Oct. 10 (Bloomberg) -- Apache Corp.'s ineffective protection of a gas pipeline against corrosion and inadequate inspection were to blame for an explosion at the Varanus Island plant in Australia, said a national safety watchdog.

The rupture occurred because of the thinning of the pipe wall and corrosion of the external surface, said a report by the National Offshore Petroleum Safety Authority, or NOPSA. Apache, the U.S. oil and gas producer that operates on five continents, may have committed offences under two pipeline Acts, said Norman Moore, the minister for mines and petroleum in Western Australia state.

The June 3 explosion caused fuel shortages in the resource- rich state that generates a third of the country's exports and may cost the economy A$6.7 billion ($4.5 billion), the local Chamber of Commerce and Industry estimates. A finding that Apache was to blame for the blast could trigger insurance claims and writs by mining companies and businesses forced to cut output because of gas shortages, according to Deloitte Touche Tohmatsu.

``Apache disagrees with any conclusions drawn at this time about this unforeseeable event because they are premature and misleading,'' the Australian chief of the Houston-based company, Tim Wall, said in a statement. ``Apache will work to determine the root cause of this explosion.''

The report identified the main causes of the blast as ``ineffective anti-corrosion coating of a gas pipeline due to damage or disbondment of the pipeline'', ``ineffective cathodic protection of the wet-dry transition zone of the beach crossing section of the pipeline,'' and ``ineffective inspection and monitoring by Apache.''

Lawyer Scrutiny

Deloitte said in July ``significant scrutiny'' would be given to the NOPSA report from lawyers determining if its findings could have a bearing on insurance claims.

``We certainly know most of the big companies will be insured, but we know not all losses that will be sustained will be recoverable'' said Hugo Loneragan, then an account director for Deloitte's forensic and dispute services.

Apache earlier today released a copy of responses to questions posed by the Western Australian Department of Industry and Resources, or DoIR, into the blast, warning against coming to any early conclusions about the incident.

``There are serious concerns if DoIR/NOPSA delivers an investigation report now,'' Apache said. ``Any conclusions about causation that are made before thorough investigations are concluded would not only be unwarranted by would also be misleading.''

No Warning

There were no warning signs on the risk of a failure of the pipeline, Apache said. Such a pipeline should be capable of operating well beyond its design life and the failure was ``surprising and certainly not foreseeable,'' it said.

Apache declared force majeure on its Western Australia contracts after the explosion. Some mining companies affected by the shortage, including Iluka Resources Ltd. and Alcoa Inc.'s Australian unit, followed suit. Force majeure is a legal clause that allows a company to miss deliveries because of circumstances beyond its control.

The Varanus plant's shutdown removed about 350 terajoules a day of supplies from the state's 1,000 terajoules-a-day market.

Apache has resumed 70 percent of the natural gas output at Varanus with the rest due back on-line in December. After the blast, some small businesses in Western Australia were advised by energy retailer Alinta Ltd., a unit of Sydney-based Babcock & Brown Power, late each working day of how much gas they could expect in the next 24 hours.

Litigation Looms

The disruption to supplies may prompt ``a lot of litigation'' in Western Australia and may trigger a Royal Commission, or government inquiry, into its cause, then-premier Alan Carpenter said Aug. 1.

Tap Oil Ltd., a partner in Apache's Harriet joint venture in Western Australia, said Sept. 25 it reached an agreement with insurers to receive a ``partial interim payment'' of A$4.7 million for production losses in June and August due to the fire. Three timber mills and two harvesters were in talks to sue for compensation, the West Australian reported Sept. 26.

Westpine Industries, 50 percent owned by Wesfarmers Ltd., fired a third of its workforce because of the loss of gas supplies. Production was curtailed at Midland Brick, the world's largest brickworks, and Prime Laundry, which serves about 85 percent of Perth's hospitality industry.

About 60 percent of the state's electricity is generated by gas-fired plants. After the blast, essential services, including hospitals, were given priority for power, while others competed for what was left.

Many mining companies operating in Western Australia curtailed production because they specifically needed gas as part of the metallurgical process and to produce products such as ammonia nitrate, sodium cyanide and carbon dioxide.

To contact the reporter on this story: Jason Scott in Perth at Jscott14@bloomberg.net

Last Updated: October 10, 2008 01:59 EDT