Also in today's AFR, Matthew Stevens intones: Meanwhile, in a...

Also in today's AFR, Matthew Stevens intones:

Meanwhile, in a market development far less tectonic, Incitec Pivot has offered some affirming clarity on its evolving plan to find enough gas at the right price to give its Gibson Island urea plant at least 12 months of breathing space while more certain raw materials solutions are developed.

Over recent years the Gibson Island plant has become the litmus of the failed state of Australian gas markets.

For better than a decade Incitec has been filling its Brisbane plant with very cheap gas provided under a legacy contract signed originally with Queensland Gas and then owned by BG Group and finally by Shell.
Gas was cheap when the deal was signed in 2005 and Incitec secured a discount to the market because the volumes on offer were transformative to Queensland Gas. As we all appreciate now, the era of sub-$6/gj gas is long gone and since 2015 Incitec management has struggled to find affordable replacement volumes enough to sustain Gibson Island.

For maybe three years now Incitec has floated the idea that Gibson Island was a plant on death row. And then in March the explosives and fertiliser maker found itself talking to the same guy who signed the peachy keen 2005 supply contract, former Queensland Gas boss and current Central Petroleum managing director Richard Cottee.

Window of opportunity

Incitec and Central are now partners in gas exploration in a new and prospective central Queensland tenement released by the state government and that arrangement is going to extend to Cottee delivering a bridging gas supply deal for Gibson Island.

In introducing a sturdy set of interim numbers yesterday, new Incitec chief executive Jeanne Johns indicated that the new gas that fills Gibson Island would cost up to $3.50/pj more than the legacy gas and that the one-year deal that was likely to be signed with Central would extend the window of opportunity to secure longer term security for the plant.

There are a couple of conclusions to draw from that number.

First,it means Cottee is prepared to surrender potential short-term margin for longer term joy given that Johns indicated that a $7-8/gj landed gas price was‘‘not a million miles’’away from reality.

Second, given that we know Incitec is likely to have a field gate arrangement with Central, that estimated cost would indicate that recent changes to the way new pipelines can recover capital costs would seem to be having early impact.

Just last year an independent expert assessed that it would cost up to $5.20/gj to transport gas to Queensland’s Wullumbilla gas hub. Given there is no way that Cottee is selling gas at anything near $3/gj, then it would seem a fair bet that Incitec has been able to get itself a much better deal on pipeline capacity than was foreshadowed by Central IE.

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Ash