Like every South American country struggling to balance the growing demands of energy and the political strings fueling it require, Chile has begun looking for new options that could spur investment in the country’s hydrocarbon industry.

Last week saw a flurry of activity on several fronts that highlighted Chile’s tenuous position and solution. On May 29, Argentina halted gas exports, forcing Chile to use backup fuel stored in a pipeline for domestic use.

A day prior, Chilean President Michelle Bachelet announced plans to construct a second liquefied natural gas facility that will ensure that by 2009, the country will no longer be reliant on Bolivian natural gas.

Currently, GasAtacama SA, the primary Chilean utility and gas pipeline company, receives about one-tenth of the natural gas needed to run its power plants from Argentina – gas that originates in Bolivia.

But as Argentina has withstood its own energy crunch, the portion available to it’s Pacific neighbor has dwindled. Chile’s sole realistic option has been to rely on more expensive diesel fuel – a move that GasAtacama executives estimate could lead to losses of $300 million this year.

The nut of the problem lies in tension between Chile and its Andean neighbor Bolivia – a situation whose roots go back more than a century but still burn hotly today.

In 1879, Chile, Bolivia and Peru became embroiled in the War of the Pacific that, when the dust settled five years later left Chile the victor over Bolivia and its ally Peru. The Chileans claimed substantial land and maritime rights - – the most notable being Bolivia’s loss of access to the sea.

Fast forward to 2003 to the announcement by Bolivia’s president Sánchez de Lozada to build a pipeline across this same territory now in the hands of the Chileans. The public outcry was immediate and overwhelming with mass protests in the streets of La Paz.

Eventually, those protests led to the Lozada’s government and the rise of Evo Morales, an Aymara Indian and leader of the opposition party Movement Towards Socialism. When the subsequent government of Carlos Mesa faltered, the populist Morales swept into power with a platform to re-assert control over the country’s hydrocarbon sector.

Bolivians have been so angry at their landlocked position ever since that they refuse to sell natural gas directly to Chile -- hence the reroute through Argentina.

That has spurred development of the country’s own meager hydrocarbon resources. So far Chile’s internal hydrocarbon development is focused on the Magallanes Basin of the far south of Chile, part of the same geological formation as Argentina’s Austral Basin which has produced over 500 million barrels of oil and more than 10 TCF of natural gas.

Currently, U.S.-based GeoPark Holdings Limited is already producing natural gas in the Magallanes Basin at the rate of approximately 252,000 cubic meters per day. Later this month, ten geographic blocks in the basin will be put out to tender for the exploration and possible production of oil and natural gas.

And other areas are being targeted for development as well. In May, Canada’s March Resources Corp. signed two contracts worth $20 million for hydrocarbons exploration in northern Chile.

Moreover, Chile is investigating the possibility of coal-fired power plants and hydroelectric development as a cheaper alternative to the gas-fired plants it is racing to find fuel to run.

If Chile is successful, it will mean more than just energy independence for the country, it will recast the country’s role in regional politics.

“This means Chile can return to its status quo -- ignoring the rest of South America except when it sees a compelling reason to engage on its own terms,” according to Strategic Forecasting Inc.