Hi Pakkham - My view on the Jemena pipeline is as follows.Jemena...

Hi Pakkham - My view on the Jemena pipeline is as follows.

Jemena and other pipeline builders like APA are always very happy to build pipelines.

However, the reason why they are happy to build pipelines is because they only take a very small amount of risk!

These companies are usually mainly financed by debt and as such their debt providers don't allow them to take a lot of risks. The sorts of risks they will take are usually limited to management of their projects in construction or operation.

By the time a pipeline company is ready to start spending serious money on a project, it will have been fully de-risked for them.

This means, they will have already got agreements in place with credit worthy parties who have agreed to pay for a significant proportion of the capacity they are building, usually at least 50 or 60% of the capacity of the pipeline for a minimum of 10-15 years.

The sorts of parties that sign up to these sorts of agreements with pipeline companies are large, well capitalised gas producers like Santos or Shell or large well capitalised gas buyers like AGL or Incitec Pivot. They do this because they are willing to make a large and long term commitment to the pipeline company and the gas resource that will supply the gas.

The sorts of agreements that the pipeline company insists on will require the owner of the capacity (sometimes the gas producer, usually the gas buyer) to pay for their capacity regardless of whether they use it or not.

Therefore, no new pipeline for a new gas field will get built until the gas producer and the gas buyer is satisfied that there is a sufficient quantity of gas. This is why resource certification is so important.

However, because gas producers are motivated to oversell the size of their resource, gas buyers will only commit to buying the gas when they have done their own research and due diligence.

In the case of Glenaras, the pipeline Jemena would need to build is likely to cost a minimum of $500-600 million (their Northern Gas Pipeline is longer and cost ~$800 million https://www.abc.net.au/news/2018-12-14/northern-gas-pipeline-opens-for-business-in-red-centre/10620202).

Keep in mind though that there are a number of companies willing to build pipelines. The big 3 in Australia are APA, Jemena and AGIG. It is a very competitive business because once you build a pipeline, you have a 30+ year monopoly.

Therefore, the big pipeline companies are always keen to get in early to tempt the small producers into working together if it means keeping out the competition.

Jemena is therefore happy to spend a few million dollars on desktop studies and preparation work for building a pipeline from Glenaras if it means keeping out APA and the others, however this spending is viewed like a marketing budget. They will not spend significant quantities because they cannot take any risk on the project not being fully funded.

Jemena will build a pipeline from Glenaras but only when a gas buyer like AGL is willing to pay for the pipeline and pay for the gas.

When will a gas buyer like AGL be willing to pay for the pipeline and pay for the gas? When AGL or the other gas buyers (notGLL) believes that Glenaras has been fully de-risked.