AVIVA CORPORATION

OPTIONS  

 

The Board of Aviva has assessed the options available for the Coolimba Power project following advice on 12 October 2009 that it had not been appointed preferred tenderer by Synergy under its 2009 supply procurement program.

 

The constraining factors in assessing the future options are as follows:

·        Synergy is the only wholesale power customer in the south-west of WA with sufficient credit worthiness to underpin the project financing of a coal fired power station.

·        Global power producers, such as AES have little interest in generation projects that are not underpinned by an off take agreement with a strongly rated counterparty, such as Synergy.

·        Without the involvement of a retailer, it is impossible  to economically aggregate small loads, and extremely difficult to put in place the required funding for the project.

·        The ongoing public debate regarding a merger of Synergy with state owned generator Verve Energy, and the changes or potential changes in arrangements between Verve and Synergy, creates insurmountable investment uncertainty for large projects necessarily reliant on Synergy for off take.

 

Market factors underpinning the opportunity for power generation are:

·        Domestic gas supplies to the southern end of the Dampier to Bunbury pipeline are, in our view, more likely to decrease than increase by 2014. Regardless we expect the price of gas for power generation to increase dramatically in that timeframe.

·        The Independent Market Operator forecasts unmet electricity demand of around 500MW in 2014/15.

·        Much of that new demand is from block mining loads in the Midwest region essential for the development of the Oakajee Port. However in the south desalination and silicon smelting loads are also set to double.

 

Project factors that remain attractive in this context are as follows:

·        Coolimba is nearing final environmental approval for a 360MW gas fired power station and a 400MW coal fired power station.

·        Coolimba is one of the most attractive sites for the development of CCS (Carbon Capture and Storage) in Australia.

·        Coolimba has fuel reserves equivalent to 100TJ per day for 30 years available for power generation.

·        Coolimba’s location adds to state energy security by increasing fuel and transmission diversity. 

 

In the absence of Synergy as a customer, it is not feasible for the company to pursue a large coal fired power project as the start up option at Coolimba. Aviva’s business case  is centred on upfront fees for the development of coal resources associated with a generation project, and therefore it is simply not attractive for Aviva to pursue power developments with gas fuel purchased from third parties. 

 

The Aviva board is of the view that in the timeframe required to make the project feasible, Synergy is no longer a potential customer for private baseload generation in the SWIS and the only options to extract value from Coolimba are to align the project with an alternative customer, either a private retailer or one of the block mining loads in the Midwest.  It is most unlikely that Aviva can participate directly in either of these development options.  To this extent discussions have commenced with relevant parties who may be interested in assuming development of the Coolimba Power project with a view to recovering some value for Aviva.

 

Agreements are in place between the owners of the mining rights, the owners of the mining title and Aviva to provide for exploration of the Central West Coal deposit.  Aviva’s option over the mining rights has been extended by mutual consent to allow for the timing of the Synergy procurement process. If Aviva does not reach agreement to extend the option on the mining rights beyond the 20 November 2010 deadline these tripartite agreements fall away, leaving the mining title, rights of exploitation and technical data in separate hands, which will make the future exploitation of the coal most unlikely.  The data generated by Aviva in its studies remains the property of Aviva.  In the past,  Aviva has been able to secure an extension of the option, however, it is unlikely that Aviva will seek a further extension of the option in the absence of a viable commercialisation opportunity for both parties.

 

ELECTRICITY MARKET

The Independent Market Operator (IMO) highlighted the need for at least 500MW of new generation by 2014/15 in its Statement of Opportunities released in July 2009. Much of this unmet demand is made up of 20Mtpa of magnetite iron ore projects. The Minister for Energy confirmed in writing to Aviva on 17 June 2009 that no decision had been made to remove the 3,000MW capacity cap on Verve Energy which had been in place since 2006. Verve has also issued statements affirming its intention to stay within the 3,000MW cap.

 

OAKAJEE PORT

It is understood that the Oakajee Port development championed by the WA government, and the intended  recipient of infrastructure funding from the WA and Australian governments, will require throughput of 25 million tonnes per annum to be viable. The most advanced projects in the Midwest likely to provide this throughput are power intensive magnetite projects. Magnetite production of 25Mtpa will require baseload power generation capacity of 400MW. The port itself and attendant service industries will require additional power.

 

FUEL SUPPLY

Aviva’s assessment of the fuel available for power generation by 2014/15 in Western Australia also supports the critical need for a project like Coolimba. Domestic gas supplies are currently around 1,200TJ/day. Depletion of existing fields is likely to cut domestic gas supplies by around 300TJ/day. New “unsold” domestic gas supplies are coming on line but only after 2014/15, including Gorgon 150TJ/day, Pluto 85TJ/day and possibly Macedon 100 TJ/day.  

 

Rapid growth in the Pilbara iron ore industry is driving the demand for gas in the northwest. Power generation requirements alone will require an additional 150-250TJ/day of gas.  Minimal transport logistics and price insensitivity are likely to make the Pilbara customers a preferred market for new gas suppliers.

 

The Dampier Bunbury pipeline supplies around 750TJ/day to the southwest market and demand for gas from the power, industrial and household sectors in the southwest continues to grow.

 

It is our view that prices for new gas contracts to support electricity generation will be at a level where Coolimba would be viewed as being very competitive.

 

SUMMARY

By 2014/15 the SWIS market is forecast to require 500MW of new generation, gas supplies are likely to be constrained, and / or  gas prices could increase significantly.

 

Coolimba Power was planned to commission in 2014/15 providing 400MW of new generation in the Midwest with a dedicated coal reserve providing 100TJ/day for 30 years at a competitive rate.

 

Without Coolimba or a similar project, we expect constrained power supplies, higher power prices, and significant impacts on the development of the Midwest.