Domestic energy users are finding lucrative export markets provide a challenging competitor to their supply and costs.
Domestic energy users are finding lucrative export markets provide a challenging competitor to their supply and costs.
The security of Western Australia’s energy supplies has come to fore this year as the financial collapse of Rick Stowe’s Griffin Group and Wesfarmers’ decision to sell out of the local sector have destabilised the once steady bulwark of local power – Collie coal.
The $750 million purchase of Griffin’s coal mines by an Indian company that wants to export the coal to more lucrative destinations has rocked the energy market, which has already been forced to confront the prospect of higher natural gas prices as the hunger for liquefied natural gas (LNG) makes foreign buyers more compelling for offshore gas field developers.
The explosion at Varanus Island in June 2008, which shut off 30 per cent of WA’s gas supplies, highlighted how vulnerable the state’s southern businesses were to power outages and exposed their reliance on cheap gas prices set decades earlier when supplies outweighed demand.
That is changing rapidly. Just months after Varanus, 115km west of Dampier in the state’s north-west, was brought back on stream, the DomGas Alliance of major local gas users estimated the amount of natural gas required to meet demand in WA was set to double by 2014.
The report by Economics Consulting Services found the state could require more than 1100 terajoules a day of additional gas by 2014-15 to meet new and replacement demand.
In response to the pressures highlighted by the Varanus accident, the state government moved to improve gas security earlier this year by establishing a Gas Bulletin Board and developing a Gas Statement of Opportunities facilitated through the Independent Market Operator.
It also approved a long-term arrangement between state utility Verve Energy and the APA Group that would lead to further development of the Mondarra Gas Storage Facility, near Dongara.
That contract was set to provide Verve with up to 90TJ/day of gas a day to enable an additional 800 megawatts of gas-fired generation to cater to peak demand periods for up to 60 days.
Verve had flagged serious concerns over the security of its gas supplies when its existing contract with North West Shelf joint venture partners expires in 2015. This was eased when it and the other state utility, Synergy, secured a supply contract with Chevron’s $40 billion Gorgon development for 125TJ/day of gas for 20 years, albeit at a higher price.
Due to Varanus, the gas users had already seen their future. Typically used to paying around $2 per gigajoule or a little more, they suddenly saw themselves paying double-digit figures.
Even though the average remains quite low, at just over $3Gj, that is being pushed up quickly as long-term contracts end or businesses expand and new contracts are being negotiated at today’s prices – with suppliers seeking some parity with world oil and LNG prices.
Increasingly, new contracts, like Synergy and Verve’s with Chevron, are being struck at $8Gj or higher.
The concern was so great that minerals processing giant Alcoa has invested directly in risky attempts to extract difficult, tight gas from onshore local fields such as Warro, 200km north of Perth, which have thwarted previous production efforts.
Against this background, Collie coal was something of a safe haven.
Collie’s relatively small deposits of low-grade thermal coal meant the two producers, Griffin and Wesfarmers, were price takers. Griffin had experimented with export but it was hardly an outstanding success.
But the collapse of Griffin has led to new owners who have different ideas.
Lanco Infratec is a big player in the energy market in its Indian homeland and sees plenty of reasons to ship coal there. Like gas producers, it sees little incentive to sell cheap coal domestically when it is spending big money on export infrastructure and can command better prices for every tonne it ships overseas.
Lanco’s move to renege on long-term supply contracts which underpin a coal-to-urea plant proposed by Perdaman Chemicals has spilled over to the domestic energy supply sector because the Griffin mines also provide fuel for Bluewaters Power Station near Collie.
That was exacerbated by Wesfarmers’ decision to sell its Collie coal mines to Chinese-owned Yancoal Australia in October for about $300 million, further raising concerns that key energy assets were being bought up by foreigners with interests other than traditional domestic supply.
WA premier Colin Barnett said that if the deal went ahead, he expected Yancoal to honour the contract between Wesfarmers and Verve, but he expressed concern about the long-term security and supply.
“Indeed, while these are private companies, the coal does belong to the state and there are provisions in the state agreement that ensure the coal is reserved for state domestic use,” he said.
Perdaman signed a deal with Griffin Coal’s administrator’s before its sale to Lanco for Griffin to supply 2.95 million tonnes of coal a year to Perdaman for its $3 billion urea plant.
But Lanco’s termination of the agreement put a cloud over domestic coal supply from the Collie-based coal plant. The parties are now locked in a legal dispute in the WA Supreme Court.
Griffin planned to expand its output for domestic supply from 4 million tonnes per annum to 8mtpa and said domestic customers would play a major part in Griffin’s future.
“It has always been our stated intention that Griffin develops a mix of domestic and international customers,” the company told WA Business News.
“We have committed to the government that we will provide 8 million tonnes of coal for the domestic market, which is twice the current consumption. Therefore, we are actively looking for additional local customers.
“Among others, it may include Perdaman, assuming it is able to raise the money for the project, and the possibility of further expansion of coal power generation in the South West region.”
Bunbury Wellington Economic Alliance chief executive Matt Granger said the issues of energy security and diversity of supply had existed for some years, however, the new ownership structure of the coal mines and the stated export plans of Lanco since taking over Griffin had brought new focus on the issue.
“Industry and the local community are monitoring developments very closely, looking to engage with the new owners of the coal resources and working with the state government to ensure supply for domestic consumers is maintained,” Mr Granger said.
