Infrastructure keeping pace with Gunnedah mine development

The Great Dividing range separates NSW’s two major coal fields. On either side high quality, shallow coal seams lie within easy reach of the miner, with the Hunter Valley on the east, and the Gunnedah Basin to the west.

A great divide also separates their levels of production. The Hunter, NSW’s wellspring of coal, has an annual production over 100mtpa. The Gunnedah Basin, despite having more than 1.5 billion untapped tonnes of recoverable coal, is a hundred years behind. The Hunter surpassed its neighbour’s production rate of 6mtpa in 1908.

But that is set to change, with a multitude of new projects in the offing for the Gunnedah Basin. BHP Billiton, Shenhua and Aston Resources all have plans for operations producing over 10mtpa. Whitehaven and Idemitsu are set to ramp up their existing operations. Significant environmental and planning issues are yet to be resolved, however coal production is expected to top 50mtpa by 2020.

The supply chain will need new infrastructure to accommodate growth. Whitehaven’s 5mtpa Narrabri longwall expects to start producing before the end of the year. Aston is planning to shift its first load by 2013, increasing to 10mtpa over the next four years. BHP Billiton’s Caroona project and Shenhua’s Watermark have estimated reserves of 500m and 1 billion tonnes respectively.

In response, Port Waratah Coal Services (PWCS) is developing huge increases in capacity at the Port of Newcastle and the Australian Rail Track Corporation (ARTC) has finalised plans to remove pinch points in the rail network.

Currently, at the major rail bottleneck on top of the peak of the Liverpool Ranges at Ardglen, carrying capacity is limited by a single track and steep grades. To rectify the problem, ARTC elected to duplicate the existing alignment. Alternate options were considered, which involved additional tunnels and decreased gradients. The duplication option won because it enables construction to be phased and is cheaper.
 

In its Hunter Valley Corridor Capacity Strategy ARTC said:

The duplication of the existing alignment can be staged. The benefit of this approach is that it allows for incremental increases in capacity and capital expenditure in line with the required capacity increases.

Tim Ryan, general manager of the ARTC, speaking at the Gunnedah Coal Conference, said there were four reasons that the duplication option was accepted. “It is by far and away the most cost effective option. It is staged and can be added to as demand is contracted. We are building the capacity as users come on line and we are not building ahead of demand and we can time it to match the timing of port capacity.”

Initially, the ARTC will spend $34m on the first stage of its project by building two passing loops. Pages River Loop is expected to be delivered half way through 2012, with Chilcotts Creek following by the end of the year.

Ryan said “We will run three distinct projects in this process. The first two, the Pages Creek Loop and the Chilcotts Creek Loop we have commenced the planning. The duplication for the rest will be a part 3A application, or whatever the alternative process is [under the new government].”

ARTC anticipates that the remaining infrastructure development on the Liverpool Ranges line, required to service industry growth, will cost $250m. Accurate predictions of tonnage will be achieved based on take or pay contracts coal companies establish at the Port of Newcastle, which will add a fourth terminal in 2015 (T4).

Ryan said “the project timing [for the Liverpool Ranges] assumption will reflect nominations people make at the port and also our assumption of unlimited T4 capacity for the Gunnedah Basin. We are assuming Aston will take their available port capacity from 2013, and then other entrants will ramp up from 2015.”

Dwayne Freeman, general manager commercial for Australia’s largest rail freight operator Pacific National (PN) said that despite the increase in track capacity, logistical issues continued to impede the supply chain.

“There is not insufficient track capacity, but it operates in such a way in which variation and recovery from loss is quite difficult. If the train loses its path in the Gunnedah Basin, those tonnes are gone. There is just not the ability to move those tonnes again

.“There is no incentive in that Hunter Valley Coal Chain Coordinator –ARTC agreement to stop people running shorter trains and to encourage investment in train size so we get maximum capacity per path. Some would say it is somewhat of an incentive to actually run shorter trains and not move to larger sizes.”

