Why APA Group paid top dollar for a prized pipeline

The strategic benefits from the acquisition of the QCLNG pipeline will see APA Group cement its dominant position in the east coast gas transmission sector.

The $6.3 billion price-tag might raise some eyebrows, but given the strategic significance of BG Group’s QCLNG pipeline to APA Group and its determination to dominate the east coast gas transmission sector, it was a deal Mick McCormack needed to do.

The price-tag of $US5 billion was significantly higher than had been anticipated. But there was strong competition for the 543 kilometre pipeline that links gas fields in Queensland’s Surat Basin to BG Group’s export-LNG project at Gladstone.

The strategic significance of the pipeline reflects the dramatic shift in the nature and geography of the gas sector that is about to occur as the three giant coal seam gas-fed plants on Curtis Island off Gladstone progressively come on stream.

BG’s QCLNG plant will be the first of the three to begin commercial production next year, with the Origin Energy-led APLNG plant probably on stream in the first half of next year and the Santos-led GLNG project towards the back half of the year.

The commissioning of those projects will fundamentally change the nature of the east coast gas market.

Historically, east coast onshore gas has flowed south out of South Australia and Queensland into New South Wales, and the pipeline infrastructure developed to ship that gas reflected the source of demand. A domestic surplus of gas also constrained pricing.

The export-LNG plants at Gladstone fundamentally change both the demand for gas and its value. The demand for east coast gas is set to more than treble over the next three or four years as the plants ramp up and the major flows of gas will be towards them rather than towards NSW.

With the majority of that gas earmarked for export, domestic gas prices will be set by the international market for LNG, netted back to remove liquefaction and transport costs.

The scale of the demand from those projects should also drive a surge in production in Queensland and South Australia, with the higher prices bring previously sub-economic conventional and unconventional resources into play.

APA dominates east coast gas transmission, so an exposure to the Queensland projects, the shifting flows of gas and the explosion of activity in the sector the plants are generating is strategically important to it.

Its existing position in the industry -- the BG pipeline intersects its existing network -- means there are synergistic and strategic benefits and options that are uniquely available and valuable to it.

The detail of the deal also appears compelling, with 20-year contracted revenues with extremely credible counter-parties in the form of BG Group and China National Offshore Oil Corp. The core tariffs in the contract, which have a base return on the asset base, escalate at US CPI and APA has the option of taking over management of then pipeline.

APA said today that the deal would be operating cash flow per security positive from the outset and would add $US383 million ($A464m) to its earnings before interest, tax, depreciation and amortisation.

The sale of the pipeline makes sense for BG. It’s in the gas business rather than the pipeline business, and will be able to extract a big lump of capital and a $US2.7 billion after-tax profit from the sale that it can deploy in higher-returning investments elsewhere, or distribute to its shareholders.

It won’t be lost on the market that all three of the Queensland projects have a lot of capital tied up in non-core infrastructure that is more valuable and strategic to infrastructure investors than it is to their own shareholders.

The APA deal with BG provides an insight into the previously unrecognised extent of that value, which could be a very useful insight, given the pressure the market has been exerting on energy companies, particularly Santos.