Alcoa gets energy chill from Australia's $130-bn gas boom

Australia is attracting more than $130 billion of investment in some of the world’s richest natural gas fields to supply buyers in Japan and China. Domestic customers, including Alcoa Inc, will have to wait.

Alcoa’s stalled alumina refinery expansion in Western Australia “will not be back on the agenda until we can secure long-term competitive gas supply,” Michaela Southby, a Perth- based spokeswoman for the biggest US aluminum producer, said in an e-mailed response to questions. The project may cost $4 billion, according to a 2008 estimate by ABN Amro Holding NV.

Royal Dutch Shell Plc plans to deploy a production vessel larger than an aircraft carrier off the coast of Western Australia to feed the liquefied natural gas boom that may see annual exports hit almost A$40 billion ($37 billion) by mid- decade. The state’s gas shortage will last to at least 2020, hindering mine projects, according to the DomGas Alliance.

“You have all this energy and gas but most of it’s exported,” said Peter Arden, a Melbourne-based mining analyst at Ord Minnett Ltd, a JPMorgan Chase & Co affiliate. “It’s going to be a really big cost input for the whole of Western Australia, especially the miners who rely on it for power.”

Alcoa, the biggest user of gas in Western Australia, gained 4.8 percent to close yesterday at $14.46 in New York Stock Exchange composite trading. The stock has dropped 10 percent this year. Alumina is used to make aluminum. LNG is gas chilled to liquid form for shipping.

New York-based Alcoa suspended a plan to double capacity at the Wagerup refinery more than a year ago because of the financial crisis and gas supply constraints. Gas prices in the state, the source of half Australia’s commodity exports, rose almost fourfold in the past decade and may keep rising until supply becomes available, said consultant ACIL Tasman Pty.

“The prices that are being asked will certainly preclude the development of a lot of future projects,” Tony Petersen, chairman of DomGas, a user’s group that includes Newmont Mining Corp and Fortescue Metals Group Ltd, said in an interview.

More than 1,000 mine sites operate in Western Australia, which generates 70 per cent of the nation’s exports to China, the biggest buyer of raw materials. The nation is the largest shipper of iron ore, alumina, lead, zinc and coal. It ranked sixth among LNG exporters in 2008.

Mining magnate Clive Palmer’s Australasian Resources Ltd and Atlas Iron Ltd and are among companies planning at least A$50 billion of projects and expansions in Western Australia and will be competing for gas.

Atlas’s power requirements after 2014 “are a real issue,” David Flanagan, managing director of the Perth-based company, said in a response to e-mailed questions.

An explosion at Apache Corp’s Varanus Island gas plant cut almost a third of the state’s supply in June 2008, closing mines, refineries and processing plants. Apache and the A$27 billion North West Shelf gas fields, in which Shell is a partner, account for about 90 per cent of the state’s supplies.

“This is the irony: Australia has only got less than 2 per cent of the world’s gas reserves, yet we are striving to be one of the world’s biggest LNG exporters,” Mike Shaw, energy manager of Alcoa’s Australian unit, said in an interview. “There is very little happening on the domestic gas front.”

Alcoa is spending as much as A$140 million to find new gas supplies, according to its Web site. It owns 20 per cent of the 1,600-kilometer (994-mile) Dampier to Bunbury gas pipeline.

There are some “serious issues in trying to manage gas supply,” Premier Colin Barnett said March 8. “If we were to have a very rapid increase in demand, it would be tight.”

To be sure, more domestic gas will become available from the projects being built because Western Australia’s government has mandated that the equivalent of 15 per cent of LNG from export projects be reserved for domestic use.

“There is plenty of gas out there and where there is firm demand from credible customers, it will be delivered,” Tom Baddeley, director of the West Australian unit of the Australian Petroleum Production and Exploration Association, said in a March 17 statement.

Citic Pacific Ltd, an arm of China’s biggest state-owned company, signed a supply contract last year with Apache and Santos Ltd for its $4 billion iron ore project at Cape Preston. Apache and Santos last year won a four-year extension to their contract with Newmont Mining Corp.

“Every change in gas price will affect the cost of producing whatever commodity is being mined,” Andrew Caruso, managing director of Australasian Resources, which is seeking to develop a A$3 billion iron ore mine, said in an e-mail.