DBP: Building WA’s future

We commenced by asking Mark to provide an overview of DBP and the structure of ownership for the DBNGP itself. Mark outlined that when the DBNGP was sold by Epic Energy and its banks in 2004, the successful bidders actually acquired the group of companies and trusts which owned and operated the DBNGP.

“As part of the sale agreement, the names of the entities were all changed to replace “˜Epic Energy’ with “˜DBNGP’. To draw a distinction between the business and the asset, it was decided to register a trading name and “˜Dampier Bunbury Pipeline’, or as we abbreviate it DBP, was chosen for the group. The corporate structure is designed to separate asset ownership, asset operation and financing functions into different companies under common management,” Mark said.

“DBP is a small group of nine employees, independent of any of the shareholders, but responsible to all of them for the performance of the asset, the DBNGP.”

Currently ownership of DBP is with three parties DUET (60 per cent), Alcoa with (20 per cent) and Alinta (20 per cent). In regard to the day to day roles, DBP holds all licences and authorisations necessary for the operation of the DBNGP with Alinta Asset Management (AAM) engaged as asset manager to perform the day-to-day operational and maintenance tasks on the DBNGP in accordance with plans approved by DBP.

“We [DBP] are responsible to the technical and safety regulators, environmental authorities and other government agencies for the safe and reliable operation of the pipeline.”

DBP also directly negotiates and manages all shipper contracts. In that regard Mark notes that AAM’s Control Centre has a very close liaison with DBP as many operational decisions require joint commercial (DBP) and technical (AAM) input.

DBP handles economic regulation as a covered pipeline under the Gas Code.

With respect to expansion projects, DBP raises all the finance and contracts with the major equipment and services suppliers with AAM appointed as Owner’s Representative and Project Manager.

As would be expected, DBP maintains a number of strong relationships with suppliers and service providers. AAM is the primary service provider responsible for providing a comprehensive operations and maintenance service for the DBNGP. They subcontract routine maintenance and minor construction works as necessary.

At this stage the major focus of DBP remains the DBNGP itself, having recently commissioned the 100 TJ/day, $430 million Stage 4 expansion. Stage 5A, representing another approximately $650 million of works, has recently commenced construction and planning for the next stage, which is estimated to cost around $200 million, is well advanced.

“Our forecasts expect further expansions through to 2012, so our current plans to spend well over $1 billion are keeping us very busy.”

However, Mark says that DBP is also keeping a watching brief on all opportunities upstream and downstream of the DBNGP.

“While our current plans do not include acquiring or building pipelines which are geographically remote from the DBNGP, our shareholders are aware of our expertise and knowledge and may choose to use this base for further expansion of the business.”

The current (as at time of writing) sale of Alinta is not expected to change much for the DBP team and should have negligible impact on the DBNGP’s expansion.

“As AAM is our principal service provider, DBP is keeping a close watch on the sale process and the expected restructuring of Alinta. We do not expect much to change, especially in the day to day operations of the DBNGP, but we won’t really know until we see the details of how the new owners of Alinta intend to provide the services we currently receive, some of which come out of Melbourne.”

With the Stage 4 expansion now completed, Stage 5A is well underway with almost all of the 570 km of pipe now in Western Australia. At the time of writing, construction of the first loop (Loop 10, south of Perth) was nearly completed and work had started on Loop 9, just north of Perth, and Loop 1 in the Pilbara. Work on the compressor station upgrades at CS5 and CS7 had also started.

“The project is on schedule for completion well in time to deliver new capacity to shippers when they need it from early 2009.”

“The next project, Stage 5A(2), is making good progress. The shipper contracts have all been finalised and the Front End Loading has been completed. We are currently arranging finance and expect to give unconditional approval mid-year. Construction is likely to be in several phases across 2008, 2009 and 2010 to match the shippers’ requirements for additional capacity.”

Mark says that in selecting Saipem as the contractor for Stage 5A, as with all contractors, DBP with support from their asset manager, AAM, used a comprehensive evaluation process.

“The process involved assessment of each tenderer’s technical and safety capabilities and record before even considering any commercial issues. We had a number of discussions with each tenderer to clarify aspects of their bid and ranked them based on technical and safety criteria.

“Then we opened the commercial bids and looked at terms and conditions and price and again ranked each tender on commercial criteria.

“By combining the two processes, we selected Saipem as the tenderer best able to deliver the project at the right price, and more importantly with the least likely technical and safety issues.”

January of this year also saw the commissioning of the interconnect between the DBNGP and the Goldfields Gas Pipeline. Mark explained that the interconnect was built in response to a specific request from a shipper who wants to deliver gas sourced from the North West Shelf Gas plant on the Burrup Peninsula to its operations in the east Pilbara and Goldfields regions.

“From DBP’s perspective, the interconnect is really no different to any other meter station on the pipeline. We also have interconnections to the Midwest Pipeline, the Parmelia Pipeline and to the gas distribution systems in and around Perth.

