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Dueling Pipelines In The Andes (Int'l Edition)


International -- Intl' Business: CHILE

DUELING PIPELINES IN THE ANDES (int'l edition)

Jose Yuraszeck is chairman of Empresa Nacional de Electricidad (Endesa), Chile's biggest electric utility, but he also had ties to a gas pipeline consortium that included Houston's Tenneco Inc. Because a rival consortium was bidding for a critical contract to sell gas to Endesa, Yuraszeck excused himself from his company's board meeting on July 12 in Santiago. To his surprise, the board voted to buy gas from the competing group, led by Calgary-based Nova Corp., which plans to build a $285 million pipeline over the Andes from Argentina. "It was a rout," says Yuraszeck.

But Tenneco and its partner, British Gas PLC, are not giving up. Despite Nova's coup in signing up Endesa, which produces 60% of Chile's electricity, they are pushing ahead with a longer, $700 million pipeline from Argentina. They will compete head-on against Nova for customers around Santiago and also will supply a nascent industrial corridor in central Chile.

SOUTHERN CONE. It's a high-stakes battle. If both pipelines are built, there almost certainly will be a years-long energy glut, lower prices for gas and electricity, and diminished profit margins for gas suppliers and power generators alike. "In my mind, there is no room for both projects," says Rafael Quijano, a Latin America analyst at Washington-based consultant Petroleum Finance Co.

But the incentives on both sides to push ahead are powerful. The pipelines and new power plants they will supply are admission tickets to Chile's fast-growing energy market, which has been supplied mainly by hydroelectric and coal-fired plants.

Looking ahead, the rivals foresee a day when the entire Southern Cone--Chile, Argentina, Brazil, and neighboring countries--will be supplied with energy from a vast gas basin stretching along the Andes' eastern flank from Argentina to Peru. Nova already has a stake in an Argentine gas pipeline, TGN, while Tenneco and British Gas are among the partners in a proposed $2 billion pipeline from Bolivia to Brazil.

That sense of opportunity is also attracting U.S. electric utilities. In late July, the Tenneco-British Gas partnership, called TransGas, announced that it will be supplying gas to plants to be built in central Chile by New Orleans' Entergy, Atlanta's Southern, and Boston-based International Generating (Intergen), owned by Bechtel Group and Pacific Gas & Electric. Southern and Intergen already have Chilean investments. "If [U.S. power companies] don't get into Chile's central grid this year, they probably won't at any other time," says Ewell H. Muse III, senior vice-president of Tenneco's gas subsidiary and president of TransGas.

Some analysts speculate that the two pipeline projects will have to merge, but both sides dismiss the prospect. "We're not interested in their project," says Muse. Adds Nick J. Kangles, a senior vice-president at Nova: "There has been talk [of merging] in the past, but it has been unproductive."

TIGHT SCHEDULE. Chile's government has decided against intervening in the fight. Officials had worried that competition could be dampened by the membership of electric utility holding company Enersis, a major shareholder in Endesa, in the original TransGas group. But Enersis dropped out after Endesa decided to buy from Nova. Tenneco and British Gas then hastened to reassure the government that they had no plans to get into the generating business.

Nova promises to start deliveries by May, 1997, taking gas from its Argentine pipeline affiliate. To meet the target, Nova's Argentine and Brazilian contractors must start work by Nov. 1 in order to have two Southern Hemisphere summers for pipe-laying over a 3,500-meter Andean pass. "It's a race," says Kangles. "Our construction schedule is ahead" of the TransGas plan. Retorts John Enloe, a senior vice-president of British Gas: "It's not who starts first, it's who can deliver gas in 1997." TransGas is planning to start work next May and hopes to begin deliveries in September, 1997.

Even with two competing pipelines, Muse says, TransGas will earn a profit above 11%--the rate of return that U.S. regulators would allow, he calculates, for a comparable project in the U.S. But if the slugfest keeps profits close to that minimum, the rivals will be poorly compensated for their risk-taking. In that event, the only sure winners will be Chilean consumers of cheaper energy.

WHO WILL WIN THE PRIZE?

FRONT RUNNER

Calgary-based Nova hopes to preempt the market with its plan to start construction in November on a $285 million, 470-kilometer pipeline to supply gas to Santiago. It will tap into an existing pipeline of Argentine consortium TGN.

PARTNER: Chilgener

CHALLENGER

Houston-based Tenneco, refusing to cede the market, plans to start work in May, 1996, on a $700 million, 800-kilometer pipeline to carry gas from Argentine fields to Santiago and central Chile.

PARTNERS: British Gas, ENAP, Argentine gas

producersBy Susan Jackson in Santiago


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