Chile-Bolivia Land Dispute Has Long-Term Implications For Mining and Gas
May 22, 2015 - Smarter Analyst

The territorial dispute between Chile and Bolivia at the Hague could have long term repercussions in the the mining and gas industries.

For over 136 years landlocked Bolivia has been – without success – demanding that Chile hand over a land corridor to the Pacific ocean, after the latter invaded and seized 400 km of coastline between 1879 and 1883.

But over the last years the dispute has reached its diplomatic peak with the presentation of Bolivia's case to the International Court of Justice of the United Nations at the Hague, Netherlands. Chile, on the other hand has presented its objections and requested the ICJ to consider itself as non-competent jurisdiction for this affair.

Convinced of its legitimacy, Bolivia challenges its neighbor to accept – in advance – the authority of the ICJ, regardless of its future verdict.

Chile's main defense argument is that in 1904 there was a bilateral act signed, which stated that the post-war borders would remain unchanged. Nevertheless, Chile has repeatedly compromised to grant an exit to the sea in contracts signed in 1920, 1926, 1950, 1961 and 1975, which complicates its argument's soundness before the ICJ.

On May 13th, both litigating parties submitted their written pleadings to the Japanese judge Hisashi Owada. Eight out of 15 votes are required for the ICJ tribunal to declare itself competent for the case. The voting is expected to be delivered by early September.

If the ICJ recognizes itself as a competent tribunal for the resolution of this dispute, and pronounces its verdict on this subject, it could either declare that the Bolivian claim is no longer valid after the 1904 agreement, or compel Chile to negotiate in good faith with Bolivia a strip of land that would grant the country access to the Pacific Ocean.

What an ICJ ruling could entail
Should the voting favor the Bolivian claim, the geopolitical consequences could be a game-changer for many businesses. But in order to understand the dimension of this dispute, we must understand the roots of the Pacific War of 1879.

The Pacific War erupted in 1879, when Bolivia intended to levy taxes on British companies operating in the Atacama region, which were exploiting mineral reserves of saltpeter and bat manure, two extremely valuable agricultural fertilizers.

Those British enterprises had their regional offices in Santiago de Chile, and losing their businesses would have entailed a heavy economic loss for Chile.

Peru saw its interests under threat and joined its belligerence efforts against Chile. However, by 1883, Chile not only defeated the Bolivian forces but also gained some of its territories, isolating it from the Pacific Ocean. Moreover, the Chilean army advanced further, defeating the Peruvian military and annexing its southern part from Arica to Iquique.

After five years of war, Chile expanded its territory by 400 km of shoreline, taking 120 thousand squared kilometers out of Bolivia's Antofagasta region, which concentrates some of the richest copper deposits on earth and currently represents nearly 50% of Chile's revenue.

David Choquehuaca, Bolivia's Minister of Foreign Affairs, claimed that Chile has received over 900 billion USD in copper exports alone since 1883, most of which lies under the Atacama Desert.

Because of its loss of access to the sea, Bolivian exports are over 55% more expensive than Chilean ones and 60% more than Peruvian ones, with a 31% premium on logistical cost compared to the regional average.

Copper mines in Atacama are some of the world's oldest. They are suffering from the depletion of mineral concentration, thus having to dig deeper, mobilizing more volumes of rock and using more water. This ultimately requires more and more energy.

Nearly 90% of Chile's northern electricity grid (SING or Sistema Interconectado Norte Grande) is consumed by mines. But, because of the long distances, Chile is unable to efficiently transport electricity from its vast hydraulic resources of the powerful rivers of its southern region. It thus has to rely on smaller thermoelectric generators installed in the vicinity of mines.

This adds a second issue, since Chile is not particularly wealthy in terms of hydrocarbons. This forces the country to import fuels by sea, particularly LNG (Liquid Natural Gas), which now accounts for 30% of the total power output of the northern grid.

Where to cut?
Because LNG terminals and pipelines are spread all over the Northern Chilean shoreline, an eventual rule by the ICJ compelling Chile to negotiate territory concessions to Bolivia will affect at least one LNG terminal and pipeline.

An ICJ decision could interfere with either the terminals or the pipelines. If Chile is forced to devolve territory to Bolivia, any continuum of sovereign land from Bolivia to the Pacific Sea will necessarily include pipelines or LNG Ports. If the ICJ dictates that Chile should find a negotiated solution with Bolivia and restore part of the lost territories in Antofagasta, that would effectively cut Chile in half.

But, Bolivia's demands do not define a specific area through which the land corridor should be granted, leaving the ICJ to define it. If the court defines that a corridor should be between the cities of Arica and Iquique, Chile could lose its border with Peru and forever modify its foreign, military, and commercial relations with one of its top trade partners.

A long process
In case the ICJ leans in favor of Bolivia, it is likely that Chile will continue to object its jurisdiction, It could take the court four or five years to dictate a decision, taking in consideration the 2008-2014 dispute between Chile and Peru in which the ICJ favored the latter with the restitution of 50.000 square kilometers of sea.

Nevertheless, the sole possibility of this happening again will likely shake the markets and elevate the investment risks in Chile. For this reason, Chile's Foreign Minister Hector Muñoz has empathically insisted that the possibility of renouncing to territory sovereignty is 'forever closed'.

As a caveat, it is worth reminding that Chile has some of the most advanced and best-equipped armed forces of the region. It is the only country capable of sustaining a logistical trail and enduring a standoff in the Atacama region, one of the most unforgiving geographical areas on earth.

Moreover, throughout the last century, the Chilean military enjoyed the highest budget on the continent, thanks to the so called 'copper law,' by which a fixed fraction of copper mining taxation was directly allocated as extra-budgetary military expenditure.

Despite Chile's comparative military might, it is unlikely that the dispute will end in direct confrontation, but is expectable to witness more military activity parallel to the escalation of political rhetoric. If not as a material deterrent, it would work as a means to protract and delay the resolution of the territorial dispute.

It is most likely that this ongoing dispute will not be resolved in the short run – before 2020 – thus not having an immediate impact over existing investments or assets. It should be taken into consideration, though, by those who are considering long-term investments in the Andean region.