Fortescue Signs Gas Deal to Ease Costs

SYDNEY--Australia's Fortescue Metals Group Ltd. (FMG.AU) signed a 20-year deal to supply its operations with natural gas instead of diesel.

The agreement, with DUET Group (DUE.AU) and TransAlta Corp. (TAC), comes as resources companies scramble to shave costs in the face of a slowing global commodities boom.

Fortescue said the shift to gas from diesel would reduce operating costs at its mines in the remote, resource-rich Pilbara region in Western Australia state. The gas will be delivered through an existing pipeline that runs from near the state capital, Perth, to Australia's northern coastline.

A new 270-kilometer pipeline will also be built to transport the gas to a power station located at Fortescue's main mining hub in the region. The pipeline is expected to be built some time early next year, Fortescue said in a statement Thursday.

The conversion of the 125-megawatt Solomon power station from diesel to a gas platform is expected to save the company about US$20 million a year in costs, Fortescue said.

DUET, in a separate statement, estimated the new pipeline would cost 178 million Australian dollars (US$158 million) to build. The company said it and TransAlta would pay about A$101 million toward the cost.

Mining companies have taken a knife to their operating costs over the past year, as they try to safeguard profits hurt by lower commodity prices. Iron-ore was among the few commodities whose prices held up well last year, but 2014 may be different as more supply comes onstream.