Unlocking Green Energy: Infrastructure Sharing in Western Australia's Pilbara Region

Introduction

The Pilbara region makes an enormous economic contribution to Australia, helping to shape and sustain Australia’s standard of living.  The regional output is driven by an extractive and export-oriented economy, contributing to 31.5% of Western Australia’s exports.  This makes the Pilbara one of the largest contributors to the state tax revenue, providing 91% of the royalties received by Western Australia, and provides thousands of direct and indirect jobs.  Port Hedland is the world’s largest bulk exporting port, recording a record annual tonnage of over 566.5 million tonnes from Port Hedland in 2022/2023. 

At present, the mining, energy and associated activities in the Pilbara, contribute approximately 8% of Australia’s CO2 emissions; and for each tonne of steel produced from Australia’s iron ore exports under existing industrial processes using coal, an additional two tonnes of CO2 is released into the atmosphere. 

So far, considerations around how to solve this significant issue have included proposals to electrify the NWIS (and thereby reduce reliance on gas and diesel), and secondly, ambitious plans to use hydrogen both as a reductant, and a fuel source, for the HBI pelletising process.

Any measure associated with decarbonising in the Pilbara is capital intensive; businesses operating in the Pilbara will often reference the Pilbara premium, being the additional cost of doing business in the remote region. 

As this next economic boom beckons, we must recall lessons from the previous economic boom in the 2000s and the failure of businesses and companies in the Pilbara to effectively share infrastructure.  In the post-boom wrap up much was written and said about these matters as “lessons learned”.  Given continuing supply chain and workforce constraints, and costs, the starting place of this next potential economic boom is more acute.  

The risk of this economic boom not delivering outcomes in Australia is significantly larger than previous economic booms - in the past, Australia has been able to rely on projects being developed, and capital being deployed, because the resources being exploited were beneath the ground, and companies had little choice but to come here to exploit it.  This time around, the choice of where to deploy that capital is different, and the international competition to attract it is greater.  Furthermore, the purpose of deploying the capital is also (in some cases) different - at least some of the large-scale infrastructure required to support decarbonisation does not necessarily need to be built in the Pilbara, and companies will make choices, based on economics, about where to deploy it.  Green HBI plants are a prime example of this.  

Clearly, plans involving greater electrification of mining, energy and other activities in the Pilbara are a higher chance of being progressed because those directly relate to the decarbonisation of existing operations, but given that electrification must displace existing fossil fuel alternatives - which may continue to be cheaper - it could be that such plans are delayed whilst supply chains for wind turbines, solar panels and BESS remain tight, and whilst the productivity and other solutions (such as automation or AI) that help resolve the labour and human capital constraints emerge.

Australia is at risk of not capturing all, or even part, of this economic boom as companies may elect to move capital intensive projects elsewhere.

One solution has the capacity to unlock decarbonisation of the Pilbara and the steel industry.  It also speaks directly to a future made in Australia. 

It is our view that infrastructure sharing and business to business collaboration will play a pivotal role in harnessing the full potential of green energy initiatives in the Pilbara.

Common User Infrastructure (CUI) Defined

Common User Infrastructure, or CUI, is the cornerstone of collaborative development in the energy and resources sector. It refers to shared facilities that enable multiple stakeholders to utilise infrastructure efficiently and cost-effectively. If adopted correctly, CUI offers an opportunity to get more green electrons to market, at a globally competitive economic scale, ahead of our competitors and at a commercially attractive offtake price, due to the time and cost efficiencies obtained through shared investment in the capital intensive infrastructure required deliver the green electrons.  It also offers the opportunity to deliver additional infrastructure (such as transmission lines and ports) and feestock (such as electrons, water and other key inputs) to major projects on a common user basis - and taking these off balance sheet for individual projects.  

The Pilbara: A Hub for Green Energy

Historically known for its mining prowess, the region is now poised to become a powerhouse in renewable energy production. The development of hydrogen hubs, backed by significant government investment, marks a strategic move towards sustainability. The 2023 Pilbara Summit address saw the Honourable Madeleine King MP, Minister for Resources and Minister for Northern Australia, commit to CUI investment initiatives, stating:

This speech foreshadowed the recent February 2024 agreement between the State and Federal Government to invest $140 million ($70 million each) in the Pilbara Hydrogen Hub. The Pilbara Hydrogen Hub will comprise, amongst other things, a hydrogen pipeline system with a transfer capacity of 492,000 tonnes per year, together with port upgrades to support the import of construction materials for the production of green hydrogen and the export of ammonia. 

