WA Gas Crisis Starts Taking Toll

Global diesel prices, already running at record highs in Asia, the US, Europe and Australia, are being further boosted by rising stop gap demand from Western Australian miners looking for new energy sources after the shutdown of Apache Corp’s WA natural gas plant slashed the state’s supplies of the fuel by a third.

And two miners, nickel group, Minara Resources and gold miner, Newcrest both warned yesterday that output from their WA mines would be cut because of the gas outage with early estimates putting the losses for both companies at more than $100 million, depending on world prices.

As well, Babcock and Brown Power, already troubled by funding issues and a low share price, yesterday warned that its earnings would be hurt by the gas outage. It distributes gas in WA using the old Alinta asswets it bought last year.

The emergency recalls problems which happened almost a decade ago in Victoria when the state’s gas supplies were shut down because of an explosion and fire at the Exxon plant that processes Bass Strait gas.

Diesel prices are high and rising as world oil prices grow and demand skyrockets from motorists looking to switch from petrol to the more efficient fuel.

At the same time demand is surging from China because it has sent hundreds of generators into the Sichuan quake zone to produce emergency electricity supplies. That has seen exports from China fall, putting further upward pressure on prices in Asia.

Oil refineries in countries like Australia, the US and parts of Western Europe are not set up to boost diesel output because they are configured to process so-called ‘sweet’ crudes which produce a lot of petrol and other light products just as jet fuels and kerosene.

Diesel and bunker oil for ships are produced for ships and industrial use in power plants and trucks and come from heavier crudes. The surge in demand from motorists has already sent prices to record levels in Australia, Europe, the US and Britain.

Now Bloomberg reported yesterday that BP, the state’s only refiner, is planning on securing extra loads of diesel in overseas markets for WA where the likes of BHP have said that if gas supplies fall short it will have to switch to diesel at some mines, especially the new Ravensthorpe. Newcrest and Minara are switching and Fonterra, the big dairy group is joining the push.

Shell is reported to be thinking along the same lines as BP.

Alcoa, a major gas consumer at its alumina refineries south of Perth, is another user switching to diesel to power its plants.

Apache warned last Friday that the Varanus Island gas production facility may be halted for two months after the fire three days earlier damaged three pipelines.

North West Shelf operator, Woodside Petroleum is WA’s biggest gas supplier and it says it is directing all available gas to Apache to help meet the supply shortfall.

The outage raises the prospects that export earnings could be hit as miners in WA are forced to cut back output to accommodate the lowered gas supplies. That recalls the flooding induced drop in coal exports from January onwards that depressed export income until April when signs emerged of an improvement and higher export coal prices.

But Minara and Newcrest Mining are the two miners to have so far gone public with estimates of the damage the shortfall will cause for them.

Both said the explosion and fall in gas supply would impact full-year production forecasts.

Newcrest shares were down 4.3% at $28.65 in early trading before ending off 68c at $29.27; while Minara were off 5.7% at $3.64 and ended down 23c at $3.63. Babcock and Brown Power shares were halted.

Supplies from Apache’s Varanus plant, 100 kilometres off the north west WA coast, have stopped while repairs to damage caused by the fire start.

Minara said today it had secured temporary gas supplies for its Murrin Murrin lateritic nickel mining operation. It is totally dependent on Apache Energy’s gas for its power.

But the disruption to gas supplies had reduced its production forecast guidance for the year to 31,000-35,000 tonnes. That’s down from the February forecast of 34,000 to 38,000 tonnes of metal.

That loss of 4,000 tonnes of nickel could cost Minara more than $82 million in gross revenues.

Newcrest says the gas problem will cut production at its Telfer mine by 30,000 ounces of gold and will impact Newcrest’s full-year production forecast of above 1.8 million ounces. That will cost Newcrest around $24 million in gross revenues.

It had already said in April that production would be at the lower end of its forecasts because of the need for more repair work at Telfer. Newcrest has been revamping the mine at a cost of over $1 billion and has suffered repeated disappointment, but thought it was slowly getting the mine right to boost output to what it sees as its best capacity.

And media reports claim the $2.5 billion float of fertiliser producer Burrup Holdings could be delayed to avoid tens of millions of US dollars being lost from its 2009 profit forecast.

It would be the second delay for the float which was due to happen earlier this year. The size was cut back then and there have been questions raised in the media about disclosure levels in the prospectus.