Growth continues for Australia’s largest pipeline owner

Having been with the company for several years, as Chief Executive Officer since July 2005 and Managing Director since July 2006, Mr McCormack is well qualified to give insights into the latest developments and future plans for APA, as well as to discuss a variety of topics concerning the Australian pipeline industry at large.

Mr McCormack’s entire career has been based in the energy transmission business and prior to joining APA when it floated in 2000, he spent thirteen years with AGL where he held a range of senior management positions within its pipeline business. Mr McCormack is the Chairman of a range of APA subsidiary companies, and he has worked on the development of new and existing pipelines across Australia.

Mr McCormack was appointed as a Director of GasNet on 10 November 2006, following APA’s acquisition of GasNet, and he is also a Director of the Australian Pipeline Industry Association board.

When we asked Mr McCormack about APA’s growth prospects with respect to greenfields and future acquisitions, he said, “APA has taken advantage of acquisition opportunities as they have arisen over the past year or so, and we are very pleased with the businesses we have been winning bidders on.”

He noted that the company will continue to act upon its previously outlined plans to apply its strict investment criteria to acquisition opportunities as they arise.

Regarding greenfield developments, Mr McCormack said that APA is currently pursuing some exciting opportunities, including the Bonaparte Gas Pipeline in the Northern Territory and the Wallumbilla to Bulla Park Pipeline linking Queensland with southeast Australian gas markets.

The Bonaparte Gas Pipeline will play a very important part in the energy security of the Northern Territory, and APA is hoping to conduct some early works in late 2007, with a view to commencing construction in mid-2008 with first gas due January 2009. Mr McCormack updated the recent planning progress, saying “The approval and licensing processes are substantially complete and major procurement and construction contract activities are underway.

“We have a long history in the Territory and the Bonaparte Pipeline will cement our presence up there,” he said.

Meanwhile, with the Moomba – Sydney Pipeline (MSP) set to expand for the supply of gas to the Uranquinty Power Station, Mr McCormack outlined the current status of the project. “The main development underway is the construction of a small compressor station at Culcairn to ensure gas is supplied to the power station. Detailed engineering and major procurement activities are progressing well. We are pushing this project hard and want to have the compressor station in operation for winter 2008 or shortly thereafter.”

He added that APA is keen to support the further development of gas fired power stations in NSW and continues to work with all parties to get these developments underway. This work includes the investigation of a pipeline link from Wallumbilla in Queensland to the MSP at the Bulla Park compressor station.

On the topic of other opportunities for APA – with its recent expansion into complementary infrastructure, such as coal seam gas and gas storage – Mr McCormack explained that part of the company’s corporate strategy is to increase distributions to its security holders by at least CPI annually, and that therefore it must be growing commensurately.

“This is the reason we have looked to invest in complementary assets that present an easy transition of our core pipeline skills to such complementary assets. Coal seam gas production and storage, power generation and such are obvious targets.”

When asked how he saw the company’s expansion beyond the pipeline industry, he replied “The extent to which we expand beyond the pipeline industry will depend on a couple things including how such opportunities fit with our corporate strategy, the skill set required and when those opportunities arise – but yes, it is quite possible we will continue to expand beyond the pipeline industry.”

Recent pipeline developments have also proved exciting for the company, and Mr McCormack has voiced his support for the Queensland to South Australia/New South Wales (QSN) Link – following Epic Energy and AGL’s announcement that the link will soon be constructed – commenting that the new pipeline may provide APA an opportunity to further expand its own infrastructure network.

When we asked him about these comments, Mr McCormack replied, “The important benefit that the QSN Link will bring will be providing a physical channel to market for gas, and in the first instance coal seam gas, out of Queensland into southeast Australian markets. This will benefit APA through ensuring the long term usage of the MSP, which will bring gas out of Queensland into the New South Wales and Victorian market.

“Notwithstanding the QSN Link,” he added, “we continue to explore a more easterly connection between Queensland and New South Wales, particularly in response to the growing possibility of a major gas fired power station being built in regional New South Wales. Such a power station development would require a very significant amount of pipeline capacity closer to its consumption, hence the Wallumbilla to Bulla Park proposal.”

Looking beyond the eastern states, Mr McCormack said, “We have had a long held view that ultimately demand for gas in southeast Australia will require gas from northern (PNG or Timor Sea) or western sources (North West Shelf). Admittedly, coal seam gas has played a very significant role in filling short term demand, however given the introduction of a carbon emission trading scheme, we believe the demand for cleaner burning gas will increase dramatically over the next decade, which in turn will bring the possibility of gas from northern or western sources back on the table.”

Commenting further on the issue of carbon emissions and the effect that recent developments will have on natural gas in the future, Mr McCormack said the introduction of a carbon trading scheme will put gas at the centre of transitioning from Australia’s reliance on black and brown coal to a cleaner energy future.

“I’m the first to admit that I don’t know what technology will be used in that cleaner energy burning future – whether that is nuclear, solar, geothermal, wind – but I have great faith that when push comes to shove, we will see a technological breakthrough in energy generation at some stage in the future,” he said.

Discussing the potential impact that this will have on gas pipelines, he said: “I think given the reality that under an energy trading scheme gas will become cheaper relative to coal, I believe it is inevitable that demand for gas will increase, and so that will mean healthy growth prospects for the pipeline industry, as it is our infrastructure that will get the gas delivered.”

When we asked about carbon dioxide storage and transportation, however, Mr McCormack admitted to being a little sceptical – “Definitively not on the science,” he said, “but on whether it could ever be justified economically.” He nevertheless thinks that the pipeline industry is in the obvious position, given its expertise, to play a significant role in planning for any carbon dioxide storage and transportation.

