WA gas explosion fallout serious for iron ore, gold and base metals suppliers

The Varanus Island gas explosion and subsequent loss of around 30 percent of the state's gas supplies is creating serious problems for the state's massive mining industry and will affect productivity and supply for months, rather than weeks.

Author: James Regan
Posted: Sunday , 08 Jun 2008

PERTH (Reuters) -

Western Australian miners, which supply the world with metals and iron ore, fear sharp falls in productivity and lay-offs after a gas-plant explosion robbed them of power, industry and local government officials said on Sunday.

"This is very serious," Reg Howard Smith, head of the state's Chamber of Minerals and Energy, said after crisis talks with some of the world's biggest resources firms, including BHP Billiton BHP..AX(BLT.L), Rio Tinto (RIO.AX)(RIO.L) and BP (BP.L).

"We're seeing some stand-downs of staff occurring and we're still deciding what needs to be done," Smith told Reuters.

Western Australia lost about a third of its energy supplies last week when an explosion crippled a gas-handling plant on the tiny island of Varanus, about 100 km (62 miles) off Australia's northwest coast. The Varanus plant, close to offshore gas fields, is operated by a unit of U.S.-based Apache Corp (APA.N).

Tim Wall, managing director of Apache's Australian unit, said on Sunday he was sticking with an earlier estimate of "months, not weeks" before damage to the plant and associated gas pipelines was repaired and operations could restart.

Western Australia's state government is trying to import more diesel from Asia to offset the drop in gas supplies, state premier Alan Carpenter said, noting that BP, which operates a diesel refinery in the state, was already at maximum production.

But getting diesel to remote, outback mines could take time.

"There is no wand to make this crisis disappear," Carpenter told reporters on Sunday. "It's one thing to get the diesel here on ships and another to where it's needed by truck."

Western Australia supplies about a third of the world's iron ore, 20 percent of the gold and tens of thousands of tonnes of copper, nickel, zinc, lead and other industrial staples.

Carpenter said stepped-up gas production from other gas suppliers would help but it could not eliminate the problem.

Smith of the Chamber of Minerals and Energy said large sectors of industry hurt by the shortage could expect little if any relief, even if more diesel arrived.

"There are large parts of our industry that are involved in processing, where there is no substitution for the gas they need," he said.

Nickel smelting and refining had been among the hardest hit, since those operations can only run on gas, Smith added.

BHP runs the Kalgoorlie nickel smelter in Western Australia, one of the world's largest, churning out 100,000 tonnes of the steel-alloying metal each year. A BHP refinery 800 km (500 miles) away, near Perth, refines a further 65,000 tonnes annually.

"This comes at a very critical time for the nickel miners, who are struggling to keep on top of demand," said Eagle Mining Research analyst Keith Goode.

"The impact on supply is still not clear."

BHP said late last week it was so far coping by conserving gas and finding other suppliers, though another nickel miner, Minara Resources Ltd (MRE.AX), which produces about 33,000 tonnes of nickel annually, said employees normally working on making nickel had switched to plant maintenance during the crisis.

Other industries also dependent on gas for production included ammonium nitrate for explosives, cyanide used in gold mining and other key parts of the mining process, Smith said.

"Those issues of how to keep up are going to take a long time to work through," Smith said.

Western Australia's biggest source of gas supply was cut off after two pipelines feeding offshore gas ruptured, causing an explosion at the Varanus island plant. Apache has since invoked a force majeure clause in its contracts.