Bachelet, ahead in Chile polls, eyes LNG to keep lights on

By Alexandra Ulmer and Fabian Cambero SANTIAGO (Reuters) - Michelle Bachelet, expected to easily win Chile's presidential election this year, will likely make liquefied natural gas the backbone of her energy policy over the next four years to ease a mounting power crunch in the crucial mining industry. A nebulous regulatory framework has left several major power generation projects in limbo and there is strong public opposition to large coal-fired plants and hydropower projects. The crunch has left major copper mines short of power and is putting at risk up to $112 billion in mining investment over the next eight years. The center-leftist Bachelet - who was president from 2006 to 2010 and has a big lead in opinion polls as she seeks a return to government - has spoken up in favor of gas as a viable solution to Chile's energy needs. Although she has not made a final decision, those in her camp think she will almost certainly turn to LNG imports, hoping to tap into the global shale boom by expanding terminals and ports. That could help close the gap between Chile's energy needs and supply, moderating steep energy prices and improving a system that has been hit by blackouts and shaky transmission, analysts say. "With LNG, we'd have a more stable system, with less cost fluctuations," said Pedro Fuenzalida, senior analyst with Larrain Vial in Santiago. "Chile could increase its LNG consumption from 10 million cubic meters per day to 17 million by 2017." A surge in shale gas production is transforming the global energy market, helping make the United States a leading natural gas-producing nation, and potentially a major exporter. Chile already imports the gas that is supercooled into a liquid for shipping, mostly from Equatorial Guinea and Trinidad and Tobago, to two regasification terminals. Due to an ongoing sea access dispute with Bolivia and a 2004 gas crisis with Argentina, it does not import gas from its neighbors, however. Bringing it in will be expensive - much more expensive than coal - making over-reliance on it a risky strategy. The impending energy crisis has grown under the watch of incumbent conservative President Sebastian Pinera, who has upset business leaders by failing to bring clarity to the environmental permit process and outline a clear vision of where Chile goes from here. But the next government - whoever it is - will have to grasp the nettle, with many analysts sounding the alarm about a strained central grid as early as 2015. An energy overhaul could prove a strong bargaining chip for Bachelet, who is set to easily win the election either in the first round in November or a run-off vote in December, but will likely have to deal with a slim majority in Congress. The right-wing Alianza coalition is keen to see a solution to the energy impasse, so Bachelet could potentially offer a deal in return for support on reforms she wants to enact such as tax and education. Bachelet's main rival, Alianza candidate Evelyn Matthei, has indicated she wants to see more renewables but has as yet said little else on her own energy policy. However, her energy advisor Sebastian Bernstein, the former head of the government's energy board, has previously spoken of his support of gas as a possible, albeit more expensive, alternative to coal. Bernstein and Bachelet's senior advisor and ex-minister Eduardo Bitran are due to hold a televised debate on energy policy on Thursday evening. WILL IT BE ENOUGH? An estimated 8,000 megawatts need to be added to Chile's 17,000 MW of power production capacity by the end of the decade, the government says. Currently, Chile's central grid is powered by a mix led by coal-fired thermoelectrics, gas and diesel and followed by hydropower, while in the north - where most mining operations are located - coal dominates, with gas a distant second. Regulatory loopholes have already caused setbacks to more than 8,000 MW worth of planned generation, according to an estimate last year by Libertad y Desarrollo, a conservative think-tank. Communities are often infuriated when mega power or mining complexes are planned nearby, especially as many in economically stratified Chile feel the benefits of a copper bonanza have bypassed them while harming the environment. But LNG is no silver bullet. It remains to be seen how much sway the government has in fomenting imports, and much also hinges on how prices and export volumes of the super-cooled fossil fuel evolve. European LNG import prices are around $10 per million British thermal units (mmBtu), while Asian and Latin American customers pay more than $15 per mmBtu. Meanwhile, the huge cost of building intricately designed plants that cool natural gas, the volatility of U.S. gas prices and the uncertainty about global demand remain key hurdles for potential U.S. exporters. Should U.S. natural gas production open for export, it would be a major economic boon for the world's biggest economy - and some Chilean companies and local energy traders are gearing up to tap into the potential boom. "We see (LNG) as a big opportunity for (local power company) Colbun," Fuenzalida from Larrain Vial said. PROPOSALS Bachelet has yet to define her energy program but a selection of proposals is currently being drawn up by advisers. She has already said she deems the 2,750-MW HidroAysen hydropower plant in Chile's far south "not viable", though some in the market say a redesign of the project could boost chances it will see the light. Smaller, more socially-acceptable coal-fired thermoelectric plants or expansions of existing ones could come online during her potential administration, which would begin in March. She could look to curb red tape in the environmental approval process or further bolster the country's new environmental regulator to avoid clogging up courts with appeals by local communities. The idea of nuclear energy has been floated but the shadow of Japan's Fukushima crisis is likely to halt any short-term chances of it becoming a player in earthquake-prone Chile. Solar power generation would be a logical step in the Atacama - the world's driest desert, where many of Chile's mines are located. Bachelet and Matthei have both said they want to boost solar power production. But panels alone cannot provide enough juice for the country's mega mines, where demand is seen roughly doubling by 2020 as lower ore grades and deeper deposits require more power. "Independently of who the next government is, the problem is the same," said Sergio Zapata, senior energy analyst with Corpgroup in Chile. "These are problems far more profound than any government has been able to tackle." (Reporting by Alexandra Ulmer and Fabian Cambero; Writing by Alexandra Ulmer and Rosalba O'Brien; Editing by Marguerita Choy)