28/01/2009 - 22:00

Affordable gas essential for new projects

28/01/2009 - 22:00

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THE announcement this month that Citic Pacific will pay $US585 for 75 petajoules of natural gas is important, not just because it underwrites the Devil Creek project in the Pilbara and a potential new supply of domestic gas, but also because we get to see

Affordable gas essential for new projects

THE announcement this month that Citic Pacific will pay $US585 for 75 petajoules of natural gas is important, not just because it underwrites the Devil Creek project in the Pilbara and a potential new supply of domestic gas, but also because we get to see what gas prices really are these days.

After some wavering late last year, Apache Energy and Santos are about to resume work on the Devil Creek project, underpinned by Chinese-owned Citic Pacific.

Citic Pacific is developing Australia's biggest magnetite iron ore project - though not the first, that's in Tasmania - which will require significant energy due to the high level of processing required for that material.

According to my calculations the cost of the gas Citic Pacific is buying is around $US7.80 a gigajoule, which is pretty expensive as far as domestic gas goes.

And it's understood that price is linked to the current international oil price, which means it would go up if oil rises again.

For domestic gas users, this is the real price of gas. Given this price was obtained when oil prices were at a third of their 2008 peak, it is a huge increase from what people have been used to paying in Western Australia.

During the height of the Varanus Island gas crisis, business learned what really high prices were all about. Many have established their businesses on prices at $2.50-$3/Gj and were rudely awakened to find themselves paying the equivalent of diesel prices for emergency gas. Prices as high as $30/Gj have been quoted to me, and certainly many paid above $20/Gj.

Nevertheless, prior to the gas crisis, the word was that new domgas was costing around $8/gj, a price rise of three times in just a short period.

In the middle of the year, $US7.80/Gj would have looked reasonable against the most up-to-date prices. But with the slump in the Australian dollar to the US65-US70 cents range, that price looks like a new benchmark at more than $11/Gj.

This is a pretty scary time for large local energy users because new projects require new energy contracts and that is proving to be a more expensive component in the cost equation.

No wonder Alcoa went into a JV with Lateral Petroleum to develop the Warro gas field north of Perth. This is not an easy project - if it had been it would have been developed years ago - but the pressure of higher prices may help the proponents find a way to extract the gas commercially.

That is innovative but it doesn't really solve the underlying issue: that WA sits on abundant energy yet has to face the prospect of paying global prices for it.

There is much irony in the fact that the WA taxpayer underwrote the development of the local LNG industry, only to find that the success of that industry and the LNG exports it produces have made supplying the domestic market less attractive.

Of course it's not only competition with successful exports. The gas is getting harder and harder to access. It's deeper offshore, in fields that are not necessarily of the same specifications as the main domgas, and everything is generally more expensive to develop.

Meanwhile, minerals processors are upset that they now have to compete for energy - often against foreign powers for which price is less of an issue than security - after decades of relatively cheap power.

Former premier Alan Carpenter tried to reserve gas from new projects for domestic use but that was a furphy. There was always the caveat of ensuring international prices for producers, thus potentially ensuring supply but providing no comparative advantage in terms of cost.

Furthermore, the reservation policy merely reflected logical thinking that already existed in the industry.

Experts reckon there are good reasons to include domgas in new fields, piggybacking off LNG developments.

Adding domgas creates a quicker payback for a developer by increasing production from the start (getting better return on the upfront capital cost of an LNG processing plant), ultimately reducing the life of the field by bringing sales forward.

But the pricing of that is still very much linked to international LNG prices and, increasingly, oil prices.

The challenge for the government of Colin Barnett is to find a way to increase the number of developments, and therefore the possibility of domgas components becoming available to the market competitively.

EMISSION CONTROL

I RECEIVED an interesting note from the Kwinana Industry Council earlier this month making a good point about the federal government's climate change policy.

The KIC's beef was that the government wants emissions reductions to count from levels of the year 2000. The KIC says its members have been cutting emissions since well before that date and will therefore be penalised if they have to cut more than if the starting point was earlier.

They have a strong point here. Because of their proximity to suburbia, which continues to encroach on their industrial buffers, they acted to cut emissions long before many polluters further away from civilisation did.

I don't know why 2000 was chosen. Perhaps it's a nice round number.

But there is a lesson in this for all of us. If Kevin Rudd's government is going to push ahead with policy that creates future emissions targets for the nation, it would best to ensure other countries acknowledge our good work.

If setting unilateral emissions reduction targets based on some artificial line in the sand can be done at national level with no regard to pre-target regional efforts, the same can happen internationally.

The danger is that, having pressed ahead and led the way, some international target is conjured up in the future which establishes a later benchmark date, potentially ignoring cuts Australia had already achieved.

The federal government ought to ensure that leaders in emission control are not penalised for being ahead of the game, both on the domestic front and internationally.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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