November 5, 2021

Chile turns to gasoil imports as the drought hits hydroelectric power

The LNG supply crunch, paired with historically weak hydropower output has incentivized Chile to substitute towards more gasoil/diesel sourced from abroad. In October, arrivals finished at 969 kt, a multi-year high. While the United States was the key supplier (617 kt), Japan (251 kt) also supplied an unusually large amount of volume. It is likely that imports will remain elevated through the end of the year.

Up to 27% of Chile’s electricity is generated by hydroelectric power systems, predominantly situated in the Maule and Bio Bio regions close to the capital, Santiago, and the surrounding metropolitan areas, where almost 50% of Chileans live. This year, however, hydroelectric power generation has been severely hampered by an unusually dry “wet season." Unseasonably low rainfall from June to August left reservoir levels at record lows, forcing power generation companies to utilize other sources of energy. Approximately 51% of Chile’s electricity is generated from a combination of coal (20.3%), natural gas (18.9%), and petroleum products (11.3%), and it is to petroleum products that the country’s gencos have turned in the last few months. Gasoil and diesel imports rose by 62% from 599 kt in September to 969 kt in October as the country braced for increased demand heading into the warmer summer months without the usually reliable crutch of supply from the hydroelectric sector.

Meanwhile, imports of coal have been stable at around 1.4 million tonnes over July, September, and October, although they slipped to just 813 kt in August. Contrastingly, imports of LNG have fallen from recent highs of 388 kt and 387 kt in June and August respectively to 291 kt in September and 220 kt in October. This is in no way surprising as Chile used its system flexibility to pivot away from LNG just as European and Asian competition for tonnage drove international market prices to new highs. Imports had held at around 350 kt per month across March, April, and May before the winter import peak through the third quarter.

Of the 969 kt of middle distillate fuels imported in October, 617 kt or 64% came from the United States. This compares with an average of 452 kt per month or 83% since January 2019. The major change in October came in supply from Asia. Since January 2019, 15% of the total or 86 kt of gasoil and diesel per month has been imported from Asia, but in October, this jumped to 345 kt or 36% of all imports. This is the largest quantity ever imported from Asia and reflects both the spike in demand in Chile but also the drop in supply from the US in the wake of Hurricane Ida. Outages in the US Gulf Coast had left refining throughput as low as 82% in the first half of the month. It had recovered to 90% by the start of October. Japan supplied 251 kt, while China and South Korea supplied just below 50 kt each. The October imports from Japan followed 116 kt in September, which were the first sourced from the country since July 2020.

The majority of Japanese gasoil and diesel exports usually stay within Asia, with Australia taking 37% of all cargoes this year, although the Japanese refining sector was quick to respond to the demand destruction brought about by the Covid-19 pandemic and reduced output from May 2020 onwards. That Chile has stepped in to take such a large share of Japanese exports in recent months shows the severe impact of the drought on Chile’s electricity generation make-up and may point to a continued elevated trans-Pacific arbitrage flow heading through 4Q21 and into 1Q22, especially given the likely scarcity of alternative energy in the form of cheaper LNG.

Monthly Chilean Seaborne Diesel/Gasoil Imports by Origin (kt) - Source: Kpler

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