The Difficult Path toward Energy Integration in South America

These days, the governments of South America have made “energy security” –ensuring a constant supply of such widely available energy sources as natural gas – one of their priority concerns. This is especially the case now, when the main economies of the Southern Cone – Argentina, Brazil and Chile – are growing at a rapid pace and enjoying macroeconomic stability. According to forecasts by the International Energy Agency, Latin America will need $1.3 billion in new investments in the energy sector by 2030 in order to deal with increased demand.


Although such countries as Venezuela, Bolivia and Peru are net exporters of natural gas, other countries are mostly importers, such as Chile. Beyond that, agreements between producing nations and consuming nations are attempting to create such ambitious projects as the ‘Energy Ring.’ That project, which now seems less likely, involves bringing Peruvian gas to five countries. Another recent project, the Southern Gas Pipeline, is even more ambitious. Promoted by Venezuela, its other partners include Bolivia and the nations of Mercosur – Argentina, Brazil, Paraguay and Uruguay.


Nevertheless, many experts have doubts about the viability of the anticipated integration of this sector in South America, given the diplomatic and trade conflicts that currently afflict the region. Argentina and Bolivia recently reached an agreement to raise the price of the natural gas that Argentina buys from Bolivia, which is trying to adapt its prices to international realities. This will lead, in turn, to higher prices for the inputs that Argentina sells to such net importers as Chile. Bolivia refuses to sell directly to Chile because Chile has not agreed to Bolivia’s historical demands for “access to the sea,” the Pacific Ocean. In addition, Brazil, Paraguay and Uruguay will all have to pay higher prices for the natural gas that they buy from Bolivia and Argentina.


Between Energy Autonomy and Integration


Chile imports two-thirds of its total inputs for energy consumption, and Argentine gas provides one-quarter of Chile’s energy needs for electricity. As a result, Chile is in a delicate position, with higher dependence of imports of natural gas and hydrocarbons, and Chile supports initiatives aimed at [cross-border] interconnection, although it does not want to lose sight of its most desirable goal – energy autonomy.


Karen Poniachik, Chile’s minister of mines and energy, recently admitted to the international press that her country has “large energy needs.” As a result, Poniachik said, Chile has considered such projects as the Energy Ring and the Southern Gas Pipeline as medium-term options. Latin America, she said, “has the potential to become an integrated market for energy resources. It is a place where producers and consumers can complement one another. We believe that energy security is currently one of the major areas of concern, and we are going to participate in every possible opportunity. This is one of the areas where our country is active, because our priority is that we need to be autonomous in the energy sector.”


With this goal in mind, the energy policy of the government of President Michelle Bachelet is based on promoting new investments, either through alternative means of generating electricity through coal, or transporting liquefied natural gas from other countries over the medium term. In reality, Chile is trying to soften the impact of higher prices and lower supplies of Argentine gas (because of growing demand in Chile) by exploring for natural gas in the Southern region of Magallanes, and by constructing a complex for the re-gasification of liquid natural gas, projected to start operating in 2008. For its part, British Gas, the giant U.K.-based company, has budgeted funds for a project that will cost about $400 million in its entirety.


Beyond those options, a major hydroelectric project in Chile’s Patagonia district has been highly criticized for its environmental impact. Spain’s Endesa and Chile’s Colbún are planning to construct a series of hydroelectric power stations on the rapidly moving rivers of [Chile’s] Aysen region, popular with tourists. The project would cost an estimated $4 billion, and would provide 2,500 and 3,000 megawatts to the Chilean electricity system, depending on its design. “Until now, there are only feasibility studies, and we will make a decision when the time is right,” Poniachik said in response to questions about the project’s environmental sustainability. However, Poniachik left no doubts about which direction her country was moving. “Chile requires energy. The country cannot afford the luxury of not utilizing its resources. As a result, we are promoting investments in every sort of energy source.”


The Uncertain Profitability of Regional Gas Pipelines


When it comes to evaluating the two big regional integration plans, the problems are also quite clear. Paul Isbell, the top international economics researcher at the Real Instituto Elcano, argued in a recent study that the Energy Ring has been surrounded by doubts and problems almost from the day when it was announced. “First of all, although reserves in the Peruvian region of Camisea are considerable (some 187 billion cubic meters of gas), new demand for liquid gas in Mexico and the United States is competing directly with the countries of the [South American] continent for the Peruvian gas. This casts doubts about the ability of Camisea to supply such large quantities to both the countries of the North [Mexico and the U.S.] and to those of South America. If you don’t take Bolivian gas into consideration, a lot of people believe that the gas from Camisea, all by itself, will not be enough to make the ‘Ring’ project profitable.”


