beyondbrics

Chile, Latin America’s most open economy, is confident of continued robust economic growth this year, despite the international crisis.

Alas, not all shocks come from abroad. Chile’s energy vulnerability is now forcing a large investor in the country not only to downsize, but to put in doubt the viability of its future operations in Chile.

Now Methanex of Canada, the world’s largest producer of methanol (a component in shampoo, water bottles, formaldehyde, polyester, fuel and even pharmaceuticals), has uttered the words no investment-orientated government can want to hear from a foreign company. In last week’s earnings report it said uncertainty over the country’s energy supplies means “we cannot be sure …that we will have sufficient future cash flows from Chile to support the carrying value of our Chilean assets.”

And investors will hardly have been cheered either to hear that Methanex could not be sure that “this will not have an adverse impact on our results of operations and financial condition”.

Methanex has long been operating way below capacity at its facility in southern Chile (its investment there dates back to 1988) because of problems with supplies of its raw material, natural gas.

The complex has limped along for several years – it is currently operating only one of its four plants, and that is 60 per cent idle – ever since gas supplies from Argentina, previously Chile’s sole supplier, dried up nearly five years ago as Argentina subordinated exports to supplying its domestic market, where demand was soaring because of cheap tariffs.

Methanex acknowledged that despite “significant investment” to explore for and develop natural gas supplies in southern Chile, “the timelines for significant increases in gas production are much longer than we had originally anticipated and existing gas fields are experiencing declines”.

That has left it little option but to move, at least some operations. It announced earlier this month that it was relocating one of the four plants at its Chilean facility to Louisiana, which is attractive because of the outlook for low natural gas prices. The plant, with a capacity of 1m tonnes, is expected to be operational in the second half of 2014, though a final investment decision will be taken in the third quarter next year.

The company is also considering using coal gasification as an alternative to gas in Chile to get around the supply bottleneck.

Chile has come a long way since Argentina’s policy shift left it scrambling for gas, and it is now planning to expand the first liquefied natural gas terminal it built in order to overcome that crisis to meet growing demand.

Meanwhile, Argentina is facing falling hydrocarbons reserves that ensure only just over 11 years’ worth of oil at current rates, and slightly over 7.5 years of gas. Chile once suggested that it could, in time, be the one furnishing the gas to its erstwhile gas supplier. But first, as the Methanex case illustrates, it still has energy problems of its own.

A spokesman for Methanex was unable to estimate total investment in Chile to date, but it recently said it was restarting a long-idle plant in New Zealand at a cost of $60m, which gives an idea of how much it costs to get at least an established plant up and running. The company also says it has spent $143m on developing natural gas resources with private company GeoPark and Chile’s state energy company Enap.

Related reading:
Chile file, beyondbrics