Switch to gas saves Gove, but uncertainty over who picks up the bill

THE underperforming Gove alumina refinery - and 1500 jobs at Nhulunbuy in the Northern Territory - are saved, but a tussle remains over who will pay.

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.