18 March 2015

Australia’s “Keystone Moment”

Flying to Australia to speak at the Conference of Major Superannuation Funds on the Gold Coast, I am reminded just how big a country Australia is.

Many parts of Australia are still undeveloped. A case in point is the Galilee Basin, an area of 247,000 square kilometers in the heart of central Queensland that is almost the size of the state of Colorado in the United States.

This, in Australian colloquial terms, is the bush. An area with natural beauty and intense heat, where farming and nature share the land. It is also a land that is incredibly rich in coal - the Galilee Basin is literally one giant coal deposit.

This has attracted the attention of investors and climate activists alike. Nine coal mines are currently planned, with Greenpeace estimating that the emissions generated from burning the coal would be 700 million tonnes of carbon dioxide - every year.

By contrast Australia’s own CO2 emission in 2010 were 402 million tonnes. If developed, the emissions from the Galilee Basin would make it the seventh largest emitter of CO2 in the world. And the climate debate in Australia is already arguably the most intensive and polarizing of any country in the world.

So far the battle between investors and activists has focused on the development of the Abbot Point port. The Queensland Government last week gave approval to the development of the port, with a plan that dredged soil will be dumped on a site next to the port, and should therefore not endanger the Great Barrier Reef. Hmmm ...... But developing the Galilee Basin takes much more than developing a port and will require 300 kilometers of new railways, with the current debate that two lines may be required, adding at least another couple of billion dollars to the cost of developing the project.

The Galilee Basin has huge development costs to develop an asset (coal) whose value has been falling and for which there is, to put it delicately, uncertain long term demand. A significant question is whether the project developers can actually find the finance required to develop Abbot Point plus railway infrastructure and coal mines.

The Institute for Energy Economics has examined the risk that financiers face and concluded that the development of Galilee Basin will require at least one of Australia’s big four banks plus participation of global banks. Already a number of global banks, including Deutsche Bank have indicated that they are not interested in financing the project. Given the historical track record that global banks have had in financing fossil fuels, this qualifies as something of a departure, and a potentially portentous one at that. Australia’s big four banks are between a rock and a hard place. If they finance Galilee projects they are likely to face significant pressure from consumers. But they are also facing political pressure to provide finance. In the last year one of Australia’s leading universities, Australian National University, divested from a number of fossil fuel companies.

The resulting reaction from the Federal Government, including the Prime Minister, included not-so-subtle threats to future university funding. The overall amount at stake was insignificant compared to the finance that is required to develop the Galilee Basin. Leaving aside the political pressure that Australian banks face, it is questionable whether financing the Galilee Basin stacks up. Coal prices are falling and best estimates are that demand for coal will decrease in future years, with China already moving in this direction.

The Galilee Basin must also compete with other coal mines globally that do not have multi-billion development costs. From a finance perspective alone, the development of the Galilee Basin simply does not makes sense. And when one adds the climate change dimension, it makes even less.

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