

SIC: Hydro Dependence

Hydroelectricity accounted for almost 60% of the SIC's installed capacity in 2005.

Source: CNE

c) Systems of Aysén and Magallanes: Both present similar characteristics, as they are not provided of interconnected transmission nets. They respectively represent 0,28% and 0,54% of the national installed capacity.

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Installed Generating Capacity by System, 2005

2. Highlights of the Chilean Legal Framework

a) Public-Technical Services Run by Privates. The applicable legal framework varies depending of the energy cycle: generation, transmission and distribution. Notwithstanding these three stages have the character of public service, they are given to the management and exploitation of private agents, but having the State a strong regulatory role focused on the planification, control, monitoring and supervision of...