Driven by trade liberalization and integration into the global economy, Chile has had one of the fastest-growing economies in Latin America over the past twenty years.2 As the following graph illustrates, Chile’s energy consumption has kept pace with Chile’s economic growth.3

Click here to view graph: Evaluation of Private Energy Consumption in relation to GDP

 As Chile’s economy continues to grow, it is projected that its “power demand will triple” over the next twenty years.5

How will Chile meet this rising demand? This article explores Chile’s options, focusing on a couple of recent developments—the HidroAysén project and the “shale gas revolution,” both in the form of liquefied natural gas from shale-rich North America and, potentially, its own domestic shale gas reserves.

 

TRADITIONAL SOURCES & ALTERNATIVE ENERGY

Chile is severely limited with respect to domestic conventional energy resources. When it comes to hydrocarbons, Chile’s domestic production falls far short of its consumption. The U.S. Energy Information Administration reports that Chile produced only 11.91 thousand barrels of oil per day in 2009, while it consumed 297.65.6 It produced only 0.048 tcf (trillion cubic feet) of natural gas in 2009, while it consumed 0.1 tcf that year.7 Coal has traditionally played a significant role in Chile’s energy mix, fueling 22.7% of its electricity production in 20078, but the environmental concerns over emissions from coal-fired plants make an increased dependence on coal an unlikely long-term solution.9

To make matters worse, some other energy options are problematic in Chile. Nuclear is not currently considered a feasible option for the “earthquake-prone” country, especially in light of the Fukushima Daiichi disaster in Japan earlier this year.10 Chile views the option of increasing its reliance on Argentina for natural gas supplies skeptically because energy shortages in that country have caused it to cut supplies to Chile before.11 There seems to be some potential to exploit the country’s wind resources in the north and extreme south;12 however, in addition to the universal issues with making wind energy economical, the distance of these resources from Chile’s demand center in the central part of the country poses transmission challenges.

CHILE’S MULTI-BILLION DOLLAR HIDROAYSÉN PROJECT

 One alternative to Chile’s conventional energy resources relates to hydroelectricity, which can be generated from its rivers. The government of Chile recently approved the construction of the $3.2 billion HidroAysén project.13 The HidroAysén project is set to consist of a total of five hydroelectric dams, two on the Baker River and three on the Pascua River in the Aysén region of Patagonia.14 Once completed, it will be the largest energy project in Chile in terms of installed capacity.15

Click here to view maps

The project is estimated to produce annually 18,430 GWh of electricity, which is around 35% of Chile’s 2008 annual consumption.16 The electricity is set to be transmitted to the Central Interconnected System, which serves over 90% of Chile’s population.17 In addition to lower cost energy, the proponents of the project state that it will bring increased energy security to Chile, as well as employment, education opportunities and infrastructure improvements to the region. HidroAysén estimates that the project will have an average monthly employment of 2,260 people and states it plans to construct 90 kilometers of new roads, improve the surfaces of another 187 kilometers and construct new port facilities that will improve “connectivity for the Aysén Region.”18

Despite these potential benefits, there is great concern regarding the possible environmental impact the project could cause in Patagonia, which is considered by many Chileans to be a pristine “national treasure.”19 Anti-HidroAysén activists have been successful at mobilizing many Chileans since the government approved the project in May, spurring protests that have resulted in “28 police officers being injured and more than $100,000 in damage to public property . . . .”20 Polls show more than 60% of Chileans are opposed to the project.21

THE SHALE GAS REVOLUTION IN CHILE

Should the HidroAysén project survive the attacks waged by its detractors, Chile’s energy problems will be lessened but not solved entirely. More will be needed given the projected tripling of Chile’s demand for power over the next two decades.22

Part of the solution to Chile’s energy issues may come from shale gas. Chile is reported to have 64 tcf of technically recoverable shale gas.23 While this number is small in comparison to Argentina’s 774 tcf or the United States’ 862 tcf, it is still 640 years worth of Chile’s national consumption of natural gas at 2009 levels.24 Empresa Nacional del Petróleo, S.A. (ENAP), the Chilean state oil and gas company, has announced that permits for oil and gas exploration in Chile’s southern Magallanes region will require exploration of shale resources.25 The special operating permits, of which ENAP will hold a 30% to 50% interest, will require the exploration companies to allocate a certain amount of their budget to exploring for shale resources.26 Whether Chile’s shale gas can be economically exploited remains to be seen—the rugged terrain and extreme temperatures in the area may make production difficult—but the possibility of a domestic natural gas source in a country heretofore considered virtually barren of domestic hydrocarbons is an exciting development.

Not only might Chile be able to tap domestic reserves of shale gas, but the shale gas revolution in North America may also alleviate Chile’s energy shortage. Chile has two existing LNG terminals, Mejillones and Quintero27, and, when the forthcoming North American LNG export terminals are operational, cargos of relatively cheap shale gas-turned-LNG could be on their way to supplement Chile’s energy needs.28 Imports of LNG from North America (where the natural gas price is based on the Henry Hub index, instead of being linked to crude oil like it is in much of the world) could decrease gas prices in the Chilean market by 50%.29 It has been reported that GasAtacama is considering “[s]upply contracts of up to 20 years in length with a value in excess of U.S. $1.5 [billion]” with potential U.S. LNG exporters.30 The benefits of U.S. LNG, according to Araneda, include its independence from the international oil price and “the added advantage of having the U.S. as a provider, resolving the problem of security.”31

CONCLUSION

If Chile is going to continue its economic growth and development, it is going to have to find additional sources of energy. Concerns about security of supply, the environment and safety keep Argentine natural gas, coal and nuclear from being serious long-term solutions. Wind and solar may some day make an impact in Chile’s energy mix, but that day has yet to come. Further development of hydroelectric power is likely part of the solution, but, as the opposition to the HidroAysén project demonstrates, hydroelectric power is not without its drawbacks and additional energy sources will be needed to cover Chile’s rapidly growing demand for energy. Shale gas, whether in the form of North American LNG or domestic reserves, will likely play an important role in meeting this demand.