CITIC Pacific, the Chinese owner of the troubled Sino Iron magnetite ore development in the Pilbara, has been forced to buy almost $200 million of gas from Apache and Santos over the past year despite having little use for the fuel.
In the latest blow to the Hong Kong-listed conglomerate, CITIC is understood to have tried to on-sell the gas to other WA industrial consumers while it waits for Sino Iron’s long-overdue construction to come to an end.
But it is unclear if those efforts were successful or if CITIC managed to achieve a higher sale price than the about $7 to $8 a gigajoule it has to pay Apache and Santos.
A CITIC spokesman would not discuss the offtake arrangement.
“CITIC Pacific Mining is fulfilling its contractual gas obligations with Apache and Santos,” he said. “CPM has a number of options in place in managing its gas profile to best suit the needs of the project.”
Industry sources had speculated that CITIC may have entered into gas swap arrangements or even tried to get Apache and Santos to delay the start of the gas supply, scheduled for late 2011, because of Sino Iron’s construction delays.
However, Santos has been booking sales revenue from Devil Creek since last year.
Neither Apache nor Santos would comment.
Under the terms of the offtake deal with the Devil Creek partners, CITIC was to buy up to 65 terajoules of gas a day since late 2011. It is part of a seven-year gas supply agreement that the parties valued at $US1.3 billion in early 2009. At the time the parties referred to a Tapis oil price of about $US50 a barrel — Tapis was last night worth $US114/b — but pointed out that the value of the offtake would be adjusted to match Australia’s consumer price index and, from the fourth year, be indexed to international oil prices.
It means the Sino Iron supply deal is worth at least $US186 million ($179 million) a year.
Sino Iron underpinned construction of the $1.1 billion Devil Creek operation, owned 55 per cent by Apache and 45 per cent by Santos.
Devil Creek produced first gas in December 2011.
Devil Creek can process 220tj/d with an initial output of 110tj/d.
Sino Iron accounts for more than half the output.
The gas is needed for Sino Iron’s energy-intensive magnetite processing operation, to be fired by a 450 megawatt power station and aided by a 51 gigalitre desalination plant. Sino Iron’s construction has been a disaster.
Timetable delays have been accompanied by a 74 per cent budget blowout to $US6.1 billion.
Commissioning of the first of six massive grinding mills has only just begun.