Aluminium producer Alcoa waiting for enough gas to revive expansion plans

AUSTRALIA is attracting more than $US130 billion ($142bn) worth of investment in some of the world's richest natural gas fields to supply buyers in Japan and China.

But it seems domestic customers, particularly in Western Australia, will have to wait.

Aluminium producer Alcoa, for one, is waiting for enough gas to revive its expansion plans.

A spokeswoman for Alcoa said its stalled alumina refinery expansion in the state would not be back on the agenda until the company secured a long-term competitive gas supply.

According to the DomGas Alliance of gas users, including miners Newmont and Fortescue Metals Group, the state's gas shortage will last to at least 2020, hindering mine projects.

Worse than that, the prices being asked would preclude development of a lot of future projects, chairman Tony Petersen said.

Ord Minnett mining analyst Peter Arden agrees.

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"You have all this energy and gas but most of it's exported," Mr Arden said.

"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."

According to consultancy ACIL Tasman, gas prices in the state rose almost fourfold in the past decade and may keep rising until supply becomes available.

More than 1000 mine sites operate in Western Australia, which generates 70 per cent of the nation's exports to China, the biggest buyer of raw materials.

Australia is the largest shipper of iron ore, alumina, lead, zinc and coal, and it ranked sixth among LNG exporters in 2008.

There are plans to massively expand LNG production with new projects in Western Australia and Queensland.

A report issued last week by the chief commodities forecaster, the Australian Bureau of Agricultural and Resource Economics, says Australia's significant gas resource base is capable of meeting domestic and export demand for the next 20 years and beyond.

But it points out that the mining industry, driven by an estimated 74 projects (worth $116bn) currently under way, will become an increasing consumer of energy, gas being an increasingly significant part of the nation's energy mix.

By 2029-30 gas is expected to make up 33 per cent of energy consumption, compared with 22 per cent now.

The mining sector is expected to consume 13 per cent of the nation's energy production by 2029-30, up from 5 per cent now.

Clive Palmer's Australasian Resources and Atlas Iron are among companies planning at least $50bn worth of projects and expansion in Western Australia and will be competing for gas. But Atlas managing director David Flanagan said power requirements after 2014 were an issue.

An explosion at Apache'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 $27bn North West Shelf gas fields, in which Shell is a partner with Woodside Petroleum, 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," the energy manager of Alcoa's Australian unit, Mike Shaw, said.

"There is very little happening on the domestic gas front."

West Australian Premier Colin Barnett said earlier this month that there were some serious issues in trying to manage gas supply.

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," says Tom Baddeley, director of the West Australian unit of the Australian Petroleum Production and Exploration Association.

According to ABARE, production of coal-seam gas in Queensland and NSW is expected to increase 20-fold by 2029-30, "when it would represent 88 per cent of gas production in the eastern gas market".

"A significant proportion of this CSG will be consumed domestically," ABARE says.

Bloomberg

ADDITIONAL REPORTING: CLIVE MATHIESON