Benefits of Infrastructure Sharing

By pooling resources and expertise, stakeholders can achieve significant cost savings and expedite project timelines. Moreover, infrastructure sharing promotes environmental sustainability by reducing vegetation clearing and minimising cumulative impacts on surrounding ecosystems. The Pilbara may be vast in its geographical expanse, but it is not an empty void, it is rich in cultural heritage, wildlife, inherent environmental amenity and agricultural food production from the coastline and to the pastoral grazing country. The social licence of decarbonisation projects cannot be taken for granted, each project must ensure that its impact on surrounding land uses, traditional owners and the environment is as contained as possible. Collaboration is not just advantageous; it's imperative for meeting net-zero targets sustainably and addressing the logistical challenges inherent in the Pilbara's remote landscape.

From a purely monetary standpoint, and as noted in the Australian Industry Energy Transitions Initiative’s Phase 2 report, the decarbonisation of the Pilbara as part of the clean energy transition will cost an estimated $17.8 billion to $38.4 billion. Therefore, collaboration between industry stakeholders is absolutely necessary to ensure developments are able to progress at a reasonable cost, as such funds are simply not readily available within the timeframes required to meet our net zero targets.  

Navigating Risks

While there are numerous benefits to infrastructure sharing, it's not without its challenges. From navigating regulatory hurdles to managing commercial sensitivities, stakeholders must tread carefully to mitigate risks effectively. The transition from a traditionally non-transparent individual ownership model to shared infrastructure demands a paradigm shift, one that requires careful planning and robust collaboration. However, with proactive government support and industry alignment, these risks can be managed effectively. Positive remarks from the Executive Director of Hydrogen and New Energies at the Western Australian Department of Jobs, Tourism, Science and Innovation (JTSI), Anthony Sutton, on the construction of connected CUI’s indicate that JTSI intend to facilitate coordinated planning of infrastructure in a manner that minimises duplication. This is critical if industry is to make significant development within a meaningful timeframe. Key issues to consider from a legal perspective when engaging in a CUI project are: 

• The FID timelines of your co-investors. If the co-investors in the project will also be the end co-users (which is often the case), then it is important that all parties share a similar timeline to obtaining FID on their respective projects to ensure that all parties are aligned as to when they can feasibly provide their share of funding and are similarly driven to meet the same development timeframes. Although this can be difficult to achieve, since we all understand that unexpected delays arise, at least if the parties start from a similar position any misalignment which arises can be mitigated, and hopefully those parties will be motivated to recover from such delays. The investment and development framework documentation (such as the Joint Development Agreement or Umbrella Co-Operation Agreement) ought to address not only the investment mechanism and commitment milestones, but also what can be done from a practical perspective if one investment partner is no longer able to meet its obligations. For example: 

  • Is that party required to withdraw from the arrangement? Or are there alternative construction models which would enable the relevant project to be developed in a modular phase which might de-risk the requirement for all parties to all take FID at, or near, the same time.

  • How can this investment be made up from other parties? Or must the parties seek additional support from an incoming party? For specialist infrastructure which is not readily accessible by third parties, it may be difficult to attract alternate investors. 

  • Can security be taken for that party’s funding obligations to keep the project on track until a replacement investor can be found.

• The commercial and risk alignment of the parties. The key commercial agreement related to the CUI project will be the terms of use which each party signs onto when seeking to use the facility. Historically where one party develops a facility and then seeks to make a return on investment by allowing other third party users to utilise spare capacity within that facility, there is a bilateral negotiation between each user and the facility owner to agree the terms of use and the price. However, this often leads to a misalignment in terms between users, which may see each user having a different pricing structure and risk allocation depending on their individual risk/price trade-off and their bargaining power at the time the agreement was struck. This can lead to ongoing complications operationally as the operator of the facility not only needs to manage contracts on varying terms, but can favour one user over another based on the implications of a failure to supply, or the financial return for additional supply, under that users contract versus another. In a true CUI project the facility is developed jointly by all users and then they sign up to a joint common user agreement or tolling agreement which applies universally to all users of that facility. Although it may prove difficult to agree these terms initially, with so many parties needing to reach agreement, the upfront effort will pay dividends in the long term as the agreement is more likely to be reasonable, balanced and functional, as each party initially sits on both sides of the fence as the infrastructure owners, and as the user. The transparency of a joint agreement between all parties also helps to avoid perverse operational outcomes going forward and enhances operational efficiencies. 

