Chile Turns to Ecuador to Answer Bolivia-Argentina Deal

Chile's President Ricardo Lagos signed an agreement with Ecuador's President Lucio Gutiérrez Thursday eliminating the existing 6% import tax on Ecuadorian crude as part of measures to ensure fuel supplies to power generators in the face of import restrictions from Bolivia and Argentina.

Chile's state oil company Enap and its Ecuadorian equivalent Petroecuador will implement the agreement, which is aimed at supplying cheaper fuel to Chilean thermo generators affected by gas export rationing from Argentina. The agreement is also seen as a political response to a gas sales agreement recently signed by Bolivia and Argentina, which contains a clause prohibiting any of the gas from being re-exported to Chile. "It's a very positive sign for the consumers and generators because it shows there are alternatives to gas, but I don't think using oil is a long-term solution to maintain low energy prices in Chile," Fitch Ratings analyst Carlos Diez told BNamericas.

"It alleviates our problems in the short to medium term maybe, but it doesn't mean we should change our energy strategy completely," Diez said. More important for a long-term structural solution to the energy crisis in the southern cone are gas price increases in Argentina, the first of which for industrial clients is planned to take effect on May 10, and the July start up of the 570MW Ralco hydroelectric project in southern Chile, Diez said.

The first will reduce gas demand in Argentina, which will relieve the gas shortage and provide incentives for investment in the sector, while the second will boost Chile's hydro generation capacity and reduce its reliance on Argentine gas, Diez said.

Some thermo generators in Chile's northern and central grids, the SING and SIC respectively, have been forced to convert their plants to burn more expensive diesel after Argentina decided to cut gas supplies by 3.3 million cubic meters a day.

Higher fuel costs were partly to blame for the recent decision by the national energy commission (CNE) to increase electricity prices for consumers by an average of 2.8% from May 1. However, generation costs should drop in the short term as a result of the agreement with Ecuador because Enap's refineries will supply generators with cheaper diesel processed from Ecuadorian crude. Enap itself has oilfield interests in Ecuador. Its international unit Sipetrol formed a strategic alliance with Petroecuador in 2002 to explore and produce oil on four fields in the Amazonian department of Sucumbio.

"Chile can be very relaxed, because if there is a problem with gas supplies, her brothers are there, in this case Ecuador, to help as much as we can so this [energy crisis] does not continue," newspaper La Nación quoted Ecuador's Gutiérrez as saying.

Chile's economy minister Jorge Rodriguez has even guaranteed domestic electricity and gas supplies for residential and commercial clients through 2006, the government said in a separate statement. But underlying the Chile-Ecuador agreement is Chile's annoyance at Argentina for accepting a gas import agreement with Bolivia which bars the gas from being redirected to third party countries. "It does not help the integration process that some countries have established prohibitions on exporting part of their resources to other countries in the region," newspaper El Diario quoted Lagos as saying. Chile's foreign minister Soledad Alvear has presented Bolivia with a formal complaint "showing our concern and annoyance about the agreement," Alvear said. Chile responded immediately by suspending negotiations with Bolivia over an economic agreement between the two countries and Chile's war secretary Gabriel Gaspar is in Buenos Aires meeting with Argentine authorities to ensure that the gas issue is prioritized on the agenda of the Chile-Argentina security committee.

However, Fitch's Diez says the agreement between Argentina and Bolivia is a stopgap measure that may actually do more to help Chile than to harm it because it will help relieve Argentina's gas shortage. "Argentina has to solve its domestic gas supply problem somehow and good on them for trying to get some of this gas from Bolivia," Diez said. In the medium to long term, once the gas price in Argentina stabilizes, Chile and Argentina will likely overcome their diplomatic differences and resume trading as before the crisis, Diez added.

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