Peru and Chile mend their maritime border

by Jed Bailey | July 30, 2014

 

The International Court of Justice (ICJ) decision delimiting the Chilean-Peruvian maritime boundary closed one chapter of a trilateral territorial dispute that has festered among Chile, Peru and Bolivia for more than a century. But while Chile and Peru mend fences, similar progress between Chile and Bolivia has not materialized. Less than a decade ago, geopolitical tensions surrounding the dispute played a part in blocking Bolivia from participating in a clear market solution to Chile’s natural gas crisis. Today, that dynamic has deteriorated for Bolivia: The region’s shifting energy market realities have removed what leverage Bolivia had in its negotiations with Chile, making a bilateral territorial settlement less likely.

 

On January 27, 2014, the International Court of Justice in The Hague handed down its decision delineating the maritime boundary between Chile and Peru. The boundary dispute is a legacy of the War of the Pacific, fought among Chile, Peru and Bolivia from 1879 to 1893 over control of the lucrative mineral deposits in the Atacama Desert. The war ended in the Treaty of Ancon, which gave Chile control of Peru’s Arica province as well as Bolivia’s Litoral department, effectively removing Bolivia’s only coastline.

 

The technical work required to implement the ICJ’s decision was completed jointly by the two countries and was finalized on March 25, less than two months after the decision. This completed the latest of many steps that have deepened cooperation between Chile and Peru in the past two decades. Most notably, in 2011 the two countries joined Colombia and Mexico to form the Pacific Alliance. This regional association, which now includes 26 observer nations, aims to promote greater economic integration among its members, including the free movement of goods, services, capital and people.

 

Relations between Chile and Bolivia have been much slower to normalize. The two countries have not had direct diplomatic relations since the 1960s. The recent maritime border decision could help Bolivia’s territorial claims—a 1975 proposal to cede a narrow corridor of land along Chile’s Peruvian border to Bolivia was scuttled by Peru as a violation of the Treaty of Ancon. It is more likely, however, that Bolivia’s best opportunity to regain access to the sea came and passed in the mid-2000s, driven by the geopolitics of the region’s natural gas sector.

 

In 2004, an energy crisis in Argentina led Buenos Aires to ration natural gas exports to Chile. In 2007, exports were cut so deeply that Chile’s power generators had to switch to far more expensive imported diesel. Bolivia had nearly 30 trillion cubic feet of proven natural gas reserves at the time and was exporting the majority of its production to Brazil, with a lesser volume going to Argentina. Chile needed the gas desperately, and Bolivia would have benefited from expanding exports and diversifying its customer base. Nevertheless, Bolivia’s historical conflict with Chile and domestic sensitivities over gas development and exports precluded an agreement. Instead, Chile turned to global markets and built two terminals to import seaborne liquefied natural gas (LNG).

 

Bilateral negotiations over the territorial dispute continued, but with little progress. In April 2013, Bolivia filed its own case with the ICJ seeking to compel Chile to negotiate in good faith an agreement granting Bolivia fully sovereign access to the Pacific Ocean. Any further negotiations will now likely await the ICJ decision, which will take time. In accordance with the established timetable, Bolivia presented its case prior to the April 17, 2014. Chile had until Feb. 18, 2015, to respond with its own case, but instead, on July 15, 2014, Chile filed a preliminary objection to the jurisdiction of ICJ to decide the case. Bolivia now has until November 14, 2014 to respond to Chile’s objection. In the meantime, deliberations on the merits of the case itself are suspended until a decision is made on Chile’s objection. A final decision could take years—the Chile-Peru maritime boundary case took almost exactly six years from the first filing to the final decision.

 

Bolivia’s previous leverage as a potential supplier of natural gas continues to erode. Bolivia has large reserves of natural gas but consumes very little of it given the country’s small population and low per capita power consumption. Being landlocked, Bolivia also faces challenges in developing export industries that would benefit from cheap natural gas, such as fertilizer or petrochemicals. As a result, the vast majority of Bolivia’s gas production continues to be exported to Brazil and Argentina. In 2012, Bolivia exported 1 billion cubic feet (bcf) per day to Brazil, meeting roughly one-third of Brazil’s total natural gas consumption. Argentina is less dependent on Bolivia’s exports, which amounted to roughly 0.4 bcf per day in 2012, representing slightly less than 10 percent of Argentina’s 4.6 bcf per day consumption.

 

However, both Brazil and Argentina, like Chile, now have two LNG import facilities each. Both are also anticipating strong growth in their own domestic natural gas production: Brazil from offshore fields related to the pre-salt oil discoveries, and Argentina from its vast shale gas resources. This additional natural gas supply will take time to develop, but once it begins to flow it will further limit Bolivia’s leverage as a regional supplier, and may ultimately limit its natural gas exports.

 

Peru also has substantial natural gas reserves—it is the only country in South America that is exporting gas as LNG—and could send gas to Chile via pipeline. On June 30, 2014, Peru tendered a 34-year concession to build and operate a pipeline that would bring natural gas to southern Peru to fuel power generation and petrochemical manufacturing. The winning consortium, comprising Brazil’s Odebrecht and Spain’s Enagas, signed the formal contract on July 23, 2014, despite ongoing challenges from other interested groups. The project would potentially reach as far south as Tacna near the Chilean border. From there, a short extension could reach Chile’s northernmost power generation facilities.

 

In short, the geopolitical and market influences shaping the region’s energy system have been transposed over the course of a few short years. Not so long ago, geopolitical tensions blocked a clear market need for Bolivian natural gas to meet Chilean demand. Looking forward, regional natural gas markets are evolving in ways that will likely further complicate Bolivia’s geopolitical situation.

 

Based on this article that originally appeared in World Politics Review on February 2, 2014. 

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