Gibson Island plant to close
The Australian newspaper today (8 Nov 21) announced Incitec Pivot’s decision to close its Gibson Island plant in Brisbane, at the end of 2022. The stated reason is the inability of the company to negotiate suitably priced gas supply contracts beyond 2023.
This ends the fifty-year run of fertilizer manufacturing at the site. Another Australian manufacturing loss. Around 170 direct jobs will be lost as part of the closure. Then there’s the indirect supply jobs that will be affected by the decision. These have not been addressed in the article.
OK, the train wreck photo is meant to be a little emotive. It does set the scene for some further contemplation of this decision and the energy transition.
Cost of transition
A reality of business around the world at present, is that the energy transition is occurring. The move to reduce the reliance and wide use of fossil fuels is happening. It is no longer an idea, but a reality.
The ongoing development of alternate, low emission fuels is a daunting task. Hydrogen is being investigated as a potential fuel source for a range of uses. Even Incitec Pivot has teamed up with Fortescue Future Industries, (FFI) to conduct a feasibility study into manufacturing green ammonia conversion from renewable hydrogen at Gibson Island.
The intent and commitment to undertake a feasibility study is admirable. But it is not yet a guaranteed economic outcome. The economic reality of the energy transition is that there will be new costs for all consumers, regardless of the energy source chosen.
This is not an argument to keep the status quo. It is an acknowledgement that the change will not be cost neutral.
The principal reason stated for the company’s decision to close the asset is the failure to secure suitably priced gas supply contracts.
The news article includes further discussion with the company’s CEO about other key factors. The CEO discussed the need for regular sustaining investment in the plant to ensure safety, reliability and productivity. One would hope that efficiency is also considered.
The CEO said that under the current gas supply contract, the plant is running at break-even levels for cash flow. This is despite current high market fertiliser prices.
This statement should make stock market investors, financiers, suppliers and customers sit up and take note. The company’s asset management is under scrutiny, here.
The CEO told the newspaper that the plant needs periodic sustaining capital works, about every four years. The current investment budget is between $60 and $70 million.
The connection of higher gas supply prices and the need for ongoing investment is a curious combination. Sustaining capital expenditure is not a surprise. It is a forward planned and budgeted investment. However, with the plant currently working on a break-even cashflow, one could conclude that higher gas prices are just another reason to close the plant.
One principal of asset management is addressing the lifecycle of the organisation’s assets. It is a long term, full life management approach. It is the antithesis of breakdown maintenance.
A clear warning from today’s announcement, is that companies must be planning now for the cost and disruption of the energy transition. Not in five years’ time. Not in a decade, but now.
The positive intent of employing hydrogen as a major fuel source is commendable. However, it is not yet known how economically practical it is, without a range of other supporting changes to business operating costs. We hope Incitec Pivot and FFI generate a positive feasibility study for Gibson Island manufacturing ammonia.
If companies cannot continue to manufacture their products economically now, one must question how they will fare in the coming energy transition. Costs of production will change. Energy costs will change. Process infrastructure investment will be needed. There is no reason to assume these costs will be lower than present.
All stakeholders, including major superannuation fund investors, must become aware of the cost impacts on their investments. The changes cannot come as a surprise to anyone.
Any failure to plan for changes to energy and production costs will end up as the proverbial train wreck. Don’t be on that line.
Keen to improve your situation?
Within SER Solutions, Peter Crane has spent thirty years working with Tier One production companies, assisting them deliver efficient capital investments, reducing waste, improving performance and increasing investor confidence. Armed with practical experience in engineering services, capital planning, project delivery, construction management and strategic asset management in the infrastructure and resources sectors, Peter offers a unique insight into operational roadblocks – and how to fix them.
If you are interested in understanding how the capital investment lifecycle model works, why not schedule a discovery call with Peter and the team at SER Solutions today?