This just out in the Fairfax press. SP not coping well with the...

This just out in the Fairfax press. SP not coping well with the northern route, imagine a GSA or some reserves conformation news is required soon or the SPP is at risk of falling over…

NEGI pipeline to shoulder big responsibility after ACCC's Shell-BG approval

by Angela Macdonald-Smith
For a small pipeline there's a lot riding on the North East Gas Interconnector, even more so now that the competition watchdog has waved through Shell's $US70 billion ($98.5 billion) takeover of BG Group with no strings attached.

But just how pipeline proponent Jemena will make money from the $800 million project isn't clear, nor is who else will supply gas into the pipeline and buy gas from it.

The decision to build NEGI is certainly significant and parties on all sides have applauded the Northern Territory government for making happen a project that few gave any credence to just 12 months ago. But amid the fanfare in Darwin earlier this week, the nuts and bolts of the deal remain shrouded in mystery.

Incitec Pivot's 10-year contract to buy gas from the Northern Territory government – or more specifically from the Northern Territory utility Power and Water – at 31 terajoules a day, or about 11 petajoules a year, will fill only about a quarter of NEGI's capacity of 120 terajoules a day.

Jemena says information on volume is commercially confidential and will acknowledge only that the foundation Incitec Pivot contract "does not fill the entire pipeline". It does say that if more customers for the line can be found by mid-2016, the capacity could be increased to more than 200 terajoules a day.

The base capacity for NEGI of 40 petajoules a year is small compared with the 133 petajoules shortfall in the east coast supply-demand balance that consultancy EnergyQuest is forecasting by 2019. But its importance as a new source of supply is much greater, particularly now that Shell's undeveloped Arrow gas in Queensland looks likely to be amalgamated with BG's.

Potential to expand

Jemena has also pointed to the potential to expand NEGI, and at the price Incitec Pivot looks to be paying under the new contract there should be other buyers around.
Grattan Institute's Tony Wood says the $55 million a year Incitec Pivot says it will save from the NEGI supply to its Phosphate Hill plant suggests the new contract undercuts its existing supply by a substantial $5 a gigajoule. That could suggest a delivered gas price of about $6 a gigajoule, compared to about $11 for the existing contract with AGL Energy.

Even assuming a discount for Incitec Pivot as a foundation customer, that allows plenty of scope for NEGI gas to undercut existing supplies.

"Between $6 and $11 is a big opportunity," Wood says, even if other customers coming later to the party have to pay $7 or $8.

His assumptions tie in roughly with analysis by Wood Mackenzie, which models a break-even cost of supply to Mt Isa of $5.70-$6.20 per thousand cubic feet – a measure very similar to a gigajoule.
Wood Mackenzie assumes a tariff for transporting gas along the new 622-kilometre pipeline at $1.50-$2 and a wholesale price of gas at $3.50. But Grattan's Wood assumes $4-$5 for reselling the Power and Water gas, pointing to a lower tariff on NEGI of somewhere more than $1.

Given the $800 million investment required for NEGI, Jemena must be counting on more lucrative gas transportation contracts to make the economics stack up, given a $1.50 tariff would represent annual revenue of just $60 million.

Meanwhile, other producers are lining up to supply gas through NEGI, starting with Central Petroleum, which is still in negotiations on its own letter of intent to supply Incitec Pivot with up to 15 petajoules a year.