THE ROAD FROM ARGENTINE NATURAL GAS TO LNG

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development and Investment
(Apr 2009)
CHAPTER 19B
THE ROAD FROM ARGENTINE NATURAL GAS TO LNG
Ricardo Peña
Carey y Cía. Ltda.
Santiago

[ENGLISH VERSION]

Ricardo Peña is the leading partner of Carey y Cía.'s Corporate / Energy Group. He practices in the areas of mergers and acquisitions, energy and general commercial matters, with an emphasis in project development and energy. He has experience in all facets of the energy business, including upstream, pipelines, refining, power generation, transmission, international arbitration and project financing. He is also experienced in infrastructure, water concessions, port concessions, transport, and consumer goods. Mr. Peña has actively been involved in the most important energy projects developed in Chile in the last years, including the LNG projects in the North and in the Central Valley of Chile, representing either the sponsors, the off-takers or the financiers. Mr. Peña is a board member of power distribution and transportation companies. He has been a speaker in several conferences on a wide range of topics, including the structuring of energy, international transactions, privatization of Chilean water companies, and mergers and acquisitions in Chile. In 1996, prior to joining Carey y Cía., he worked as an international associate with Simpson, Thacher & Bartlett, New York. Mr. Peña is a graduate of the Universidad Católica de Chile School of Law and was admitted to the Bar in 1978. In 1993, he attended the American Law Program at the University of California. He is fluent in Spanish and English.

The construction of the LNG terminal in Quintero was not the only initiative espoused by the Chilean government to tackle the crisis triggered by the supply of Argentine gas. Through Corporación del Cobre de Chile S.A. -Codelco-, a second LNG project located in Mejillones (northern Chile) is already in full swing, mostly geared toward meeting the needs of the mining sector. This project was developed by Codelco together with multinational Suez and entails an investment in excess of US$400 million. It is slated to go on stream sometime during the second half of this year.

Likewise, Codelco is already at an advanced stage in a bid for a power supply agreement to meet the needs of its mining facilities in Chile's central valley, which combined total 800 MW. To this end, Codelco called an international bid for power supply, which calls for entering into a toll agreement to be in effect for 20 to 30 years. The aggregate investment is estimated at US$ 1.5 billion.

There are also several other private initiatives in the energy sector that will become operational in the medium term, all of which have taken advantage of a recently-created legal framework that encourages energy investments.

This has been the Chilean government's response to the serious problems that arose with the crisis in the supply of Argentine gas. In fact, over the past five years Chile has had to cope with a dramatic dearth in energy resources, which has impacted strongly on its economic growth.

Because of this crisis:

• Large-scale mining investment projects were shelved.

• Important industrial projects were paralyzed or abandoned, while others migrated to more energy-rich countries such as Peru and even Argentina.

• Billions of dollars invested in natural gas distribution networks and combined-cycle power stations are in jeopardy.

• Electricity prices spiraled unchecked, forcing several factories to file for bankruptcy and resulting in a brutal price hike in residential consumers' electric bills.

Although the Chilean government has been proactive in pushing for new projects through State-run companies like ENAP and Codelco, its reaction was slow and the crisis caused irreparable damage.

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This begs the question: how did Chile, a country that was able to successfully steer its economy for over 30 years, fall into this dark pit?

The answer is: lack of energy diversification.

Over the past two decades, Chile placed all its chips on Argentine gas to fuel its economic growth, believing in the purportedly endless nature of this gas supply, pushing off and discouraging investment in hydropower and alternative sources. In the case of hydropower, for example, outright counterproductive laws were enacted, which -for example-eliminated drought as force majeure and brought in a myriad risk factors that hydropower investors had to cope with. This reality, coupled with the unbeatably cheaper prices for Argentine gas, brought hydropower investment to a standstill for more than fifteen years.

But this was a luxury that Chile simply could not afford, because we are a deficit country in terms of oil & gas production. In fact, our reserves in the far southern reaches of Chile are pitifully small.

A power grid operates in northern Chile (Regions 1 and 2), with rated capacity of 3,200 MW. Generation is almost exclusively thermal, coal- and gas-fired, and the largest customers are the local mining companies. Codelco's Mejillones LNG project will supply fuel for CC power stations with 900 MW rated capacity.

Elsewhere in Chile, where 93% of the population resides, rated capacity is 6,700 MW, of which 60% is hydro. The Quinteros LNG project plus...