Virtual Gas Pipeline to Supply Pilbara Mine in Australia

Researched by Industrial Info Resources Australia (Perth, Australia)--A deal with Fortescue Metals Group Limited (ASX:FMG) (East Perth, Australia) to supply compressed natural gas via a virtual pipeline to the Pilbara mine may be the first of many if things go well for gas supplier Sub 161 Pty Limited (Brisbane, Queensland).

Sub 161 is one of only a few companies in Australia that are trying to introduce virtual gas pipelines to the mining industry. Virtual pipelines involve the transport of compressed natural gas via specialized road tankers. Traditional pipelines are generally more economical over the long term, but virtual pipelines provide more flexibility.

In this case, gas would be moved to Fortescue by virtual pipeline until the 270-kilometer (170-mile) Fortescue River Gas Pipeline is complete. Construction on the underground pipeline is due to commence in the second quarter of 2014 and to be complete by the end of the year.

Fortescue has signed a take-or-pay agreement with Sub 161 to supply the compressed-natural gas equivalent of four petajoules during the next 12 months. Based on current prices, the deal is worth about US$60.9 million (AU$68 million). Fortescue plans to reduce running costs by utilizing the natural gas to replace an estimated 300,000 litres of diesel used each day by its 125-megawatt power station.

This is the first major contract for Sub 161, which has plans to build a number of facilities in the Pilbara and Goldfields regions and begin supplying other mining operations that rely on diesel for their power generation.

Angus Karrol, the chief executive of Sub 161, said he believes his company can save mine operators as much as 30% on their energy costs. Typically, wholesale gas contracts are between $6 and $8 per gigajoule, which is significantly cheaper than diesel, and not subject to the volatility of the international oil price and fluctuating Australian dollar.

In addition to supplying gas for power generation, Sub 161 has plans to supply compressed natural gas and liquefied natural gas for use in mine haul trucks and locomotives.

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