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German tests for $2bn Gippsland coal/fertiliser project

Victoria’s first clean-coal facility moved closer this month as tests converting Gippsland coal into fertiliser started in Germany.

By Susan Webster - 28th October 2008 - Back to News

About 1500 tonnes of brown coal from Loy Yang is being tested as the first step in a $2bn project using low-value lignite to replace fertiliser imports.

Latrobe Fertilisers Ltd CEO Bob Davies said drying tests finished on October 17 – cutting the water content of brown coal from about 65% to 12%.

The drying process is the first step in transforming lignite into its gaseous components before converting the nitrogen gas into a solid – urea – a fertiliser used widely to boost pasture.

Annually Australia and NZ uses 2m tonnes of urea, 80% imported from the Middle East, where it is manufactured using gas-based fuels. Rising gas prices have seen global urea prices soar over the past eight months.

Addressing a meeting of Agribusiness Gippsland Inc recently, Mr Davies explained that farmers would also benefit from a price-stable supply of locally-sourced fertiliser.

Agribusiness Gippsland Inc chair Alex Arbuthnot said: "The farming community has an immense interest in this, and the Latrobe Valley needs this sort of secondary industry."

Mr Davies said the German tests dried high-moisture, high-sodium lignite coal that the electricity-generating plant at Loy Yang cannot use. "This coal overlies the mining coal but they can’t burn it," Mr Davies said. "If we take that, we will reduce their overhead costs."

The drying test, undertaken by Germany’s RWE Power, was done in two batches and the coal is now ready for the gasifier stage. "The first tests started this week and we should have all testing done by the end of next week, with the results coming at end of month," he said, adding: "We’re comfortable that we’ll be successful."

"There’s a lot of coal companies around the world seeking to make coal to gas and then to another product. But the underlying logic is the availability of cheap coal," he said.

Using coal from an existing mine has cost benefits, no capital expenditure, low cost and no permit delays, he said. The process uses off-the-shelf technology currently in operation in 150 plants around the world.

Apart from the German lignite drying technology, Latrobe Fertilisers has sourced its gasifier through Siemens, another German company. Mr Davies said: "You have to get in a queue for these things. China has 5m tonnes of coal-to-urea planned.

"Why urea? In terms of long-term prices we get more returns from urea than methanol, with the lowest returns from diesel fuel."

He continued: "And why brown coal? Brown coal is stranded because it’s 65% water. Black coal is the export commodity at the moment.

"Also, we think there is still significant natural gas price risk and we think price parity will happen. Gas prices are going to move to reflect whatever the energy requirement is.

"A lot of urea plants in the US are shutting down because of high fuel prices."

The energy requirement of the plant itself would be considerable, Mr Davies explained.

Drying the coal requires heating it to 1500C. Fly ash is added as a flux and the process finishes as a solidified slag.

"Because we burn at a much higher temperature than the power station, the resulting slag is inert. You could use it for road making."

"The sulphur we capture and sell, so there’s no ash to dispose of. We are also drawing nitrogen from the air through the air separation units in the gasifier," he said. "We have a very small environmental footprint."

Another by-product of the process is a very pure carbon dioxide that requires no further treatment prior to compression and underground sequestration.

"We’ve worked with this for about 10 years and have done a lot of work on it. It’s hard because you want to be taken seriously," he said. "One myth is that it’s unproven science and the other is that once you put CO2 down there it’s going to pop up again."

"However, we will not be sequestering CO2 at the outset of the project," Mr Davies said.  "We’re too small. We can’t justify infrastructure for 1.5m tonnes, although we’re looking for a common-user hub." Such a hub would sequester CO2 from a variety of sources.

He warned, however, that the project was "not a panacea in terms of cost. In terms of the best numbers it will cost $14-20m/tonne for CO2 sequestration," he said.

Would there be government investment in the plant? "They might have to invest, especially for establishing CO2 reservoirs, because they’re so capital intensive."

He added: "Urea from Loy Yang coal will cost more to produce than urea produced from Middle East gas because of high capital costs, but offsetting that is a $80/tonne freighting advantage over urea brought in from the Middle East."

He added the freight advantage extended up the east coast and west as far as Esperance. Mr Davies said the project had committed 1m tonnes/year freight to Geelong on V/Line and is also looking at storage at a grain port facility at the Port of Melbourne.

Asked about the possibility of shipping from Hastings once the anticipated upgrade is finished, Mr Davies answered: "We’re all about certainty."

Asked about the lack of standard gauge rail, he replied: "It adds to the handling problem.

"We’ve looked at construction of a broad gauge rail line around Melbourne to Geelong. If you build the infrastructure, people will come and use it. If we want to expand the plant by adding more urea production or by adding ammonium nitrate production we’re strapped or stranded. We will have used all the port facilities. But if we build the plant and have a successful operation, we have a stronger bargaining position."

