Late in June, Alcan notified the Blacktip Joint Venture that it was terminating the Gas Sales Agreement (GSA) entered into in November 2004 for the supply of gas through the proposed Trans Territory Pipeline. The gas was to be used to fire Alcan’s expanded alumina refinery at Gove in the Northern Territory, which currently runs on fuel oil.

The termination was the result of a request from the Blacktip Joint Venture, comprised of Woodside Energy and Eni Australia, for an approximately 30 per cent price increase on the gas to be delivered. Woodside and Eni first asked for an increase in the gas price in April.

The GSA was for the supply of 800 PJ of natural gas over 20 years starting in 2007. The Blacktip gas field is located in the Joseph Bonaparte Gulf 250 km south west of Darwin.

“We are extremely disappointed by the actions of Blacktip as we are aware of the impact of this change on a number of stakeholders. We negotiated in good faith but the cost increase was unacceptable,” said Richard Yank, President of Pacific Operations, Alcan Bauxite and Alumina. “Alcan will pursue other options to deliver cost-effective gas to Gove.”

True to these words, within 24 hours a new GSA, between Alcan and Exxon Mobil for the supply of Highlands gas through the proposed PNG-Queensland pipeline, was announced.

The agreement covers the sale of 43.5 PJ of gas per annum for a period of 20 years from PNG Gas Project start-up, a 3.5 PJ/a increase compared to the agreement with the Blacktip Joint Venture.

ExxonMobil Gas and Power Marketing Vice President of New Business Development Rob Franklin said “We are pleased to announce this agreement for the provision of PNG gas to Alcan. This is a significant contribution to achieving the level of sales required to underpin the PNG Gas Project.”

In terms of the effect the change in gas will have for Alcan, this is a question that will ultimately be answered over time. While the PNG gas will come at a cheaper cost than that being demanded by the Blacktip Joint Venture, it will also delay the conversion of the Gove refinery to gas by at least two years.

While Blacktip gas would have been available from 2007, PNG gas will only be available from 2009 at the earliest, meaning the refinery will have to continue to run off diesel fuel. With world oil prices reaching record highs, the financial benefits of cheaper gas may be negated by the need for large quantities of expensive oil to fire the refinery in the meantime.

Mr Franklin said the PNG Gas Project was now well into the Front End Engineering and Design (FEED) program that was announced in October 2004. Approximately 150 staff from the Project participants and the FEED contractor, Eos, are engaged in the detailed FEED work.

In addition to the FEED program for the PNG component of the Project, APC (a consortium of AGL and Petronas) is undertaking the FEED program for the Australian section of the pipeline and will now work with the PNG Gas Project participants on the requirements for a lateral extension of the pipeline to supply Gove.

Following these announcements, momentum surrounding the PNG-Queensland pipeline continued to build and a week later, AGL announced it had signed agreements to purchase approximately 75 PJ/a of PNG gas and take a ten per cent stake in the gas project.

The agreements are worth almost $A5 billion in total. The GSA is valued at $A4.5 billion, while the equity stake in the project is valued at $A400 million.

Importantly, these two agreements push the project partners past the 150 PJ/a of gas sales they have long-maintained would be required before a decision to go ahead with the project can be taken.

Oil Search will retain approximately 37 per cent of the Project and be the largest equity holder. Oil Search Managing Director Peter Botten said, "These agreements represent a major step forward in commercialising the large PNG gas resources. It is pleasing to introduce AGL into the upstream Gas Project Joint Venture, aligning the interests between stakeholders in the gas reserves, pipeline infrastructure and gas marketing.”

Both agreements are subject to conditions precedent including the PNG Gas Project reaching financial close. A final investment decision is expected in the second half of 2006.

AGL Managing Director Greg Martin said “The Gas Supply Agreement secures around 1500 PJ of competitively priced gas to meet future customer demand and underpins AGL’s participation in the fast growing Queensland energy market.

“These agreements complement AGL’s existing commitment to build the Australian component of the PNG gas pipeline. There is now greater certainty for the pipeline project.”

The effect of the announcement on the Australian Pipeline Trust, the lead investor in the consortium announced as preferred tenderer for construction of the Trans Territory Pipeline, will be minimal according to then Managing Director Jim McDonald. This is due to an agreement APA has with AGL to take a stake of at least 20 per cent in any pipelines built by AGL. According to Mr McDonald, “Twenty per cent of the PNG pipeline would not be much different to half of the Territory pipeline.”