Energy Integration In Latin America: Chilean and Argentine Perspective.
| Jurisdiction | Derecho Internacional |
(Mar 1999)
Energy Integration In Latin America: Chilean and Argentine Perspective.
Sipetrol, S.A.
Santiago, Chile
1. Introduction
In the following pages we will analyze the materialization of a very old and of course desirable objective, the energy integration between Argentina and Chile. The idea of connecting Chilean consumers of oil and gas with the Argentinean producers was conceived around 20 years ago but the first remarkable advance was only made in 1990, when Patricio Aylwin, former President of Chile, and Raúl Menem, President of Argentina, signed a "Joint Declaration" (Declaración Conjunta) in which they stated as one of the basis of the declaration to "Promote immediate actions towards an effective physical, economic and energetic integration between both countries"1
The first transboundary pipeline was constructed only in 1993 and started the transportation of oil in February of 1994, currently there are 6 gas pipeline projects (four of them under construction) from the Atacama Region in the north of Chile to the Straight of Magellan2 . The necessary effort for the conclusion of the integration process was committed by both the Chilean and Argentinean Governments as well as the private sector that relied on the policies sponsored by both administrations in a unexplored market and with great business prospects.
2. The Previous Scenario.
Historically the use of natural gas in Latin America has not been a significant feature, instead the activities of the private and state owned exploration companies were orientated to oil discoveries. "In 1970 over 40% of the natural gas produced in the region was unused, falling to 20% in 1980"3 . In the 80's and 90's most countries of the region had started a consistent economic growth that demanded increasing sources of clean and environmentally safe energy1 , being the reason why there is only one oil pipeline from the Neuquén Basin to Chile (Oleoducto Trasandino) Before entering into the legal study of the Chilean-Argentinean case, we must take a brief look of the gas business.
The exploitation of natural gas fields is necessarily linked to the transportation feasibility to the consumers through the distribution facilities, therefore, we can recognize at least 4 different actors, the Gas/Oil Producer, the Transporter, the Distributor and the Consumers; in the case in
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study, before the Privatization of 1990, we can notice that the gas Market in Argentina has the following characteristics: Production Areas separated from the Consumer Centers, increasing demand of natural gas at an annual rate of 6,4% and a consequently low investment in exploration of gas reserves.
The above mentioned conditions contributed to a constricted gas market where the discovery of gas fields was almost a punishment, hence the open of new gas markets, in side as well as out side of Argentina, was a primary objective of the Argentinean Government and the Industry. Regarding this the Secretario de Combustible (Combustible Agency) said in a recent interview "the opening of the regional markets (out side of the country) has changed the exploration in Argentina..." "...most of the basins are explored to find gas."4
It is also important to bear in mind some technical reasons involved in the production of associated gas. The production of oil in any field is limited to the gas lift because the reservoir contains oil, gas and water. The pressure drops in a reservoir due to the withdrawal of some of the fluids initiating the expansion of the remaining fluids. Oil, gas and water are then produced and as result of their expansion and the expansion of the surrounding remaining reservoir rock. This
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recovery process is called "Natural Depletion Mechanism". A reservoir that initially contains free gas as well as the gas dissolved in the oil will benefit from the additional expansion of the free gas. On the other hand if you have a reservoir with a huge gas cap, your problem should be how could you produce more gas in order to increase your oil production rate. To solve this situation the Exploration Company shall overview two factors, the possibility of flaring or venting the gas releasing it to the environment or sale it if there is a market available (as well as transportation facilities). In Argentina the hydrocarbon regulations5 provides that a maximum amount of 50 m3 /m3 can be flared or vented daily, therefore, if the gas/oil ratio is two high (likely common in the Neuquen Basin) the oil production shall be restricted because of these regulations.
Therefore, in order to encourage exploration activities n basins such as Neuquen or Austral it is essential to give the private investor equal access to the pipeline network and consequently, obtain an increase of the reserves that make possible the exportation to other markets like Chile, Brazil and Uruguay, keeping the national consumption unaltered. (As an example, following the privatization process YPF, former Argentinean State owned exploration and Exploitation Company, is only one of over 100 oil companies in Argentina.)
Across the border the motivations were different than in Argentina. The Chilean energy sector is characterized by a highly dynamism due to the economic growth and the consequently increase of the purchasing power. The energy consumption is increasing 10% a year and the private sector is investing US$ 600,000,000.oo in this sector each year. The introduction of a new energy source in the Chilean market shall benefit the local economy, such as the substitution of other environmental aggressive fuels such as oil and coal; reduction of the electric generation cost; reduction of the atmospheric contamination in Santiago and improvement of new related business such as the electric power generation.6 The following chart shows the expected gas consumption in Chile.
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3. Legal Framework.
3.1. The Southern Cone: International Treaties
The development of the economies of the Latin American Region and the changes made to their political structures involved in the privatization trend that invaded the region in the last two decades make the integration process possible. In 1980 Bolivia, Colombia, Ecuador, Peru (The Andean Pact); Argentina, Brazil, Paraguay and Uruguay (MERCOSUR); Chile and Mexico, signed the "Montevideo Treaty" set the Latin...
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