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Against the Flow – Chile and Colombia Look for Energy Partners

hydro

Source: Distintas Latitudes

           Colombia and Chile have recently layed out initiatives for natural resource policies that place the nations in stark contrast to one another. Colombia, fresh from a successful campaign to clear territory from leftist FARC (Revolutionary Armed Forces of Colombia) rebels, is aligning its crude oil and mining deposits for export to generate national income. Farther south along the Andes, Chile is desperately seeking to avert electricity shortage. Interestingly and fortunately, the two nations have found a common interest in commercializing Colombian copper mines. Colombia needs the income, and Chile needs a good to trade for dollars to spend on power.

            Chile’s President Sebastian Piñera has had a rocky couple of years, as I have discussed before, and procuring electricity has been keeping him up at night. According to an article on the Americas Society website, Chile will need to raise electrical output 50% by 2020 in order to both meet the government’s growth targets and ensure supply to the mining industry. Chile lacks commodity deposits, and imports about 70% of its energy. In the past, this has hamstrung its supply chain – economic crises in Argentina have caused disruption, and Chile has complicated political relationships with Peru and Bolivia, who both could be suppliers. The government has focused on developing renewables – hydro, solar, and wind power, and this effort has great potential. Hydropower already generates 34% of supply.[1]

            Renewable development comes with plenty of domestic political baggage, however. In the first place, promotion of an energy policy that serves the mining industry is controversial. Mining provides 15% of tax revenue, but uses 38% of national energy supply. Environmental protests have been most prevalent, however. To build dams, the government will need to fell trees, dig out mountainsides, and chase away migrating birds. The major project of the government’s hydropower policy is the $7 billion HidroAysén Development, consisting of 5 dams along 2 rivers in the Aysén region, a sparsely populated area of Southeastern Chile. Progress has been stalled by fervent street protests – according to a May article in MercoPress, 74% of Chileans are against HidroAysén.[2] They cite environmental concerns, and have built a political case that resonates – President Piñera’s brother-in-law sits on the HidroAysén Board.

The Chilean government has ample economic impetus to move forward and strong political barriers against doing so. The average of these is stalemate – dam construction has been approved by the Supreme Court, but official approval has not been granted to build the 2,000 kilometers of power lines necessary.

Colombia, meanwhile, is looking to sell its resources, and looking for new buyers. Colombia produces almost 1 million barrels of oil per day, and exports about half to the United States. However, slow economic growth in the US and the explosion of American natural gas production have caused Colombia to look East, “as the U.S. ally rethinks its traditional reliance on markets in the north and west.”[3] In Beijing last month, state-controlled China Development Bank authorized financing for a pipeline to carry 600,000 barrels a day of Venezuelan and Colombian oil across the Andes to a Pacific seaport in Colombia. Colombian President Juan Manuel Santos and his bureaucratic team also offered Chinese companies the chance to develop Central Colombia’s coking coal reserves and other mineral deposits, and to build a railway to Colombia’s Pacific Coast to stimulate exports to Asia. In return, the Colombian Government will request solar panels to help power schools not collected to the country’s electricity grid, and probably hefty payments as well. Such a deal could be a long-term stimulus for Colombia’s economy by providing higher-quality infrastructure – a new railway, a long oil pipeline, and better schools. This development could also help to diversify Colombia’s economy down the road. Eventually, Colombia may start to consume more of its own oil.

Colombian and Chilean interests have come together on the development of Colombia’s copper deposits. Large swaths of land in South-Central Colombia have been recently liberated from rebel control, and they are believed to be rich in mineral content. The Colombian Ministry of Mining and Energy is erecting a new agency to manage mining concessions with private companies for 11,500 square miles of territory. One such taker is Corporación Nacional del Cobre (“Codelco”), controlled by the Chilean government, and the largest copper producer in the world. This would be Codelco’s first foreign project, and is an effort to expand production from 1.7 million tons per year to 2 million tons. Codelco CEO Diego Hernández spent the recent Summit of the Americas eagerly chatting up Colombian ministers; he is excited by the prospect of entering a market with no incumbent competition from government-backed or private miners.[4]

Colombia holds the cards, but a deal here could work out in both nations’ interest. We know Chile’s challenges and its plan – sell more copper, buy wind turbines, solar panels, and power lines. As for Colombia, President Santos has named mining one of five locomotoras, or “engines of growth.” If copper is to be a focus, Codelco has ideal exploration and extraction heft. Colombia would want to minimize environmental hazards, and Codelco’s experience helps. Depending on the development of this mining process, Colombia and Chile could be entering a longer-term geopolitical alliance based on energy and mineral initiatives.



[1] http://www.as-coa.org/article.php?id=4181&nav=res&pid=10

[2] http://en.mercopress.com/2011/05/17/overwhelming-majority-of-chileans-reject-hydroelectric-project-in-patagonia

[3] http://online.wsj.com/article/SB10001424052702304203604577394022580435862.html

[4] http://www.as-coa.org/article.php?id=4109&nav=res&pid=10

 

Author

Hunt Kushner
Hunt Kushner

Hunt Kushner is a John C. Whitehead Fellow with the Foreign Policy Association. He currently works in Corporate Development with Ports America Group, the United States' leading port terminal company. Prior to this, he worked for 6 years at Deutsche Bank in the Corporate Finance and Mergers and Acquisitions for Latin America Group. In his 6 years at Deutsche Bank, Hunt worked on mergers and equity offerings for companies across Latin America in sectors such as energy, real estate, transportation, and banking. Hunt graduated from Yale University in 2006 with a BA in Political Science.

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