Switch to gas saves Gove, but uncertainty over who picks up the bill
Rio Tinto confirmed on Wednesday it would keep Gove, operated by its Pacific Aluminium subsidiary, up and running after the Northern Territory 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.
The gas will help the loss-making refinery move from expensive fuel oil, 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 possible only because in 2005 the territory signed a 25-year contract with Eni, at about half the market price, at about $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.
NT Chief Minister Terry Mills put the cost of the deal at $1.2 billion. Eni and the APA Group will spend $500 million drilling a new offshore well and on 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 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 full capacity due to design flaws. But the deal involving Gove would improve Rio's chances of selling Pacific Aluminium, which Deutsche valued at $US3.5 billion.
Mr Young said the decision to keep Gove operating would cost shareholders half a billion dollars, even when accounting for closure costs.
Frequently Asked Questions about this Article…
The Gove alumina refinery was kept operating after the Northern Territory government arranged a plan to supply gas, saving about 1,500 jobs at Nhulunbuy. The gas switch was intended to replace expensive fuel oil and keep the loss-making refinery open.
Gas will be supplied from Eni's offshore fields in the Bonaparte Basin. The arrangement is for the next 10 years and involves building a 600-kilometre pipeline to deliver the gas to Nhulunbuy.
Pacific Aluminium is understood to buy gas directly from Eni on commercial terms, with the price to be negotiated. The deal is structured so Pacific Aluminium will purchase gas without a direct government subsidy.
The Northern Territory Chief Minister put the total cost at about $1.2 billion. Eni and APA Group will spend roughly $500 million on drilling a new offshore well and compression equipment; another $500 million is expected to build the pipeline from Katherine to Nhulunbuy (potentially owned by APA). The plan is to recover costs from gas sales to Pacific Aluminium; the Commonwealth government is being asked to underwrite the pipeline, though it’s unclear whether that would be a guarantee or direct funding.
Pacific Aluminium will spend about $200 million to convert its generators at Gove from fuel oil to gas as part of the switch to cheaper gas fuel.
A 25-year contract signed by the territory in 2005 with Eni at about $6 a gigajoule — roughly half the market price at the time — makes some gas available for Gove. The territory is prepared to bring forward production plans and shorten its period of gas price certainty to make gas available to the refinery.
Deutsche Bank’s resources head Paul Young said Gove had been the 'problem child' of the Pacific Aluminium portfolio, and keeping it operating would improve Rio Tinto’s chances of selling Pacific Aluminium (Deutsche Bank valued the business at US$3.5 billion). However, Young also estimated the decision to keep Gove operating would cost shareholders about half a billion dollars, even after accounting for closure costs.
Key parties involved include Rio Tinto (via Pacific Aluminium), Eni (supplying gas from the Bonaparte Basin), APA Group (potential pipeline owner and co-investor), the Northern Territory government, the Commonwealth (asked to underwrite the pipeline), and the Export Finance and Insurance Corporation (potential part-funder). Deutsche Bank provided commentary on the financial implications.
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