Slugcatcher: Watching a pipeline going around in a circle.

The imminent sale of the Dampier to Bunbury natural gas pipeline in WA for a reported $1.86 billion draws to a close one of the Australian energy sector’s most painful deals – or does it?

So far, all we have heard is the quiet pop of a few champagne corks at the offices of Alinta and the Diversified Utility & Energy Trust (DUET) which plan to own 20% and 60% respectively of the 1600km pipeline and associated infrastructure.

There has been no sound from Alcoa, the prospective owner of the remaining 20%, but only because they’re yanks and there’s no drinking (or fun) allowed during office hours.

While welcoming the deal, as leaked so far, Slugcatcher cannot help but think the proverbial fat lady is yet to sing, in other words, hurdles remain – as shown by the uncertainty on the stock market where the prices of Alinta and DUET have slipped lower despite management celebrations.

As word reached the street, Alinta fell from $7.48 to $7.16 but is now creeping back up. DUET fell from $2.43 to $2.36, but is also slowly recovering.

A number of issues are obviously worrying investors, and Slugcatcher shares their concern.

First, there is the price itself. How cute is that $1.86 billion, which just happens to match the debts owed to the 28-member banking syndicate. If that is the price then it surely has nothing to do with the earnings power of the pipeline (or its replacement cost) and everything to do with buying out the banks – and then hoping that the earnings power can be found.

Second, is the assumption that a State Government agency, Western Power, is going to pay a transport premium to ensure that it gets the gas it needs now, and provides the cash for a much-needed $500 million upgrade of the pipeline. While some observers see this as a given, the chairman of Western Power, Neil Hamilton, can be a tough bird and will take unpopular decisions, as shown in his role as chairman of the goldminer, Sons of Gwalia, which was tipped into receivership this week because it faced severe financial problems

Third, there is the issue that no-one seems to have mentioned. The pipeline remains a regulated asset. No matter who does what deal with whom there is still another party who is yet to be heard on this matter, and that is WA’s newly-appointed Economic Regulator, Lyndon Rowe.

So far, Rowe has said nothing because there is no deal done. His role bobs up when one of the parties asks for the right to start charging more for the transport of gas down a monopoly pipeline.

For followers of the Dampier to Bunbury pipeline this will sound awfully like deju vu, because it was the last regulator, Ken Michael as the independent gas pipelines access regulator, who refused to allow Epic Energy a tariff increase, thus precipitating the collapse of Epic.

Slugcatcher may be missing something here but it seems to him that all we have on the table is what the experts in monopoly law call a “bare transfer” of a monopoly asset from one owner to a new owner. The question of what prices the new owners can charge for transporting gas remains with the regulator.

As usual, WA’s energy minister, Eric Ripper, has washed his hands. He has been reported as saying that Western Power has to negotiate a gas tariff which has “no impact on electricity prices”.

Those words could yet prove to be a deal-killer because someone is going to be paying a higher tariff, even with a $100 million government sweetener tossed into the deal in the form of forgone sales tax.

In Slugcatcher’s humble opinion much more needs to be seen of this deal before anyone can say it’s done because someone will have to pay a higher tariff as the price is an entirely artificial $1.85 billion, plus there is a need to find an extra $500 million for a pipeline upgrade, and when we get to that point it all goes back to the regulator – at which point we all throw our hands up and say, isn’t this how it all started!