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Showdown in Latin America

Fortnightly Magazine - April 1 1998

largest electricity generation and transmission utility, CMS Energy (the international unit of Consumers Power Co.), and two smaller stakeholders. The group plans to transport gas from Cornejo, Argentina to Mejillones, Chile via a 930-kilometer pipeline. The pipe would end at a 600-megawatt, combined-cycle generation plant that would serve the SING. Endesa and CMS each hold a 40 percent share in the GasAtacama venture, estimated at $700 million.

A similar plan, the NorAndino project, is being developed by Brussels-based Tractebel and Southern Energy. It will transport gas across the Andes from Argentina to a 740-MW generating plant to be built in the SING, for about $850 million. The generating unit will be built by 67 percent Southern Co.-owned Chilean utility Edelnor, and financed by its customers.

Finally, Chilgener, Chile's second-largest electric generation utility, plans a 632-MW, combined-cycle, natural gas-fired generation plant at Salta, Argentina, along with a 450-kilometer electric transmission line to carry the power to the SING, estimated at $440 million.

All three projects are expected to come on line next year. CMS has secured the necessary concessions, environmental approvals and permits for its Chile development, but is awaiting an Argentine approval for the pipeline section in that country, says Kelly Farr, a company spokesman in Dearborn. "We don't expect any trouble."

The two other competing projects still must secure a number of approvals as well, he adds.

So while Argentina and Chile have transparent development and investment regulations, government approvals could yet trip up one or another of the deals. While that's not likely in these countries (em unlike some Latin American countries (em approval delays conceivably could be used by a government to cull a weak project.

Three Suppliers, Too Much Demand?

Predictions differ on which (em and how many (em of the three trans-Andean power projects will be built.

"The deals themselves are so fundamentally different that it is really hard to compare them," reckons Simmons. His investment bank and Banco Bilbao Vizcaya are providing a 10-year, $314-million project-financed credit to the Chilgener project. "The product at the end of the day is a megawatt," he says, "and each of the projects is delivering a megawatt at close to the same price.

"But if I had to bet, I would wager that one gas pipeline will be built in addition to the [Chilgener] transmission line. The only party left in Norgas [NorAndino] is Tractebel; the other parties kind of walked away, so I don't think that deal's going to come to fruition."

Since Chilgener is converting Argentine gas to electricity within Argentina, then transporting electricity over the Andes, its capital costs are lower than that of the two gas pipeline projects, which will convert the gas in Chile. Chilgener is confident enough in its numbers to continue, despite the threat of overcapacity, which has hammered its stock value by as much as 30 percent.

"Obviously if the two gas pipelines are both done, the rate of return will be much lower," says Mercedes Poblete, a Chilgener investor relations official in Santiago. "But we think rationality will prevail at the