Orica's gas deal could ignite a price surge  

The BS reports that explosives company Orica are looking to avoid manage their exposure to rising natural gas prices by contracting future gas supplies - Orica's gas deal could ignite a price surge. Orica's Ian Smith was on the ABC's Insiders program this morning talking about the deal and noting that while mining services companies that are involved in construction are in trouble with the end of the mining boom, other mining services companies (like Orica) that are involved in ongoing production are actually benefiting from decreasing quality of ore grades, with more explosives being required to extract the same volume of iron.

Ian Smith isn’t relying on governments or a breakthrough in the impasse over exploitation of NSW’s coal seam gas reserves to secure Orica’s gas supplies. Today he added a conventional arrangement with Esso and BHP Billiton to an earlier and rather less conventional deal to get access to gas.

The three-year agreement with Esso and BHP enables Orica to acquire up to 42 petajoules of gas over three years, beginning in 2017, from the Bass Strait partners. There is provision for the agreements to be extended into the next decade.

Earlier this year, Orica unveiled a very different kind of arrangement under which it signed a gas off-take deal with Strike Energy. This enabled it access to 150 petajoules of gas at an ‘’affordable’’ price over the next two decades by making pre-payments of $52.5 million to help fund commercialisation of Strike’s coal seam gas project in the southern Cooper Basin in South Australia.

Smith said today discussions were also underway with a number of parties over the supply of 3.5 petajoules a year to Orica’s Yarwun ammonium nitrate facility in Queensland. The Esso/BHP deal will meet the gas requirements of its Kooragang Island facility in NSW.

Smith has made it very clear that he isn’t going to leave Orica exposed to the outcome of the inconclusive debate about ‘’reserving’’ gas in Australia, nor risk the eventual outcome (if any) of the highly-politicised debate about the development of NSW’s extensive coal seam gas resources.

That determination to lock in his group’s energy requirements flows from the knowledge that the contracts that had under-pinned the access to gas for large domestic customers will fall away over the next couple of years just as the domestic gas market in Australia undergoes fundamental structural changes.

It is the development of the coal seam gas-fed export LNG projects at Gladstone in Queensland that has fundamentally changed the nature of the market. From next year, BG Group will begin exporting LNG, with the other two big facilities owned by the Santos and Origin Energy-led consortia not far behind.

That will divert a lot of gas that might otherwise have been sold into the domestic market offshore and expose domestic gas consumers, used to a market where there was a surplus of gas, to export-related prices for the first time. (In fact, recent gas contracts have reflected the oil-linked LNG prices, less the cost of liquefaction and transport, with the price rising from around $4 per gigajoule into the high single digits.)