Chile Green Tax on Coal Increases Cheap Shale Gas Gamble

Chile is gambling on overcoming a looming energy crisis in the biggest copper-producing country by generating more power with U.S. shale gas, just as prices of the fuel are rising.

President Michelle Bachelet will unveil an energy plan on May 15 that will rely on liquefied natural gas to ease the cost of Chilean power, the most expensive in Latin America. A $5-a-metric-ton carbon emissions tax proposed in March will punish coal-fired power and encourage gas-fired stations that today are a fifth more expensive, according to AES Gener SA, the country’s second-biggest power provider.

Bachelet is pinning hopes on surging LNG supply from the U.S. shale boom and lower prices to provide the fuel Chile needs to ensure its mining industry stays competitive. Mining companies from Anglo American Plc. to Teck Resources Ltd. have postponed $43 billion of projects as they weigh up rising costs and declining copper prices, according to the National Mining Society, an industry lobby group.

“The law favors LNG; coal power stations aren’t welcome,” Alexander Galetovic, a professor at Universidad de los Andes and adviser to AES Gener, said in an interview. “It’s a fantasy to think that shale gas will remain cheap.”

Bachelet will travel to Washington next month to meet with U.S. President Barack Obama on an official visit where energy cooperation will be on the agenda, according to a statement from the U.S. Embassy in Santiago.

U.S. Exports

Global LNG demand will exceed supply until at least 2020, according to BG Group Plc. Consumption increased after Japan’s Fukushima disaster led to the closing of the nation’s nuclear plants, boosting LNG prices in Asia to a record last year.

U.S. natural gas for June delivery has risen 3.5 percent this year to $4.38 per million British thermal units on the New York Mercantile Exchange.

Pending Obama approval, the U.S. will start to export LNG in 2015 and will become a net gas exporter by 2018, according to the Department of Energy.

Companies such as Houston-based Cheniere Energy Inc., ConocoPhillips and San Diego-based Sempra Energy have sought U.S. Energy Department approval for 37 LNG export projects, using gas from hydraulic fracturing, or fracking. Cheniere won approval to export LNG from Sabine Pass, the world’s largest LNG terminal, in 2012.

Japan and Korea are snapping up LNG supply and expanding the nascent market by 5 percent a year, Goldman Sachs Group Inc. said in a January study on the market.

Argentine Gas

Chile is already paying some of the highest prices in the world on gas obtained from the LNG market, Energy Minister Maximo Pacheco said.

“New investments, instead of being the cheapest, will be more expensive and with that the price of electricity will go up for everyone,” Andres Cabello, head of environment at AES Gener, said in an e-mailed response to questions.

Chile, which imports more than 90 percent of its fossil fuels, has failed to secure supplies from gas-rich neighbors Bolivia and Peru because of political differences. Argentina, which has suffered its own power shortages this year, severed gas to Chile a decade ago via pipelines that crossed the Andes.

Chile survived Argentina’s decision to cut off exports by burning diesel fuel while it embarked on a decade-long copper boom, where prices of the metal quadrupled and GDP per capita rose to $19,000, the highest in the region.

‘Nouveau Riche’

Former president Sebastian Pinera, who was succeeded by Bachelet in March, endured further power restrictions during his tenure as four years of drought exacerbated the power crunch.

Seeking to quell environmental opposition, Pinera ask GDF Suez to halt work on its 540-megawatt Barrancones coal-fired power project on the northern Chilean coast in 2010. Opposition groups also stalled a coal-fired plant proposed by Brazilian entrepreneur Eike Batista.

Chile’s growing middle class and the government are snubbing cheaper forms of energy on environmental reasons, Universidad de los Andes’s Galetovic said.

“We have a nouveau riche syndrome, that anything can be solved with money,” Galetovic, who has a doctorate in economic from Princeton University, said in a Santiago from interview. “The increase in energy costs is going to be a lot.”

Requests to interview Pacheco weren’t granted.

Green Policy

Colbun SA, which owns 49 percent of the HidroAysen hydroelectric project in southern Chile’s Patagonia region, suspended work until Chile attains a nationwide consensus on how it should resolve the energy crunch. Pacheco said in March that HidroAysen isn’t viable in its current form.

Bachelet’s green tax, due to start in 2017, will cost coal-fired power stations as much as $30 million a year, Ricardo Katz, an analyst who compiled a study for Chile think tank Center of Public Studies, said in an interview.

“These are taxes to protect the environment,” Chile’s Finance Minister Alberto Arenas said in a May 6 interview.

Still, Endesa is going ahead with a coal-fired power project in Punta Alcalde, an area that sits in center-north Chile where Barrick Gold Corp., Goldcorp Inc. and Teck Resources Ltd. plan new mines.

Endesa “has done its numbers, and evidently nobody likes taxes, but it is not a sufficient enough motive to annul investments,” Ignacio Antonanzas, CEO of Endesa’s parent company Enersis SA, said in comments obtained by Bloomberg. Endesa is Chile’s biggest power provider.

Mine Halt

While Endesa pushes ahead with the plant, some of its clients are being more cautious.

Vancouver-based Teck, which operates the Andacollo and Quebrada Blanca copper mines in Chile, has shelved Relincho, its third mining project in the South American country.

“We are meeting with the government at multiple levels and understanding their position and their initiatives going forward,” Dale Andres, Teck’s senior vice president of copper, said in a April 22 analysts call. Water and power are “two big issues in Chile today, and that’s not just with mining companies,” he said.

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