11/06/2008 - 22:00

Business braces for the worst as gas crisis bites

11/06/2008 - 22:00

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As Western Australians head into their second week of dealing with reduced gas supplies, the spectre of the costly Longford gas disaster in Victoria looms for local industry.

Business braces for the worst as gas crisis bites
COST: The explosion at Apache Energy’s Varanus Island plant has caused major disruption to gas supplies. Photo: Courtesy Apache

As Western Australians head into their second week of dealing with reduced gas supplies, the spectre of the costly Longford gas disaster in Victoria looms for local industry.

The Varanus Island gas explosion has already caused major disruption to a wide range of industries, but the Longford incident suggests the problem could get worse.

In particular, many companies are using inventories and stockpiles to offset the impact of forced production cuts, but that may not be enough to see them through the gas supply crisis, which is likely to last more than two months.

During the Longford crisis 10 years ago, Victoria's consumers and manufacturers lost their gas supplies for a staggering 19 days, with conservative estimates putting the overall cost to the state at $1.3 billion.

The Varanus Island explosion has resulted in WA losing one-third of its gas supplies, though in WA's case gas plays a bigger part in energy generation.

An industry survey held this week found that 14 per cent of respondents will have to shut down operations, while 64 per cent expect a decline in production.

The Chamber of Commerce and Industry WA survey revealed that many local companies have been forced to scale back operations and stand down staff.

A CCI spokesman said the survey sought responses from businesses of all size, but it was mainly medium to large business among the 83 respondents, which was a reasonable size sample given the quick turnaround required.

Affected businesses included chemical manufacturers for the mining industry and road making input suppliers, he said.

Following the explosion last week, the state government formed an energy working group to assess contingency plans of how best to deal with the crisis.

At a meeting on Sunday, the group agreed to fast-track the re-start of the 120 megawatt coal-fired power station at Kwinana, shift demand to low peak times and make diesel available.

Also part of the contingency plan was to source extra gas from the Woodside-operated North West Shelf venture, a process that is already underway.

Woodside is directing all available gas to assist Apache in meeting its obligations, supplying up to 100 terajoules a day above its existing customer commitments.

Electricity generator Alinta has managed to source some additional gas supplies, which it says will assist in stabilising the situation.

With speculation that mining companies stand to lose hundreds of millions of dollars in production as a result of the gas plant shutdown, not to mention the millions in royalties and taxes and job losses, the true cost of the incident may be some time away.

The mining industry had been one of the hardest hit sectors, with some of the state's biggest players forced to scale back production or bring forward shut-downs for maintenance.

Alcoa of Australia managing director Alan Cransberg said the miner and alumina producer was keeping operations at full throttle despite the gas issues, using diesel to power its mining and refining facilities.

While not wanting talk in detail about the current issue, Mr Cransberg reiterated Alcoa's long-held concerns about overall energy security.

"If you think from an industry perspective, Australia needs a long-term energy strategy that would determine issues such as how much gas should be preserved for domestic use, cleaning up coal and the possibility of nuclear power," he said.

"We need a coherent policy, not just for this generation, but for future generations."

Mr Cransberg praised Premier Alan Carpenter's controversial decision to reserve gas from future developments for domestic use.

Nickel miner Minara Resources Ltd announced that production at its Murrin Murrin operation would continue at a reduced rate, after securing temporary gas supplies.

The company has reduced its production forecast guidance for the year to 31,000-35,000 tonnes, down from an earlier forecast of 34,000 to 38,000t.

Minara needs gas to process nickel. This is also the case for other nickel operations, including Norilsk's Cawse nickel operation.

Gold miner Newcrest Mining Ltd has also managed to secure an alternative source of gas for the short time at elevated prices, allowing it to operate one of the two processing trains at its Telfer operation.

The company estimates the gas supply interruption will reduce its production by up to 30,000 ounces of gold plus associated copper.

Iluka Resources Ltd general manager investor relations and corporate affairs Robert Porter said the company had taken down most of its operations.

"There are some small mining activities occurring in the Mid West and we are running one of the kilns at a lower production rate in the South West," he said.

Discussions between Iluka and Alinta over gas allocation are continuing, with the mineral sands miner allocated a small amount of gas on Tuesday to feed one of its kilns.

Mr Porter said the company was looking at opportunities to source gas from other supplies.

Iluka has also implemented steps to reduce operating costs and has suspended contract services from its two main mining and transportation contractors in WA, including Picton-based Piacentini & Son.

The suspension illustrates the flow-on effects of gas shortages.

CSBP Ltd, which supplies the majority of ammonia, ammonium nitrate and sodium cyanide to the WA mining industry and most of the fertilisers used by the agricultural sector, has suspended ammonia and sodium cyanide production at Kwinana.

CSBP managing director Ian Hansen said that, based on existing stock and current consumption levels, it should have sufficient stocks to supply its customers for several weeks.

"We are working to secure an ammonia shipment to supplement our existing stocks and should have a clearer picture of longer-term supply to customers in the next few days," he said.

The building and construction industry has also been significantly affected.

Master Builders Association of WA housing director Gavan Forster said brick suppliers had some stocks available, and if need be, would look to import from the eastern states.

"The kilns are running albeit by alternative power which is more costly so it could be up to several hundred dollars per house as a result of converting to electricity," he said.

The plaster and fibrous boards sector, which is heavily reliant on gas, also has the potential for serious shortages.

Some of the timber mills are up and running and looking for alternatives energy sources, most likely diesel, and current have about a month's worth of stocks.

"The industry being a resilient one, when these problems arise they can be very flexible and this is what is happening now but they're looking for alternative solutions to keep production going and hopefully there won't be too much interruption," Mr Forster said.

An Austral Bricks spokesperson said the company has secured on-peak power at three times the cost of its regular power supply, and would assess over the coming days whether to pass those costs onto its customers.

The tourism and hospitality industries are heading for major disruptions after two major providers of laundry services, Prime Laundry and Spotless, suspended operations.

The shut-down will affect between 45 and 50 hotel businesses in the Perth metro area, representing about 85 per cent of hotel accommodation stock.

It couldn't have come at a worse time for the tourism industry, with Perth due to host a major tourism trade event on the weekend.

Australian Hotels Association chief executive Bradley Woods said hotels would start shutting rooms down on Wednesday if gas supply did not resume.

Mr Woods said some hotels were looking at the option of flying or shipping linen to and from the east cost.

The explosion has also interrupted gas supplies to Energy Development's Karratha LNG plant, which has been shut down pending gas supply resumption.

LNG inventory stored at the plant, which was only recently commissioned, will be used to continue to supply electricity to Broome, Derby, Fitzroy Crossing and Halls Creek from its four LNG power stations.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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