Secondly, adds Isbell, “An old conflict between Chile and Peru about the demarcation of the maritime border [between those countries] suddenly disrupted bilateral relations in 2005, and cast even more doubts about the future of the plan.” However, Alan Garcia’s arrival as President of Peru has eased relations with Chile, and opened the door for possible [bilateral] trade in natural gas. During a visit to Santiago in June, as the president-elect, Garcia himself declared that he was ready to sell gas to Chile. The trip was interpreted as a clear sign of reconciliation.


Meanwhile, the Southern Gas Pipeline is an initiative launched by Venezuela. It would include a main line of 6,600 kilometers and branch lines that would add up to 8,000 kilometers of pipeline with the capacity to distribute 150 million cubic meters of gas daily. According to the timetable now under consideration, the interconnections should be completed by 2017. However, Isbell notes that the new continental gas pipeline will have to overcome “a long list of obstacles.” The first obstacle is the formidable cost of the investments that are required, more than 20 billion dollars. As Isbell points to the Gasene gas pipeline, the only pipeline in the region that is already under construction. Gasene is intended to bring gas from the south of Brazil to Brazil’s northeastern states. Isbell notes that the projected budget for that project “is being significantly increased, and many companies that are involved in it have stopped working on it.”


If the experience of the Gasene project serves as any example, continues Isbell, “It is possible that the Southern Gas Pipeline will wind up costing even more than the current estimates — especially when you take into account that it is more than likely the project will face protests by environmentalists (and possibly some from indigenous populations) because it could involve some vulnerable regions of the Amazon.”


Isbell adds that the project could face other barriers. According to industry studies, when it comes to distances greater than 3,000 kilometers, it is more profitable to liquefy the gas and export it by sea. “Given the possibility that the costs of the gas pipeline will continue to rise, both Brazil and Chile could return to their earlier plans, which revolve around a strategy for liquid natural gas (LNG). That possibility leads to even more uncertainties, given recent events in Bolivia and Vienna.”


In Vienna, during the latest summit between the European Union and Latin America, Bolivian president Evo Morales announced that he would not comply with the demands of some foreign companies that they receive compensation for the government’s nationalization initiative. As a result, notes Isbell, “a strategy favoring liquid gas could wind up being more attractive than ever, if not indispensable, both for such consumers [of gas] as Chile, Brazil and Argentina, and for its possible future exporters such as Brazil itself.”



Multiplying Energy Sources


Eduardo Saavedra, director of the economics department at the Alberto Hurtado University in Santiago [Chile], agrees that natural gas could wind up being less profitable than a national policy that involves diversification of energy sources. Saavedra notes, for example, with the exception of its Magallanes region, Chile had previously “lived” without natural gas for many years. “The country had other problems associated with its dependence on water for electrical consumption, and the fact that all of its requirements were met with petroleum. The natural gas that came from Argentina became a sort of blessing. It enabled Chile to reduce its energy risks when it came to the volatility of water resources, and substitute for it [later] when supplies were cut off.”


Natural gas came to Chile as a replacement for coal, which was a very expensive product that was manufactured less efficiently more than a decade ago.   According to Saavedra, “between 1997 and 2004, this enabled everyone in Chile to consume electric energy at lower prices than we would have. When we look at wholesale prices, we realize that they dropped significantly; this resulted from the launch of combined cycle plants fed by natural gas.” However, recalls Saavedra, beginning in 2004, Argentina decided to make its internal consumption into a priority, with all the restrictions that appeared as a result. “We realize that the risk of scarcity is political, and it is not a risk that can be quantified or diversified. It depends on the way the other country runs things; in this case, Argentina’s energy policy regarding production and distribution.”


Saavedra insists that natural gas is a cheap product, but it is no longer cheap when there is a risk that supplies might be cut. “The question that everyone asks is, ‘Is natural gas more expensive than coal? If there is [an adequate supply of] gas, it is clear that it [gas] is cheaper, but if there isn’t, then gas winds up being more expensive. In that sense, a country’s energy policy must involve the diversification of risk; in other words, it must multiply its sources [of energy].”


Saavedra adds that natural gas has become a commodity, if you consider that you can buy it in its variant form, as LNG. “That makes plants for the re-gasification of LNG viable,” says Saavedra, including those that Chile and Brazil have in mind. “If they turn off the spigot [of natural gas] forever, we’ll have to do what we did earlier, and we’ll consider ourselves fortunate for having consumed it at cheap prices for quite some time. Those who constructed the gas pipelines (between Argentina and Chile) are probably reevaluating today whether they were profitable or are not. This is another topic. That’s the nature of the risks in those businesses.”


In 2004, Alexander Galetovic, a professor at the University of Chile’s Center for Applied Economics, argued that the supply of Argentine natural gas for generating electrical energy was already very beneficial for Chile. “If it [Chile] loses Argentine gas,” warned the study, “the cost of electricity generation in the country’s so-called “SIC” (the electrical system in the center of the country) will grow by approximately $350 million a year. This is a large loss; the equivalent of 0.5% of the GDP, or half of the [annual economic] impact of the trade agreements that Chile has signed with the United States and the European Union.”

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