“The significance of the GGP interconnect for the industry is that it opens up opportunities for gas users in the east Pilbara and Goldfields to access gas supplies from the North West Shelf Gas JV as well as from the various Varanus Island JV’s. It also creates more opportunities for gas trading, as financial trades can now be better backed with physical contracts. However, it is still early days for these sorts of developments.

Extending the DBNGP to Albany, is a project which, similar to the interconnect, has been mooted for many years. Mark says that currently, as detailed in a White Paper prepared for the WA Government in 2000, only about half the load necessary to make the pipeline commercially viable exists.

“A number of the loads identified in 2000 have now gone, but new ones have also appeared – but it is still only about half viable. DBP is ready to extend the DBNGP to Albany if someone – the State or Federal Government or local authorities – who is able to manage the growth risk is willing to underwrite the non-commercial half (or so) of the pipeline. DBP cannot control decisions such as local planning rules and government policies on regional development which directly influence the growth prospects for a region such as Albany and the Great Southern, so we are unable to take on that risk.”

With regard to their role in APIA, DBP continues to support the Association strongly. “APIA, as the peak body for our industry – the pipeline industry – is very important to DBP. As a pipeline owner, we have always maintained Sponsoring Membership and have contributed directly or by supporting our asset manager AAM in actively participating in a number of APIA committees. While we are only a small team, we will continue to support the Association directly and will actively encourage our asset manager to participate in the Association and its committees.”

Turning to the key issues facing the industry, gas supply, regulation and proposed legislative changes stand out as significant issues in the medium term according to Mark. He says that until proposed legislative changes are implemented and the industry has had the opportunity to operate under them, they must remain a major concern for all in the industry due to the potential impact on future investment.

“As the DBNGP is fully contracted, and as there is no incentive under current regulatory arrangements to build spare capacity we are expanding in response to firm contractual arrangements with shippers which is not always the best outcome for the industry or the community. There is some hope for more rational expansions in the proposed legislation, but we are concerned that it will be too little, too late.

“Technical, safety and environmental regulations, particularly in Western Australia, are emerging as a significant issue. Ever tighter regulations are being proposed; more areas are being proposed for environmental and heritage listing; urban sprawl is encroaching on areas formerly considered as rural, and in which pipelines have built to rural standards; and our infrastructure is ageing.

“All of these factors are contributing to ever tighter scrutiny being applied by regulators to the operations of existing pipelines and to the conditions being applied to new pipelines, including expansions of existing pipelines. There is a real danger that new standards will be applied retrospectively in an ad hoc manner, exposing pipeline owners to costs which have not been expected – all due to the actions of others.

“There is a growing need to become more active in managing environmental issues, not just in construction where the industry has very high standards, but also in operations. Methane is a greenhouse gas, to say nothing of carbon dioxide and other pollutants emitted from compressor engine exhausts, so we must be seen to be proactive in managing and reducing emissions and participating in initiatives to assist in the overall community drive to reduce society’s impact on the environment.”

Probably one of the hottest topics in WA in recent years has been the domestic gas (Domgas) situation and the balance between LNG and Domgas. As Mark says, “The availability of gas supplies for the domestic market and for the growth of gas based industries is a key issue for the near term. As gas (particularly LNG) trading expands, the supply/demand equation is changing rapidly and producers will look at options to maximise returns on their investments, which will not necessarily be offered by traditional nearby domestic markets.

“DBP firmly believes that the market is the best way to resolve any supply/demand balance. However, to achieve that balance, both the supply and demand sides need balanced opportunities. With current market structures, the Trade Practices Act prohibits gas buyers from buying gas as a bloc as it could be seen as price collusion while the ACCC has authorised, under the same Act, bloc selling by the producers under approved joint marketing arrangements.

“This imbalance of market power needs to be addressed either by revisions to the joint marketing authorisations or by some other form of government intervention. There is no silver bullet, but rather the market participants and governments need to work together to arrive at the solution which best meets the needs of the participants, but more importantly, meets Australia’s economic development needs.”

Mark finished by looking at whether supply or demand in WA is likely to be the constraining issue in the future. “We are seeing no shortage of demand, and many people coming to us asking “˜Where can I buy gas?’ There seems to be a lack of either ability or will on the part of producers to sell gas on terms which the domestic market will bear at the current time, so supply is the real threat.”

As the NWSG Domgas plant is expanded or other gas supplies come on stream, the demand for gas supply will be met, shippers will commit to new projects and sign contracts with DBP, and DBP will expand to capacity of the DBNGP to meet those contracts.

Key partners on the Stage 5A expansion of the DBNGP
* Project management: Alinta Asset Management * Engineers: WorleyParsons * Compressor suppliers,: Solar and Nuovo Pignone * Pipe suppliers: MetalOne * Pipe laying contractor, Saipem * A number of specialist advisers in safety and environmental areas

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