Impasse over Natural Gas despite Apparently Obvious Solution

Abstract:
Chile and Argentina urgently need natural gas. Bolivia has plenty and urgently needs markets. Why aren't deals being made?

Analysis:
Chile and Argentina are booming, and both are fueled by natural gas but don't have enough to meet their current needs. Bolivia, which borders both countries, has abundant natural gas, but a stagnating economy. It now markets only a fraction of its gas potential, some to Argentina. On the surface it seems obvious--Argentina and Chile should buy more gas, and Bolivia should sell it to them. However, it's not that simple.

Booming Economies
Chile's economy is growing at its fastest rate in four years. One good reason is booming China. It has become Chile's second biggest export market after the U.S. First quarter shipments--mainly of copper--were worth close to $2 billion, up half again as much from 2003's first quarter. To fuel this economy, Chile imports virtually all its energy, mainly from Argentina, in the form of natural gas.

Argentina is in the midst of a touch-and-go recovery after years of a poorly performing economy, including defaults on international bank debt. It, too, depends on natural gas for the lion's share of its fuel needs. But a misguided energy policy now threatens to undo the recovery. In the process it may take down the Chilean economy with it.

Argentina has domestic natural gas production. But not enough to meet current demand. Gas has not been realistically priced since 2002. That year, taking steps to deal with a cratered economy, the Argentine government slashed utility tariffs by a third and then froze them at that level after currency devaluation. The result was that the price of natural gas available in Argentina became roughly one-third of world market prices. Residents and industries all over the country rushed to convert from coal and oil to gas.

At those prices, Argentine natural gas producers could not earn enough money to maintain their production facilities and drill for more gas. Looking for more revenues, they aggressively marketed gas to the energy-hungry neighbor across the Andes: Chile. With only hydroelectric power backed by very little oil and gas production, Chile was a natural market. Over recent years, it has come to rely on Argentine natural gas for about 40 percent of its electricity. Since the mid-1990s, around $5 billion has been invested in gas pipelines and power plants. Homes and industries have followed through by converting.

As Argentina's domestic demand began to grow with economic recovery, it increased imports from Bolivia to make up the shortfall. Now, economic recovery has sharply escalated demand, and shortages have developed.

Argentina finds itself between a rock and a hard place. While it can buy more gas from Bolivia, it has to pay market prices. Argentine people and industries howl at the prospect of increases in their fuel costs. Furthermore, Bolivia sells gas to Argentina only on condition that none of it is rerouted to Chile.

Faced with this situation, Argentine president Nestor Kirchner in March ordered a cut of up to a quarter in exports of Argentine gas to Chile. This created a row between the two countries. Chile says that its deal specifies that Argentina can make no more cuts in exports to Chile than it makes to its own domestic customers.

From that point, the dispute has taken off in several directions. Politicians and some businessmen in Chile have called on president Ricardo Lagos to retaliate--with trade sanctions or legal action--against Argentina. Argentine president Kirchner has publicly blamed Argentine gas producers, saying they failed to invest in more supplies.

And then there is the situation in Bolivia.

No Gas for Chile – Or Anyone Else
Bolivia has bountiful supplies of natural gas. It could easily develop and sustain an LNG export industry with plenty remaining to meet the requirements of Argentina and Chile.

The problem is, market logic doesn't hold much sway in Bolivia these days. A plan to set up the LNG export industry failed last year. Bolivians, chiefly indigenous people, together with labor groups, opposed a plan to build liquefaction facilities on the Chilean Pacific Coast and export LNG to the United States. One position often cited was that the plan would benefit foreign companies instead of Bolivia's poor.

President Gonzalo Sanchez de Lozada was forced to resign in October after weeks of deadly protests.

In addition, almost nobody in Bolivia believes that the Chilean coast west of Bolivia truly belongs to Chile. Even though lost by treaty, Bolivian feeling is strong that it still belongs to Bolivia. This firm belief is responsible for much of the opposition to the LNG facility. It is also behind prohibiting Argentina from re-exporting Bolivian gas to Chile.

Could There Be Any Winners Here?
It's a tough to look at the surface facts without seeing a natural solution. Chile's thriving economy is at risk because it can't get the gas to fuel it. Argentina's recovery is threatened unless it increases Bolivian gas imports, and deals with substantial price increases. And Bolivia sits on abundant gas supplies that could relieve it from a stalled economy. This seems to call for what politicians call leadership. But is there a politician anywhere who could handle all the baggage? Would anyone dare ask the Argentine public to agree to world market gas prices? Get Bolivia to sell gas to Chile? Influence Chile to cede a few miles of coastline to Bolivia? This is probably wishful thinking. As Argentine president Kirchner began blaming the natural gas industry last week for the shortfall in gas supplies, Bolivia set a referendum for July on what it should do with its natural gas, including the option of nationalizing the industry.

It seems like politics as usual--that is, politics for the sake of politics, with nothing much aimed at fixing the basic economic problems. Still, all three countries could make substantial gains if a solution is found, or maybe even if just a little progress is made.