orica's gas deal with esso and bhp signals pri

Orica's gas deal with Esso and BHP signals price surge ahead

STEPHEN BARTHOLOMEUSZBUSINESS SPECTATORNOVEMBER 12, 2013 12:00AM


IAN Smith isn't relying on governments or a breakthrough in the impasse over the exploitation of NSW's coal-seam gas reserves to secure Orica's gas supplies.

Yesterday he added a conventional arrangement with Esso and BHP Billiton to an earlier and rather less conventional deal to get access to gas.

The three-year agreement with Esso and BHP enables Orica to acquire up to 42 petajoules of gas over three years, beginning in 2017, from the Bass Strait partners. There is provision for the agreements to be extended into the next decade.

Earlier this year, Orica unveiled a very different kind of arrangement under which it signed a gas offtake deal with Strike Energy.

This enabled it access to 150 petajoules of gas at an "affordable" price over the next two decades by making pre-payments of $52.5 million to help fund commercialisation of Strike's coal-seam gas project in the southern Cooper Basin in South Australia.

Smith said discussions were also under way with a number of parties over the supply of 3.5 petajoules a year to Orica's Yarwun ammonium nitrate facility in Queensland.

The Esso/BHP deal will meet the gas requirements of its Kooragang Island facility in NSW.

Smith has made it very clear that he is not going to leave Orica exposed to the outcome of the inconclusive debate about "reserving" gas in Australia, nor risk the eventual outcome (if any) of the highly politicised debate about the development of NSW's extensive CSG resources.

That determination to lock in his group's energy requirements flows from the knowledge that the contracts that had underpinned the access to gas for large domestic customers will fall away over the next couple of years just as the domestic gas market in Australia undergoes fundamental structural changes.

It is the development of the CSG-fed export LNG projects at Gladstone in Queensland that has fundamentally changed the nature of the market. From next year, BG Group will begin exporting LNG, with the other two big facilities owned by the Santos and Origin Energy-led consortiums not far behind.

That will divert offshore a lot of gas that might otherwise have been sold into the domestic market and expose domestic gas consumers, used to a market where there was a surplus of gas, to export-related prices for the first time. (In fact, recent gas contracts have reflected the oil-linked LNG prices less the cost of liquefaction and transport, with the price rising from around $4 per gigajoule into the high single digits.)

Orica said yesterday its agreement with Esso and BHP incorporated an oil-linked component.

Earlier this year, Origin Energy announced it had agreed to buy up to 432 petajoules of gas from Esso and BHP over a nine-year period. While the pricing has not been disclosed, the market is convinced that it, too, would reflect the international prices for gas.

The ability of Orica and Origin to secure gas illustrate the sector's belief that there is no shortage of gas resources in Australia, if the price is allowed to reflect the impact of linking the domestic and international gas markets, which the Queensland LNG projects will result in. Higher prices will make a lot more gas projects and reserves economical to develop.

That in turn casts light on the real issues driving the debate about "reserving" gas. It is not as much about protecting access to gas for big domestic industrial customers as it is about reducing the price they might have to pay, which would be materially lower than the international prices paid by their competitors.

The discussion about gas security has been focused on NSW, which imports almost all of its gas requirements from interstate. The environmental and community welfare issues have frozen coal-seam gas development in NSW and led to concerns that it will face supply shortfalls from the middle of this decade, as its current sources of supply shift their production to the Queensland plants.

The deals struck by the Bass Strait partners tend to indicate that, at oil-linked prices, they may have the ability to commercialise a lot more gas than was previously recognised.

There are some question marks over the pipeline capacity between Victoria and NSW, with some in the industry saying there will be supply shortfalls at peak times either because of insufficient reserves or infrastructure constraints. However, that hasn't been a barrier to the Origin and Orica deals.

Those deals also indicate that the price shock ahead for industrial and ordinary gas consumers isn't going to be confined to NSW. Whether the gas is exported as LNG or sold into the domestic market at export-related prices, significantly higher prices will be locked in for eastern seaboard customers.

Increased supply -- higher prices will stimulate supply and bring more unconventional gas into the market -- would provide something of a ceiling on the domestic price. But it is almost inevitable that the price will be at least double what customers faced when the market was purely domestic and in surplus.

Stephen Bartholomeusz is a columnist for Business Spectator. Visit businessspectator.com.au

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