This week, Department of Industry and Resources director general Jim Limerick will begin a task crucial to Western Australia’s economic future.
This week, Department of Industry and Resources director general Jim Limerick will begin a task crucial to Western Australia’s economic future.
He will start sifting through submissions that hold the key to the state’s downstream processing and domestic gas pricing future.
They are from the state’s gas producers in response to a government discussion paper on reserving part of WA’s gas production – up to 10 per cent – for future domestic consumption.
And that includes low-cost supplies to attract such value adding, downstream producers as Indian-owned Burrup Fertilisers Pty Ltd’s (BFPL) $A790 million ammonia plant on the Pilbara’s Burrup Peninsula.
This is the world’s largest ammonia plant and the first downstream processing facility in the North West based on local gas production. The first shipment will leave Dampier next month.
The bad news is that, because of high gas prices, which account for more than 70 per cent of the project’s operating costs, nearby construction of an associated $2.7 billion urea plant and a $410 million ammonium nitrate plant will instead, almost certainly, be built in Papua New Guinea.
Premier Alan Carpenter has acknowledged high gas and construction costs have deterred fresh investment in downstream processing on the Burrup, where the government has spent about $180 million on infrastructure to attract such investment since the beginning of the decade, when BFPL decided to build its ammonia plant there.
But gas prices have more than doubled since then, and BFPL chairman Pankaj Oswal told WA Business News the ammonia plant would not be built at today’s gas prices.
And while a final decision on an associated ammonium nitrate plant is still six months away, it is likely to become part of the biggest ammonia urea plant in the world, to be built in Papua New Guinea.
Mr Carpenter’s continued optimism for the Burrup was underlined by Woodside’s recent decision to base its $5 billion Pluto liquefied natural gas (LNG) development there, close to its existing North West Shelf (NSW) LNG facilities.
It is a good place to be if you own the gas.
Pluto, 190 kilometres west of Karratha, is scheduled to produce up to seven million tonnes of LNG a year from 2010. Woodside recently spent $2.4 billion on expanding LNG train-4, will spend a further $2 billion to build train-5, scheduled to come on stream in 2008 and taking NWS LNG capacity to more than 16 million tonnes a year.
But nearly all NWS gas will go into the export LNG market, not surprising when LNG sells for about twice the price of WA domestic gas.
An Australian Petroleum Producers and Exploration Association (APPEA) spokesman declined to comment on APPEA’s response to the discussion paper, other than to concede gas reservation was a complex question.
“It’s certainly a priority area for the government,” he said.
There is a strong argument for letting market forces prevail, but the discussion paper argues this would leave the state economy “exposed to considerable risk and uncertainty as to the longer term availability and price of domestic gas”.
In other words, unless there is some gas reservation, big dome-stic price rises are not far away.
The paper says WA’s gas demand will grow 4 per cent a year, and expects a requirement for at least 6.2 trillion cubic feet of gas to be sequestered for domestic use up to 2020.
For some comparison, a trillion cubic feet of gas is equivalent to 20.5mt of LNG and would provide enough fuel for all Western Power generation in WA for 7.5 years.
BFPL’s ammonia plant is the biggest Indian investment ever made in Australia and was the project that triggered the state government’s multi-user infrastructure investment on the Burrup several years ago.
Then, there were about half a dozen major downstream processing projects on the drawing board, with BFPL being given the tag of least likely to succeed.
Those that came and went in a flurry of hype and feasibility studies included: the $600 million plus US-based Syntroleum Corp synthetic fuels project; the $2 billion Canadian Methanex methanol project; London-based GTL Resources’ $528 million methanol plant; Canadian Agrium Inc’s $900 million ammonia urea plant; and more recently, multi national DME International’s plans to build a $500 million alternative Dimethyl ether fuel plant.
Still in play are the $900 million multi national Dampier Nitrogen ammonia/urea project, in which giant Norwegian Dyno Nobel has a major stake while also considering building its own $650 million ammonia plant, and the $400 million Deepak Fertilisers ammonia nitrate project.
For successful downstream processing industries to be established in WA, Mr Oswal said the state needed to realise it was competing with a variety of other places, such as Malaysia and countries in the Middle East.
“The gas price has to be competitive and it isn’t,” he said.
Because of the gas price struck several years ago, the Burrup ammonia project has a pay back period of five to seven years, with 25 years of production worth more than $270 million a year already sold.
BFPL deputy managing director Vikas Rambal recalls those early establishment days with a wry smile.
”Back in 1999, we were not even considered seriously. Many times we thought of leaving,” he said.
“We came to realise this was a different world. People here didn’t know the ABC of ammonia or downstream industries and we had already built two world-class ammonia plants.
“We were the guinea pigs and I believe it has worked for all of us, but it has taken five years of our lives.”
India is now WA’s fourth biggest trading partner, up from 16th in 2002-03, with bilateral trade worth $3.1 billion a year.
This accounts for more than 40 per cent of Australia’s entire trade with India, which is just less than $7.5 billion.
More than 1,100 jobs were created during the plant’s construction and about 100 will be employed at full production.