Asked about the lower-end supply chain, he said: ‘We’re looking at distribution strategy of getting it as close to the farmgate without relying on others."

The farmgate is the fundamental for Bob Davies.

So is water.

The plant will need 4GL/year and will be designed to recover all water gained from coal drying. The reused water will be used in the gasifier quench.

Mr Davies added: "We’re also looking at taking water from the power plant’s existing ash ponds when it gets to high-enough saline levels and treating that water at 60c/tonne to use for cooling," he said. "Another alternative is to take water from the Gippsland Water Factory, although that will require some treatment and we’re trying to sort through the alternatives. We’re also looking for a commitment from the State Government for water. We need committed water under contract. It’s critical."

And it also needs coal. The company has signed a coal reservation agreement with Loy Yang, which will later convert to a supply agreement. "Loy Yang produces 30m tonnes coal a year, we need 3m tonnes," Mr Davies said.

And land. The plant would be on cleared farmland currently zoned industrial. A flora and fauna benchmark survey has started as preparation for environmental permit applications. And the company has been offered a facility adjacent to the railhead to truck out product over normal roads to then load and rail-freight to port.

Negotiations are also underway to acquire land nearby for the processing facility.

Mr Davies said: "There is the possibility of two sites leased adjacent to Loy Yang but we would prefer to acquire private land and we are in negotiation now. We would prefer that to the leasehold arrangement."

The project requires about 1 sq km, with the factory footprint about 40% of the site. "The geography means we can’t bring in large components but have to new build because it’s inland," he said.

The company is looking for "the right IR structure" because of the construction process, he added.

"We’re looking for global-scale contractors to build a plant of this size. We’re needing and Australian-designed and built plant with overseas expertise in a partnership."

A self-confessed finance person who knows "nothing" about farming, Canadian Mr Davies came out of retirement to join the project headed by entrepreneur Alan Blood. Prior to retirement, Mr Davies had worked for companies such as Western Mining Corporation, BHP and Alumina. "I’m here to bring a team of strategic investors in so we can go forward.

"Our construction cost is $2bn but our cash operating costs will be among the lowest in the industry," he said. "The biggest reason for construction costs is just finding people. Luckily, on the plus side, building in the Latrobe Valley means that it’s a reasonable place to live compared to Cape Yorke or WA. From that’s standpoint it’s a positive for us."

The economics of the project have been boosted by increased gas prices. Financing the capital costs, however, are less certain in uncertain times.

"In this environment we’re looking at 55% debt," Mr Davies said. "That equation means $1.1bn of equity and the rest in debt, plus a buffer to sustain overrun. We’re looking for a gap between debt and equity of $3bn."

Although the company is unlisted there are some shareholders. "We did an equity raising involving some fund managers, but they’re now stretched," he said. "If we knocked on the door now we wouldn’t get the money. But we have enough money to June next year."

With the fuel and the land – and the finance – in place, Mr Davies detailed a projected timeline for the project. "We’ll have to the end of 2009 to give us a fully engineered plant with costs and we’ll use that to negotiate with bankers and lenders and bond holders. We’ll be looking to a financial close at the end of June 2010 and then we could start construction with plant start-up in mid-2013."

He continued: "Our secondary position would be to look at bringing in strategic partners, people in the fertiliser industry or coal or gas. A marriage with a gas/oil or fertiliser company could cut six months off the fund-raising stage and you’d whack six months off the overall schedule."

However, the project faces several challenges, he explained. Emissions trading would penalise the fledgling company. "No one in the world who produces urea is subject to an emissions trading scheme (ETS)," he said. "If we have to pay, we will wipe out our cost advantage with freight."

Large, established companies, such as aluminium smelters and oil refineries have been promised free carbon credits. Mr Davies responded: "But we’re in the fertiliser industry and the authorities need to think about us. We meet all of the requirements of emissions intensive and we’re trade-exposed, too.

"I can’t see the Middle East signing an ETS anytime soon, Other major exporters are Trinidad and Russia; I can’t see they’re going to implement an ETS for the foreseeable future. We’re happy to compete where everybody is paying for a permit, but what you can’t do is pay for the permit when nobody else is paying for a permit.

"The only red light we have at the moment is the ETS, otherwise the commercial logic says you would go ahead and do this. If you were BHP you would definitely go ahead. The economics are good enough to sustain it," he said.

"This is the first clean coal project for Victoria. We will be way ahead of the others coming out of the blocks. What a great opportunity."


Source: http://gippsland.com/

Published by: susanw@ptarmigan.com.au



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