HISTORY

Chile is a significant mining country whose main resource and major export product is copper. Between 1990 and 2000, the global demand for copper increased at an average annual rate of 3.9%, a rise that fuelled increased copper production in Chile, and allowed it to take 34.7% of the global market.

In response to the growing demand for electric energy from the new mining projects developed in northern Chile, and in view of the fact that the price of electric energy constitutes a significant part of the total mining cost of production (approx. 30%), the Sistema Interconectado del Norte Grande (SING; Interconnected System for Norte Grande) became an attractive market for the introduction of natural gas from Argentina – an opportunity to produce electricity and modernize the main electricity producing infrastructure in this region of Chile.

At the end of the 1990s, the operating cost of the existing thermal power stations was high due to the fact that they were mostly comprised of coal-fired stations (98%) causing major environmental impact, as well as having high breakdown levels. In the face of this, the market was looking for other sources of more efficient and less contaminating energy, such as natural gas, which was a favored option due to the existence of nearby gas deposits, located in the north-west basin of Argentina, and because it had a more competitive price than coal. Thus, natural gas from Argentina enabled the diversification of energy use by means of the construction of combined cycle power plants.

The favorable scenario described above attracted new investors to the north of Chile, such as CMS Energy and ENDESA, who invested over US$800 million between 1996 and 2002, through GasAtacama (GA), in the construction of a 1,200km gas pipeline, 740MW combined cycle power plants, and 880km of electricity transmission lines.

Between 1997 and 1998, GasAtacama initiated electric power generating and transmission activities in the Interconnected System for Norte Grande (SING) via the Central Atacama Pipeline Power Project.

The Central Atacama Pipeline Power Project envisaged the installation of two combined cycle power stations for natural gas, which began commercial operations in July 1999, working with three gas turbines and two steam turbines.

Meanwhile, in March 1998, GasAtacama began the construction of a new transmission system that linked its Atacama Power Plant to the Interconnected System for Norte Grande (SING), which improved the quality of service provision for electric power. Additionally, through Transemel, GasAtacama built over 360km of power lines to supply and improve the quality of electricity services to the cities of Arica, Iquique and Antofagasta, which have been in operation since January 2002.

The experience gained from the construction of power lines allowed GasAtacama to provide this service to its clients. Therefore, between July 1999 and November 2000, GasAtacama installed new power lines for the Escondida, El Peñón and El Tesoro mines.

In 2002, the installation of the fourth gas turbine was completed at the power plant, which included an air cooling system and a bypass gas chimney, which strengthened reliability and safety in the SING.

As a result of its policies on quality, the company was awarded certification for its Environmental Management System in accordance with ISO Standard 14.001 for the Atacama Power Plant, in June 2002. It was the first power station in the SING to obtain this certification.

Equally, in April 2003, GasAtacama Generation was awarded certification for its Quality Management System in accordance with ISO Standard 9001:2000, becoming the first power station in Chile to achieve this certification.

During 2003, the company consolidated its position as a major player in the Chilean energy sector, providing over 50% of natural gas and 25% of electricity power to the SING. By mid-2003, the company decided to sell its electricity transmission assets, as well as its involvement in subtransmission circuits, in an effort to recoup part of its investment and concentrate its investments in the rubrics of electricity generation and the transport and supply of natural gas.

A change of ownership of GasAtacama took place in 2007, when CMS Energy decided to sell its interest. The investment fund of the Southern Cross Group became part-owners of GasAtacama in August 2007, when they acquired 50% of the company, sharing the management of the company with Endesa Chile from that date.

2002 – 2008: Crisis over Argentinean Gas Supplies

As a result of the Economic Integration Treaty between Chile and Argentina, signed in 1995, approximately US$5,000 million were invested in Chile on the infrastructure for gas pipelines, natural gas-fired thermal power plants, distribution networks, industrial conversions and other elements.

However, as a result of the Argentine government’s decision to devalue the Argentinean Peso against the US Dollar, in 2002, the country’s authorities decided to fix the price of natural gas, as well as the transport of gas and electric power, to its local currency, in order to control the rise in inflation caused by said devaluation. The low prices removed the development incentives for natural gas upstream, simultaneously increasing consumption levels for both gas and electricity. During 2004, the production of natural gas was no longer capable of supplying both the internal Argentinean market and the export contracts signed with Chile. Faced with this situation, the Argentine government decided to give priority to local demand, progressively increasing cuts to the export of gas and applying new sales taxes at the beginning of April 2004.

Due to the shortage of Argentinean gas, some electricity generating companies in Chile, including GasAtacama, were forced to replace natural gas with diesel to avoid interruptions to its power supplies to clients and, at the same time, they were obliged to renegotiate prices for their sales contracts, in order to spread the increased direct costs of production.

GasAtacama successfully integrated the new conditions and renegotiated with all its independent clients. However, in 2007 and 2008, it faced a serious deficit in supplies from its energy distribution clients from the EMEL Group. But because those companies serve the predominantly residential market that is regulated, it was not possible to pass on the increased costs of power generation.

That commercial deficit put the company in a complex financial situation which drove it to the brink of collapse, which would have implied severe rationing of power in the SING region of northern Chile, thereby also threatening a large part of the country’s mining capacity. With the objective of ensuring the continuity of power supplies in the SING during 2008, GasAtacama and three of Chile’s major mining companies signed an agreement for the purpose of providing a backup service to the SING by GasAtacama.

As a result in the loss of confidence in Argentinean natural gas supplies and the additional increased costs of power production, the generating companies, mines and Chilean government took the opportunity to initiate a series of projects aimed at ensuring energy supplies in the long and short term. Among the projects developed were:

• The construction of new coal fired power plants to substitute the gas-fired plants.
• The construction of a reception and regasification terminal for liquid natural gas to enable gas imports from different countries, substituting diesel and increasing the availability of gas power stations.
• Promotion of the development of unconventional renewable energies (solar, wind and geothermal) and other alternative sources.

Current Situation and Future Development of GasAtacama (GA)

At present, GasAtacama is focusing its long-term development on the generation of electric power using natural gas to supply mining companies in northern Chile. Therefore, it is concentrating its efforts on consolidating its natural gas supplies at competitive prices as compared to other energy resources that form part of the energy supply foundation for the SING area.

To achieve this objective, GasAtacama is pursuing power generation using natural gas imported from the USA, which will be regasified at a floating terminal (FSRU) in the Bay of Mejillones. This is believed to be a competitive option in terms of future costs, due to the commercial exploitation of shale gas.