It appears the fluid nature of the expansion and approvals process creates difficulties for above rail operators servicing the mining industry. Freeman explained that “the issue for PN, from an above rail perspective, is a lack of transparency around the planning and constructing that exists in most projects and how that impacts the investment choices we have to make.

“If you look at the Gunnedah Basin specifically, PN are going from seven, to 20 and then to 30 trains. During a period of shutdown, that is 30 to 40 km of train. Where do they go? There is insufficient space at low points in the majority of times, or the area surrounding track is either government owned or ARTC owned. There needs to be a solution for where trains go, to get them off the network in low times, shutdowns in the network etcetera.”

Aston and Whitehaven, both with major new coal projects under development, are satisfied with the progress and scope of rail infrastructure in the Basin. Similarly, further along the supply chain, both companies are confident that port capacity will match their export needs.

At the AJM Gunnedah Coal Conference, Aston chief executive Todd Hannigan said he is confident that rail capacity will match demand and explained that Aston elected to only accept the minimum capacity at Newcastle to trigger the construction of T4.

“Even assuming highly bullish production growth from NSW coal producers over the next five years, there is still likely to be significant excess capacity at Newcastle. With a surplus of port capacity, the likely outcome is that port entitlements may trade at a significant discount to their take or pay obligations,” Hannigan said.

Whitehaven’s executive director Andy Plummer, speaking at the same conference, agreed with Hannigan’s positive assessment of rail infrastructure developments. Similarly, Whitehaven’s projected output of coal exceeds its allocation at port for a number of years.

“Our mines will be putting through more coal than we have port capacity,” Plummer said. “But that’s not a terribly bad place to be because we expect deals with other producers whose development hasn’t come on as quickly as expected, to fill the four year gap.”

In the interim, prior to the completion of T4, PWCS will accommodate the needs of producers with the expansion of current infrastructure capacity from 113 to 145mtpa.

Chief executive of the Government’s operator, Newcastle Port Corporation (NPC) Gary Webb spoke at the Gunnedah conference about the Hunter Valley Coal Export Framework (HCEF). Webb explained that the framework is a commercial agreement between the port’s commercial operators – PWCS and the Newcastle Coal Infrastructure Group – and NPC.

Under the HCEF, port operators can suspend the Common User clauses in their contracts with NPC, which force them to accept all vessels seeking access, in turn freeing them to enter into long term take or pay agreements with coal producers. Webb said “it is an historic agreement to ensure there is growth in coal export capacity and that there will be equitable long term access to that capacity.”

Webb explained that long term contracts allowed both port operators and users to invest on future developments with greater certainty. “One of the key economic considerations was if we had the long term take or pay contracts, the terminal capacity will be built. Therefore, that commitment will drive capital investment up the chain.”

T4 was triggered under the Long Term Commercial Framework (LTCF). Under this framework, PWCS has a legal duty to provide sufficient terminal capacity to meet the required capacity of coal producers. PWCS predicts exports will grow to 200mtpa by 2020.

The T4 expansion has now been granted Major Project Facilitation status by the Department of Infrastructure and Transport to expedite development. The project’s general manager for PWCS, Lindsay Crutchsaid the pre-feasibility study is around 80% completed. He explained that the building of the project would be funded by the common user charge, which would be in the order of $1.5 – $2 billion.

Speaking at the Gunnedah Coal Conference, Crutch said PWCS has lodged a Part 3A application and begun its Environmental Assessment process which will consider the presence of sensitive fauna. The proposed T4 site, Crutch explained, contains a population of Green and Golden Bell Frogs and an internationally recognised wetland “that is a feeding area for migratory birds. The Commonwealth Government has had quite a bit of interest in that.”

Crutch said PWCS would find it difficult to stick to the timeline and ship first coal in 2015. “I don’t think you should underestimate the competition for port development resources. That includes manufacturing capacity, dredging and anything associated so keeping the time frame will be a major challenge.”