Chile Oil and Gas Report Q1 2013

BMI View: Chile's small resource base makes the country heavily dependent upon imports to satisfydemand and promote economic growth. Indeed, Chile in 2011 had to import 97% of total oil needs and66% of its natural gas requirement. These issues will persist in spite of some long-term upside potentialstemming from the country's shale gas prospects. In the meantime, imported liquefied natural gas (LNG)will play a greater role in energy security.

The key trends and developments in the Chilean oil & gas sector are:

In terms of domestic production, we forecast both oil and gas to rise moderately in the comingyears, with oil production increasing at an average of 1.8% through to 2021 and natural gasincreasing at an average rate of 1.05% through to 2015 and then to decline thereafter. At thesame time, Chilean consumption of oil and natural gas will steadily increase, adding additionalpressure on the government and state-owned Empresa Nacional del Petróleo (ENAP) toincrease imports. Indeed, due to the country's small resource base, Chile in 2011 had to import97% of total oil needs and 66% of its natural gas requirement.

Today, two LNG import terminals service different regions of the country. The Quinteroregasification terminal provides natural gas to the majority of the country's population, while theMejillones terminal is well positioned to service the lucrative Chilean copper mines in the north.Due to the energy intensity of the copper industry, there is significant interest in expanding thecapacity at Mejillones up from its current annual capacity of 2.0bn cubic metres (bcm).

Chilean power generators Colbun and AES Gener have selected Bermuda-registered HoeghLNG to install a new floating storage and regasification unit (FSRU) in Chile. The term of thecontract is 10 years, with an optional extension of five years. The FSRU, which will be situatedin Quintero Bay, will supply AES Gener's power plants in the country with natural gas. Thescheduled start-up of the project is late-2014. The transaction is subject to completion of finaldocumentation and board approval from both parties.

In terms of consumption, we forecast that oil use will rise from an estimated 332,400 barrels perday (b/d) in 2012 to 345,700b/d by 2016. It will continue to increase steadily at an average rateof 1.8% through to 2021. If Chile is to boost oil production, its best hope lies in explorationtaking place in the Magallanes region in the south of the country. We are also forecasting gasconsumption rising from an estimated 6.1bcm in 2012 to 9.8bcm by 2021.

The advent of technology capable of extracting oil and gas from shale formations has given Chile reasonfor optimism over the long term. Although still very preliminary, the EIA estimates that Chile's oil andgas producing Magallanes region may also contain 1,812.5bcm of technically recoverable shale gasresources. Should even half of these estimated resources become economically recoverable, the amount ofgas produced would be sufficient to meet a 7.9bcm/year consumption rate for approximately 115 years.Although we have not taken shale gas production into account in our forecasts, it remains a significantupside risk in the long term. Indeed, the Chilean copper mining industry has already expressed interest inutilising shale gas to power production.