Investing on the Road to Global Financial Crisis II

Creating an energy glut in both the coal and natural gas markets at the same time begins with enormous investor optimism that their energy investments will deliver high returns.

2 costly LNG terminals sit idle Need vanishes for fuel imports

by Jay Fitzgerald, Globe Correspondent, 23 January 2013.
This is what happens when a bet on energy prices goes spectacularly wrong.

Anticipating that natural gas prices in New England would remain high, two companies spent $350 million to $400 million each just a few years ago to build terminals off the North Shore of Massachusetts to bring imported fuel to local consumers.

UPDATE 4-New US LNG terminal to start up but may sit idle

by Edward McAllister, Reuters, 8 June 2011.
Nearly $5 billion has been poured into LNG import terminals over the past decade on the expectation that the United States would be a major importer of natural gas.

Australia was caught up in the same bet on energy prices that went spectacularly wrong. Always ready to gamble with other people's money, even now the Australian coal seam gas industry continues to draw in more punters...

North America Hungry for LNG

posted by Gav, Peak Energy, 16 February 2005.
Australia must develop its gas reserves to be ready to supply North America's huge and growing liquefied natural gas (LNG) markets, Australia's federal industry minister Ian Macfarlane said yesterday.

The Australia federal government [in 2005] was pushing for Australia to be a major supplier of LNG to Mexico and the west coast of the US.
On the Mexican leg of his North American visit Macfarlane toured the sites of two proposed LNG receiving terminals in Baja California, Mexico.

One of the most striking symptoms of the first Global Financial Crisis of the 21st century was readily available credit to build and buy houses. In Spain the solution to a glut of houses for a long time was ... to build even more houses

Gas Flaring - Disposing of natural gas keeps prices high

Spain's house prices to fall another 30pc as glut keeps growing

The UK Telegraph, by Ambrose Evans-Pritchard, 27 December 2012.
Spain's property slump will deepen for much of the next decade, and tracts of buildings along the Mediterranean coast will have to be demolished [an idea similar to flaring of natural gas], the country's top consultants have warned.
...
Fresh losses could reach 50pc and drag on for 10 to 15 years in those places where construction ran wild during the bubble, bringing the total decline from peak to trough towards 75pc.

"The market is broken," said Fernando Rodríguez de Acuña, the group's vice-president. "We calculate that there are almost 2 million properties waiting to be sold. We have made no progress at all over the past five years in clearing the stock," he said.

When Irish Eyes Are Crying

Vanity Fair, by Michael Lewis, March 2011.
First Iceland. Then Greece. Now Ireland, which headed for bankruptcy with its own mysterious logic. In 2000, suddenly among the richest people in Europe, the Irish decided to buy their country—from one another. After which their banks and government really screwed them. ...
...
... The numbers were breathtaking. A single bank, Anglo Irish, which, two years before, the Irish government had claimed was merely suffering from a “liquidity problem,” faced losses of up to 34 billion euros. ... And that was for a single bank. As the sum total of loans made by Anglo Irish, most of it to Irish property developers, was only 72 billion euros, the bank had lost nearly half of every dollar it invested.
...
Ireland’s financial disaster shared some things with Iceland’s. It was created by the sort of men who ignore their wives’ suggestions that maybe they should stop and ask for directions, for instance. But while Icelandic males used foreign money to conquer foreign places—trophy companies in Britain, chunks of Scandinavia—the Irish male used foreign money to conquer Ireland. Left alone in a dark room with a pile of money, the Irish decided what they really wanted to do with it was to buy Ireland. From one another.
...
In recognition of the spectacular losses, the entire Irish economy has almost dutifully collapsed. When you fly into Dublin you are traveling, for the first time in 15 years, against the traffic. The Irish are once again leaving Ireland, along with hordes of migrant workers. In late 2006, the unemployment rate stood at a bit more than 4 percent; now it’s 14 percent and climbing toward rates not experienced since the mid-1980s.

On the Investment Road to Global Financial Crisis II

Creating an energy glut in both the coal and natural gas markets at the same time begins with enormous investor optimism that their energy investments will deliver high returns.

It is now time to stop and ask directions, rather than repeat the mistakes made in Ireland by "the sort of men who ignore their wives’ suggestions that maybe they should stop and ask for directions."

Two energy investment losses stand out like lighthouse beacons warning of rocks ahead:

BHP writes down US shale assets by $US2.8b

Sydney Morning Herald, by Peter Ker, 3 August 2012.
...
The shale impairment will be recorded against the Fayetteville assets that were bought off Chesapeake Energy for almost $US4 billion in February 2011.

The other half of BHP's surge into US gas: the $US15 billion acquisition of Petrohawk Energy was made in August 2011, and has so far not suffered an impairment.

BHP is trying to avoid an impairment on the latter assets by switching its focus from gas to liquids in those fields, and the market may know by February if an adjustment in value is needed.
...
Price slump

The gas impairments were caused by a slump in US gas prices which took the benchmark price from about $US4 per British thermal unit to about $US1.90 earlier this year.

Rio Tinto CEO Tom Albanese out over $14bn write-down

The UK Telegraph, by Emma Rowley, 17 January 2013.
...
A disastrous $4 billion African coal takeover spelled the end for Rio Tinto’s chief executive Tom Albanese, forced out by a massive write-down after the deal turned sour.

Acknowledging that “accountability” rested with him, Mr Albanese left the post immediately, after more than 30 years with one of the world’s biggest miners. Iron ore head Sam Walsh replaces him.

The mining giant surprised the markets by announcing $14 billion of write-downs on acquisitions across the world. But it was the $3 billion write-down on Rio Tinto’s coal assets in Mozambique, wiping out most of the $3.7 billion it paid less than two years ago, which finally cost Mr Albanese his job.

As  the rush to get a piece of the global liquefied natural (LNG) market gathers momentum around the world, the prospects of a looming crash in the global price becomes ever more clear. Both the USA and Australia are rushing to bring additional LNG export terminals into production. At the same time, major consumers are pushing ahead with coal-to-natural gas plants that will help them dramatically cut reliance on high-price imported LNG.

Coinciding with the rush to create a natural gas glut, coal exports from the USA and Australia are rising sharply. And this, in the face of falling global prices, is being driven by the low-cost natural gas supply in the USA that has slashed domestic coal demand.

An obvious direction the energy market could have taken was to use existing coal resources to create substitute natural gas (SNG) as China is doing.

• The USA would not now be facing coal mine closures while coming to terms with the environmental impact of "fracking".
• Australia also would not be weighing up the impact of coal seam gas production on the long-term viability of the country's most productive agricultural land.

The banking system, superannuation funds and shareholders are lining up to pour $$$ billions into BOTH coal mining AND natural gas production, together with associated export infrastructure. Building more housing in Spain has finally lost its appeal, but too late to avoid massive financial losses.

It may not be too late to learn a valuable lesson from the experiences of  Spain, Iceland, Greece and Ireland in Global Financial Crisis I.

Investment in coal to substitute natural gas plants may be a more prudent investment. This approach can lower the environmental hazards from coal (for example, removing mercury from gasified coal) and avoid the environmental impacts of coal seam gas extraction and "fracking" in shale gas production.

Related link -
Coal seam gas up in smoke