Rio Tinto to keep Gove alumina refinery running
Rio Tinto confirmed on Wednesday that it would keep Gove, operated by its Pacific Aluminium subsidiary, up and running after the NT government said gas would be supplied from Italian major Eni's offshore fields in the Bonaparte Basin for the next 10 years, via a new 600-kilometre pipeline to Nhulunbuy. The gas will help the loss-making refinery move from expensive fuel oil to gas - an option apparently rejected by former operator Alcan in 2003.
It is understood Pacific Aluminium will buy gas directly from Eni on commercial terms without a direct government subsidy, at a price to be negotiated.
The deal is only possible because in 2005 NT signed a 25-year contract with Eni, at about half the market price, in the vicinity of $6 a gigajoule, and is prepared to make some of that gas available to Gove, by bringing forward production plans and shortening the territory's period of gas price certainty. There will be no immediate increase in gas prices for territory consumers, however.
NT Chief Minister Terry Mills put the cost of the deal at $1.2 billion. Eni and the APA Group will spend $500 million on a new offshore well and new compression equipment.
Another $500 million will be needed to build a pipeline from Katherine to Nhulunbuy, perhaps owned by APA, and part-funded by the Export Finance and Insurance Corporation.
The Commonwealth is being asked to underwrite the pipeline, but it is not clear whether this will be through guarantee or direct funding.
The total cost will be recovered from gas sales to Pacific Aluminium, which will spend $200 million to convert its generators to gas.
Deutsche Bank's head of resources, Paul Young, said the Gove refinery had long been the "problem child" of the Pacific Aluminium portfolio as it had never achieved its nameplate capacity, due to design flaws. But the deal on Gove - which supplies alumina to Rio's smelters at Bell Bay, Tiwai, and Tomago - would improve Rio's chances of selling Pacific Aluminium, which Deutsche valued at $US3.5 billion.
Mr Young said, however, that the decision to keep Gove operating was less than optimal and would cost shareholders half a billion dollars, even factoring in closure costs, compared with the option of exporting 100 per cent of the bauxite to China.
Frequently Asked Questions about this Article…
Rio Tinto confirmed it will keep the underperforming Gove alumina refinery (operated by its Pacific Aluminium unit) up and running after the Northern Territory government arranged gas supply from Eni’s offshore Bonaparte Basin fields, delivered via a new 600-kilometre pipeline to Nhulunbuy.
The switch from expensive fuel oil to gas is expected to help the loss-making Gove refinery become more viable, and the article says this outcome saves the refinery and about 1,500 jobs at Nhulunbuy.
Key parties named in the article are Rio Tinto (Pacific Aluminium), Italian major Eni (gas supplier), APA Group (pipeline partner/possible owner), and government bodies including the Northern Territory government and the Commonwealth; the Export Finance and Insurance Corporation may help part-fund the pipeline.
No — Pacific Aluminium is understood to be buying gas directly from Eni on commercial terms without a direct government subsidy, although the Northern Territory is making some contracted gas available under arrangements that bring forward production.
The Northern Territory said gas would be supplied for the next 10 years to support Gove. The arrangement is possible because the NT signed a 25‑year contract with Eni in 2005 at about half the market price (around $6 per gigajoule), and the territory is prepared to make some of that gas available — with no immediate increase in gas prices for territory consumers.
NT Chief Minister Terry Mills put the total cost of the deal at about $1.2 billion: Eni and APA will spend roughly $500 million on a new offshore well and compression equipment, another $500 million is expected to build the pipeline from Katherine to Nhulunbuy (possibly part-funded by EFIC), and Pacific Aluminium will spend about $200 million to convert its generators to gas.
Deutsche Bank commented that keeping Gove operating could improve Rio Tinto’s chances of selling Pacific Aluminium (valued by Deutsche at about US$3.5 billion), but it also said the decision was less than optimal and could cost shareholders roughly half a billion dollars compared with the alternative of exporting all bauxite to China.
The Commonwealth is being asked to underwrite the pipeline (details unclear), and the article says the total cost will be recovered from gas sales to Pacific Aluminium — meaning the infrastructure outlays are expected to be recouped via commercial gas revenue rather than direct ongoing subsidies.
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