• Stapling ownership of the asset and the use rights . Another issue to address is the circumstances in which an investor will be allowed to assign their interest in the facility or their use rights to a third party. The parties may decide that they want to maintain the strategic alignment noted above, and staple the ownership right to the use right such that a party is not allowed to assign either their ownership interest or their use rights without also assigning the other. This does limit an investors ability to deal in the asset and therefore may limit the range of parties interested in making that initial investment (i.e. some parties may see themselves more as passive investors in the infrastructure and only having a short term need to use the facility, while others may see a long term need to use the facility, but may want to release some of their initial capital investment in the facility once it is operational to re-invest in their individual operations). The advantages and disadvantages of stapling the two interests will need to be considered in light of the make-up of the original investors and the nature of the projects they are seeking to support. The parties’ financiers may also take a view on this based on the financial modelling and this could end up driving the decision (in whole or in part). 

• Scheduling, priority use rights and entitlement to excess capacity. Ideally all parties should be given an equal opportunity to utilise their proportionate share of infrastructure capacity. However, each party can have a different idea of “equal opportunity” with majority participants expecting to obtain some priority treatment when it comes to managing the use schedule and the right to take up any available excess capacity. Minority participants can find themselves being offered the “left-overs”. Whilst it is important to ensure that the additional financial contribution made by majority participants, and therefore their additional usage needs, are respected and acknowledged, likewise the interests of minority participants need to be protected to insure that their interest in the project is “bankable” and effectively supports their operational needs. This is especially so if all parties are paying the same price for their usage rights, they expect to receive the same level of service reliability. 

• Indemnity regime.  One of the key deterrents to parties engaging in CUI projects is the inability to effectively manage the risk of one parties’ operations disrupting that of another and the domino effect this can have on all users. It is difficult enough for greenfield project developers to manage the myriad of risks facing their project, let alone being opened-up to the flow on effects of a disruption to another entities project. Therefore, the indemnity and cross securitisation (required to enforce those indemnities) will be critical to securing cornerstone investors and ensuring the ongoing viability of the CUI. Knock for knock indemnities are the cleanest way to ensure that each party remains responsible for any risks emanating from its project and can be used to quarantine risk with that party. The indemnity regime should also be structured to allow risk to fall with the party best able to manage that risk, and in some instances this will not be the individual users, but rather the facility manager. In which case the operator of the facility is likely to have taken on that role on a no-risk, no-reward basis and therefore, it will be the owners of the facility which will ultimately bear that risk proportionally to their interest.  

• Integration of Government support. How is the Government’s financial support reflected in the project? Does the Government simply contribute funds on a grant basis? Is the Government offering a limited recourse loan to the project on favourable terms? Will the Government continue to be involved through acting as a facilitator between the parties to secure the final agreement? Or does the Government wish to take an equity stake in the facility to ensure it is able to: obtain a return on investment for tax payers, oversee the effective management of the asset going forward; and potentially use the facility for a public purpose in the future. Australia has not traditionally seen Government’s take an equity stake in CUI infrastructure, and such a move has often been shunned by private investors due to a distrust of the Government’s commerciality. However, as Australia reflects on the trajectory of its energy security and how such matters have been handled in the past, in particular oil and gas operations, we would not be surprised if the Government (State or Federal) looks to secure the national interest through taking an ownership interest in CUI which is regarded as “nation building” or corner-stone infrastructure which will support critical industries for decades to come. Recent announcements from the Federal Treasurer aimed at bolstering the ACCC’s and FIRB’s ability to review M&A transactions which could impact competition in the Australian market and foreign investment which could impact Australia’s national interest or security, shows that the Government does not seem perturbed by any claims of Australia now having a higher degree of “sovereign risk” and is keen to oversee the course of private investment in Australia’s critical industries.

