The Obama-Bachelet Summit: Is Energy the Next Phase of the U.S.-Chile Relationship?

This Monday, June 30, Chilean president Michelle Bachelet will be in Washington, D.C., to meet with U.S. president Barack Obama. This is her first visit to the United States since she was reelected (for her second, nonconsecutive term) in December of 2013. President Bachelet assumed office last March and has successfully finalized many important initiatives as part of her promise to fulfill 50 commitments within her first 100 days in office.

She is taking the reins at a particularly tumultuous time for the country. The past few years saw a government heavily criticized in massive student protests over education reform—not to mention a host of issues spanning socioeconomic inequality, indigenous rights, marriage equality, and constitutional reform.

Despite the challenging domestic context, Chile is one of two Latin American countries in the Organization for Economic Co-operation and Development (OECD; Mexico is the other) and is poised to become the first developed nation in South America. Perhaps one of the greatest obstacles to the country’s development and economic growth, though, is its remarkable reliance on foreign sources of energy—according to the World Bank, Chile imports about 70 percent of the energy it uses. As a result of this dependence, Chile’s electricity prices are among the highest in Latin America, as well as the OECD.

With the recent news of the Bachelet government’s decision to scrap the HidroAysén hydroelectric project in the southern Patagonia region because of significant public outrage regarding environmental concerns and the possible displacement of local populations, the country’s long-term plan for energy security becomes more important than ever. So where does Chile stand, and what are its options moving forward?

Q1: What is Chile’s energy situation now?

Unlike much of the rest of the region, Chile is largely lacking endowments in most conventional energy resources. As a result, Chile has remained heavily dependent on foreign energy, importing about 70 percent of its energy from abroad—a reality that has the potential to limit the country’s overall success and development.

Today, Chile imports most of its primary energy. According to the U.S. Energy Information Administration, oil imports alone total over 300,000 barrels per day. Purchased mostly from South American producers, oil makes up about half of the country’s total energy basket.

Liquefied natural gas (LNG) and coal are also imported largely from other South American countries, making up 14 and 13 percent of Chile’s energy basket, respectively. The latter constitutes about 27 percent of the country’s domestic energy production, while the former is 17.

Though hydropower makes up only around 6 percent of Chile’s energy basket, it comprises about one-third of the country’s total domestic production. And while there is increasing interest in developing Chile’s wind-power capacity, the current use of that resource remains negligible.

Q2: What options does Chile have to diversify its energy basket?

Chile’s dependence on energy imports to feed its demand has for years posed a serious challenge to the country’s growth and prosperity. Perhaps as a result, the Bachelet administration’s long-overdue energy agenda—which aims to create a diverse and sustainable energy plan—has been generally well received.

But with estimates that the country’s energy demand will double by 2022 and triple by 2032, accomplishing the goals of this new agenda will be no small feat.

The most recent major project proposed, the disputed HidroAysén hydroelectric plant, would have helped address these demands, theoretically producing almost 3,000 megawatts of power—or around one-fifth of Chile’s current needs. Intended to be developed in the southern region of Patagonia, an area known for its pristine and wild natural beauty, the project proved highly controversial. Environmental groups, as well as indigenous and local populations, all protested against the power plant, culminating in the cancellation of its development earlier this month.

Chile could also explore the possibility of developing its nuclear energy capacity—though this could hardly be expected to be less controversial than hydroelectric power. In a country susceptible (like Japan) to earthquakes and tsunamis, fears of a Chilean Fukushima are all too high. For now, the idea is a subject of official study alone—and development of nuclear energy seems far off, at best.

But nuclear and hydroelectric power are not Chile’s only options—far from it. And in her new agenda, President Bachelet explores the remaining (and ideally less controversial) possibilities.

The country’s abundance of volcanoes, which makes it an ideal producer of geothermal energy; its scorching-hot Atacama Desert, which could be a perfect place for solar power generation; and the tracts of Chilean countryside that are particularly well-suited to generate plentiful wind power are potential alternatives for Chile moving forward. In El Arrayan, north of the capital Santiago, for example, a new wind farm is set to become operational as early as later this year.

And not all aspects of the energy agenda are geared toward decreasing Chile’s dependence on foreign energy sources—some aim simply to reduce the costs of energy. Included in the agenda are plans to build a third LNG terminal and expand the capacity of two existing terminals, which would ease the cost of bringing the precious gas into the country. The recent discovery of Argentina’s massive Vaca Muerta shale fields could provide Chile with a new, close, and likely cheaper source of LNG, particularly as the extraction and production of gas becomes cheaper as technology improves.

Even with the development of LNG production in Argentina, though, Chile could also look further north for its natural gas fix. The United States has been producing shale gas in larger and larger quantities (in the past decade, natural gas production in the United States has increased by more than 75 percent), and with new technologies and expanding industry knowledge, both the production and the transport of LNG are cheaper than ever before.

Q3: What could greater energy cooperation between Chile and the United States look like?

The United States and Chile currently enjoy close and friendly ties, largely focused on economic cooperation. The two signed a free trade agreement in 2004, increasing U.S. exports to the South American country by nearly 600 percent by 2012 (to about US$19 billion, up from US$2.7 billion in 2003) and making the United States Chile’s second-largest export market. The two are also deeply invested in the Trans-Pacific Partnership negotiations (of which Chile is a founding member), and Chile was recently nominated for the State Department’s Visa Waiver Program.

On the energy front, the two countries have traditionally worked together as well. In 2009, the United States and Chile signed a memorandum of agreement as part of President Obama’s “Energy and Climate Partnership for the Americas.” The agreement focuses on the development and implementation of clean energy technologies, providing support to Chile’s Renewable Energy Center, as well as to pilot projects to generate solar energy in Chile’s Atacama Desert.

Chile has also signed separate memorandums of understanding with the states of Massachusetts and California, chiefly focusing on innovation, clean energy, biotechnology, and education.

Liquefied natural gas, however, has the potential to be the next “big thing” in the bilateral relationship. With Chile’s recent development of its LNG-receiving technology and the growing shale-gas production here in the United States, there has never been a better time for the two to explore this potential. And with the United States focusing on creating the infrastructure to export the product to both FTA and non-FTA countries and the U.S. Department of Energy accepting applications from companies for approval to export, this seems like the obvious next step in the relationship.

But realization of this potential may still be a few years off—to date, only one company has received approvals to both export and construct liquefaction terminals, and it isn’t expected to be operational until 2016.

Conclusion: With U.S. LNG production on the rise and Chile’s persistent dependence on high-cost foreign energy, the development of a bilateral framework for energy cooperation is clearly in both countries’ interests.

The United States is closer than ever to being a net energy exporter—a reality that seems, for the first time, within reach. And President Bachelet’s commitment to investing in the development of lower-cost energy alternatives has set Chile up as the ideal partner for the United States in furthering the countries’ individual and bilateral interests.

Perhaps her visit to the White House next week will serve as the springboard for this next phase of the U.S.-Chile bilateral relationship.

Carl Meacham is director of the Americas Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Ian Kowalski, intern scholar, and Jillian Rafferty, program coordinator, both with the CSIS Americas Program, provided research assistance.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Carl Meacham