Looking more generally at the major issues confronting the pipeline industry in Australia, he said: “My perennial favourite is where we are going to end up with regulation. I sometimes think that we in the pipeline industry are “˜easy targets’ for regulators because of our perceived market power. However I think that rising prices in the gas market in Australia of late far outweighs any market power pipeliners can exert on influencing gas prices to consumers.

“Another major issue is the ageing of the industry, both infrastructure and people. The pressure of regulation and different business structures can result in under maintenance of long term infrastructure like pipelines. We are seeing evidence of this in the current round of access arrangement submissions across a broad range of gas and electricity transmission and distribution businesses. These access arrangements are proposing large expenditure increases in an attempt to catch up on past under-investment.

“The ageing technical workforce is a common issue across all technically based industries. The APIA Young Pipeliner Forum is one initiative that has been implemented by the industry in recognition of the need to encourage younger people to join and stay in the pipeline industry.”

Yet another major issue affecting the pipeline industry in recent times has been the issue of domestic gas supply and gas prices. When we asked Mr McCormack about this, he said that there are ominous signs that gas prices are set to rise significantly given the push in Western Australia to have domestic gas priced at the prevailing international LNG market prices.

He also pointed out the fact that more of the same upward pressure on gas prices in eastern Australia has come from recent announcements by Arrow Energy and Santos that they are proposing to develop LNG export facilities at Gladstone to take advantage of international LNG prices.

“On the one hand, we don’t want to see significant increases in gas prices, since it may dampen demand and will in turn dampen demand for pipeline capacity,” said Mr McCormack. “Of course, on the other hand, an increase in gas prices may bring into production those marginal producing areas that are sub-economic at lower gas prices, which may bring more gas into the market, and so may increase demand for pipeline capacity.”

Meanwhile, water shortages in Australia have seen a number of traditional oil and gas pipeline construction companies playing major roles in the development of large water pipelines, a development that Mr McCormack thinks will continue to present huge opportunities for oil and gas construction companies. He pointed out that this was understandable, given the obvious engineering similarities in design, construction and operation of water and hydrocarbon pipelines, but also said that APA will be making careful considerations before jumping on the water pipeline bandwagon.

“I can’t speak for other companies,” he said, “however we at APA are interested observers in the development of the water pipeline industry, and we will be so until we get a clear understanding of the policy framework (particularly pricing) around the whole water industry.

“I guess we want to be sure that before we consider investing in water pipelines that there is no possibility that the rules might change, say if the drought breaks.”

In recent times, Australia has seen a number of different contracting models used in the construction of pipelines, and when we asked, about the how the balance between EPC, Alliancing and others might develop in the long term, Mr McCormack said: “I have an old fashioned view of pipeline construction when using contractors – in that whatever the contracting methodology, if you get the risk allocation balance wrong between the owner and the contractor and something goes seriously astray during construction, you will have a serious squabble on your hands.

“As they say, irrespective of the goodwill between parties, it’s only when one party is facing serious loss on a project that you really do get to test how good the contracting methodology is,” he said.

“Over the years, I’ve been involved in some very successful pipeline projects under a raft of different contracting methodologies, and I think it’s fair to say the success of these projects was due entirely to me as owner and the contractor both believing ultimately we got a reasonable outcome – I got a well-built pipeline, and the contractor made a reasonable quid out of it. As I say, if a project is underway and a serious, unquantified risk crystallises unexpectedly, then if one party thinks they are unfairly exposed relative to the other, then you have got a serious issue brewing.

“I guess what I am saying is that over recent times I have seen too many examples of owners and contractors being forced (due to competitive tensions) to bid into pipeline development projects knowing that some risks weren’t being priced adequately, then worse, those risks weren’t allocated between the owner and contractor. Such situations really are a case of “˜let’s put the bid in and then pray that if we win, construction goes real well’. I hope that over the longer term this situation is changing, because the best projects always will be those where all concerned go home believing they have made a fair return for the risks borne.”

For this special IPLOCA edition of The Australian Pipeliner we wanted to get Mr McCormack’s perspective on lessons that Australia could learn from the international pipeline industry, and vice versa. He told us, “I think that the Australian offshore pipeline industry is part of the international pipeline industry, so lessons learnt are automatically adopted. The Australian onshore pipeline industry is so remote from and smaller than the international industry that I find it harder to connect the two.

“One area of two-way learning has been in the pipeline research area with APIA, EPRG and PRCI coordinating and sharing pipeline research and development. An example of Australia’s contribution in this area is that an Australian research paper won the best paper awards at the recent International Pipeline Research Meeting in Canberra.

“Similarly with the IPLOCA convention happening here…it is a great chance for the interchange of ideas and experiences which will benefit both the local and the international industry.”

When we asked whether APA might be considering involvement in pipeline or other assets outside Australia, he replied “Anything is possible I guess, however for the moment we have plenty to do in Australia without looking to overseas markets.” But he also pointed out that the company does aim to keep abreast of pipeline development and acquisition opportunities in other parts of the world.

Wrapping up with APA’s plans for the future, Mr McCormack revealed that the company’s immediate focus is to bed down the acquisitions it has made over the past year or so, and continue to extract synergies out of the business.

“Over the distant future, we will look to how we can position the company so that it will continue to play a leading role in the development and operation of this country’s gas transmission and distribution infrastructure, as well as determining where APA will be positioned as we transition to a cleaner energy future in the next generation.”

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