The time taken to agree these arrangements in a CUI project should not be underestimated, nor undervalued. If a clean and functional risk allocation can be struck, whereby each participant is equally or proportionately (as appropriate) exposed to the risks and benefits of the CUI facility then it is more likely that the facility will be successful in the long term and serve the operational needs of its investors. Further, the CUI project is likely to be sustainable in the long term and attract new or replacement investors/users as needed if the use and investment rights are not overly complex, and the parties are aligned from a legal, economic and strategic perspective.

Market Examples

Some examples of successful CUI infrastructure can be seen in relation to the coal industry, which has been under enduring pressure to keep production costs low to remain competitive. For example, the Newcastle Coal Infrastructure Group - which is an incorporated joint venture between BHP, Yancoal Australia, Whitehaven Coal, Peabody Energy and Banpu Public Company that owns and operates rail, coal storage, ship loading facilities servicing the Hunter Valley. In Queensland, a similar model is used at Wiggins Island Coal Export Terminal in North Queensland, which is also an incorporated joint venture between Glencore, Coronado Curragh and Yancoal that owns and operates similar port infrastructure. Each project involves multiple parties in the same sector funding the development, construction and operation of port and rail infrastructure to ensure access and capacity. Aside from the more traditional case of co-use and co-ownership, more creative arrangements can include each party contributing different assets ‘in kind’, such as land, capital or technology. It is rare to find a developer with all three attributes, and by pooling resources and spreading investment risk between participants, each party will receive stronger financial and operational outcomes.

In addition to The Pilbara Hydrogen Hub (noted above), the Australian Government is investing over half a billion dollars to build hubs at key locations like Kwinana, Gladstone, Townsville, Bell Bay, Port Bonython and the Hunter as part of its Regional Hydrogen Hubs program.

Horizon Power is working with Woodside to support their decarbonisation plans for the Pluto LNG facility, which includes connecting the facility and a new 50 MW solar farm located in the Maitland Strategic Industrial Estate (MSIA) to the NWIS. The Pluto LNG facility would be the first standalone system to connect to the NWIS under the new regulatory regime (Pilbara Network Access Code), delivering increased reliability and reduced carbon emissions for the facility. Horizon Power has said that it hopes this development will encourage other isolated power systems in the Pilbara to connect to the NWIS, and demonstrate the reliability of common user infrastructure as industry evaluates its decarbonisation options.

JTSI is supporting the development of the MSIA 24 km west of Karratha, the proponents of which include Fortescue Future Industries, Yara International, Hexagon and Perdaman Chemicals and Fertilisers. The MSIA will enable a range of projects, including ammonia, hydrogen and renewable energy production to proceed and help decarbonise operations on the Burrup Peninsula. Through co-locating these projects together it is hoped that synergies will be found in utilising common service infrastructure on and to the peninsula and minimising disruption to the Murujuga Country (see also the Statement of Intent signed with the Murujuga Aboriginal Corporation regarding agreement making on country).

Another example is the Geraldton Export-Scale Renewable Investment green hydrogen project, where bp was recently allocated 220 hectares at Oakajee (subject to agreeing the terms of a lease with Development WA), which has the potential to be developed into a world-class renewable energy-powered hydrogen production hub creating local jobs and clean energy industry opportunities. Phase one would see bp working with State and Federal governments to advance plans for the development of shared infrastructure, such as a port and electricity transmission, to enable the supply of clean energy domestically and internationally.

Conclusion

Infrastructure sharing will be imperative to achieving commercial operation of key projects, within the timeframe and cost, required for Australia to remain competitive as a global supplier of clean energy and to meet its own net zero targets. Yes, legal and commercial risks are born out in the CUI model, however given the immense issues surrounding:

• land access

• engagement with traditional owners; 

• labour shortages; 

• distance between generation projects and the end users; 

• regulatory approvals timeframe; 

• the environmental impact of clearing infrastructure corridors; 

• the impact on surrounding industries (such as the agricultural industry); and

• the additional carbon footprint arising from duplicated infrastructure,

the best option for project success is to pursue a CUI model wherever possible. 

In the Pilbara these drivers toward CUI are even more pressing given the remoteness and cost of construction in the Pilbara arising from the limited access to materials and labour and the environmental and cultural value of the landscape. 

We look forward to seeing how the abundant resources, government support, and industry collaboration in the Pilbara can converge around a CUI model to unlock a new era of prosperity for the Pilbara as a national and international supplier of green energy and green, or greener, products.