News Room - Business/Economics

Posted on 09 Jan 2009

State gas prices to surge on Citic deal

WEST Australian domestic gas prices are continuing to rise, with Santos and Apache securing potentially the highest prices ever in a $1.8 billion deal with China's Citic Pacific that has resurrected the stalled Reindeer gas project.

 

In only the second Australian contract linking domestic gas to international oil prices, Citic's $US4.2 billion ($5.8 billion) Sino Iron ore project in the Pilbara will pay about $US7.80 a gigajoule (GJ) for its gas when oil prices are at $US50 a barrel, according to Santos yesterday.

 

The healthy price, which is double Santos's third-quarter average sales price, illustrates the tightness in WA's mine-dominated domestic gas market despite slumping commodity prices and recent mine closures.

 

The deal's indexing to oil also shows that miners still need to compete with liquefied natural gas (LNG) export plants -- previously the sole domain for oil-based contracts -- for the northwest's vast natural gas reserves. LNG spot prices have slumped with oil prices, and late last year went below $US10/GJ -- down from prices near $US20 that were achieved in September.

 

In December, Santos said the $842 million Reindeer project had been postponed because of Citic being hit by the economic outlook, and that engineering and construction contracts were being terminated.

 

At the time, Citic had just disclosed big losses following an executive's unauthorised foreign exchange bets that the Australian dollar would stay above US87c.

 

The first Australian domestic gas deal linked to oil prices was Santos's October pact with Moly Mines to supply the Spinifex Ridge molybdenum and copper project at a rate of $US11.50/GJ at $US90 a barrel oil.

 

That deal is under a cloud, however, with Moly still trying to secure finance for its mine.

 

The Citic contract is fixed for three years, but after that is understood to be directly linked to oil prices, and at $US90 a barrel would deliver prices of around $US14/GJ to Santos.

 

"The advent of significantly higher natural gas prices in Western Australia has enabled the large capital commitments required to develop new fields such as Reindeer," Apache chief executive Steven Farris said.

 

Santos chief executive David Knox said the gas project would bring a significant new source of gas into the rapidly growing WA market.

 

Apache has a 55 per cent stake in the Reindeer field and Devil Creek processing plant, while Santos owns the rest.

 

Santos said its share of the 75 petajoules (PJ) of gas to be supplied to Citic over seven years would provide revenue of $US585 million if oil prices stayed at $US50 a barrel.

 

Dan Pickering, of Houston energy investment bank Tudor Pickering Holt, described the price as "a nice uplift" in a long-anticipated gas deal.

 

The Australian first flagged Citic as Reindeer's foundation buyer in June.

 

The 27 million tonnes a year Sino Iron magnetite project at Cape Preston is due to start in mid-2010, a year or so before the gas contract begins.

 

A spokeswoman for the miner said other gas agreements had been signed for the start-up period.

 

At full capacity, Reindeer will add about 215 terajoules a day to WA's stretched domestic gas supply, of which a third will be taken by Citic.

 

Citic Pacific Mining chief executive Barry Fitzgerald described the state's commercial gas supplies as critical and said the Sino Iron project was helping underwrite a project that would also increase supply into the domestic market.