Queensland coal projects bring ‘unprecedented’ investor risk

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IEEFA report says proposals for new coal facilities in Queensland’s Galilee Basin introduce ‘unprecedented’ levels of financial complexity and risk.

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Aerial view of Galilee Basin coal deposit. Source: Greenpeace

The mounting financial risk attached to the development of massive coal projects in Queensland’s Galilee Basin has again been flagged, this time by the Institute for Energy Economics and Financial Analysis (IEEFA).

In an industry brief published today by IEEFA – a New York-based NGO funded by philanthropic organisations including the Rockefeller Brothers Fund and the V. Kann Rasmussen Foundation – analyst Tom Sanzillo says proposals for new coal-production facilities in the Galilee Basin are too risky to attract adequate investor support.

In fact, says Sanzillo, who is IEEFA’s director of finance, the projects’ huge scale, greenfield nature and foreign ownership introduce “an almost unprecedented level of financial complexity and risk.”

The projects he is talking about include the multi-billion dollar development of what would be one of the world’s biggest coalmines, largely earmarked for export to India.

In 2012, India’s Adani Group announced plans to proceed with its $10 billion development of the massive and as-yet untapped Carmichael coal deposit, including large-scale rail and port infrastructure investment, that would create 9,000 jobs, and export coal to India from 2016.

Last year, a $1.25 billion debt issuance was proposed to help refinance Adani Abbot Point Coal Terminal, the 99-year lease for which was bought for $1.8 billion in May 2011.

But IEEFA’s Sanzillo says the project faces an increasingly difficult hurdle in securing funding due to the rapid deterioration of coal project profitability following a halving of the coal price, and the increased probability of a structural decline in thermal coal.

“The Galilee coal project proposals are highly unlikely to proceed without the support of the four Australian bank majors, plus some of the nine leading global investment banks,” Sanzillo said.

Just this week, anti-coal campaigners began targeting Australia’s Big Four banks, starting with ANZ, to protest their funding of fossil fuel projects. Meanwhile, some of the world’s leading investment banks have already joined the growing fossil fuel divestment campaign, in keeping with their commitments under the Equator Principles.Screen Shot 2014-10-23 at 1.25.03 PM

The IEEFA report highlights that greenfield coal projects such as the Galilee – those that break fresh ground in previously undeveloped areas – are an increasingly tough sell and that foreign ownership of the Galilee projects brings additional risk.

“IEEFA estimates that the most advanced Galilee coal greenfield projects, both run by Indian conglomerates, face a combined $21 billion in infrastructure costs, including rail and port construction.

“These projects are commercially unviable, reflective of the enormous capital investments required, the relatively low quality thermal coal involved, globally depressed seaborne coal prices and the lack of any of the necessary infrastructure required,” Sanzillo said.

Given the financial challenges, the report concludes that adequate investment-bank participation is ultimately unlikely.

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10 Comments
  1. michael 5 years ago

    probably an accurate portrayal of the likelihood of them going ahead… and then he throws the humdinger in…”“an almost unprecedented level of financial complexity and risk.” … that’s stretching it a bit! How would this setup be any more complex than the finance setup required to fund any number of resource projects or for that matter and major infrastructure? most major projects require multiple banks, mezzanine financing, equity finance, bonds etc

    • Richard Hayes 5 years ago

      >How would this setup be any more complex than the finance setup required to fund any number of resource projects or for that matter and major infrastructure?

      Because almost no one in the value chain wants the project to go ahead.

      India does not want the coal priced in USD, the ‘natural’ capital providers such as Government Import/Export Agencies, investment banks and large pension funds do not want to supply the capital at the prices being offered.

      The large investors already have enough ‘legacy’ investments. They would rather own Apple, Siemens or GE. If they are required to own fossil fuels due to asset allocation it is much easier to own Exxon or Royal Dutch Shell rather than debt in an Australia / Indian start up.

      • michael 5 years ago

        that’s doesn’t sound complex, it’s no different to any other borderline resource project trying their hardest to secure access to capital. anyway, maybe just nit picking, seemed a weird thing to say in an otherwise considered piece

        compare it to the finances they tried to get together for Solar towers multiple times in country australia (say near Mildura), which never got up despite governments kicking in large licks of capital. just because something can’t be justified on economic grounds, doesn’t make it complex

  2. adam 5 years ago

    “Meanwhile, some of the world’s leading investment banks have already
    joined the growing fossil fuel divestment campaign, in keeping with
    their commitments under the Equator Principles.”

    Pretty much all banks subscribe to these and I’m pretty sure they don’t require fossil fuel divestment. In fact, they’re even applied to fossil fuel projects to allow them to be debt financed.

  3. Chatteris 5 years ago

    I wonder if divestment from fossil fuel projects, especially new ones, is becoming like the anti apartheid movement’s campaign to punish those who profited from business here in South Africa. I think it did have an impact, albeit limited, but that business people also hated being seen as moral pariahs and themselves started to push South Africa to change. We have seen some signs of this unease with their image in the ‘greenwash’ that the oil companies have indulged in with their glib advertising slogans, cf BP’s sun logo.

    Once South Africa changed, it was business as usual. However, in this case the fossil fuel companies know that if they lose the argument it will never be business as usual: they’ll have to leave all that valuable stuff in the ground and do something that doesn’t make such a quick buck.

    How to get off the addiction to ‘extractivism’ is the problem, and we’re all to some extent hooked.

  4. Michel Syna Rahme 5 years ago

    Seriously, if you were an Australian, owned property, held mortgages, and was committed to inter generational equity and ethical investment, what bank besides the Big 4 would you swap to? Taking into consideration risks associated to global economic recessions/depressions likely to occur again in our lifetimes. What bank in Australia, beside the Big 4, would you turn to?

    • Chris Fraser 5 years ago

      I’m not with them, however Citi is trying to understand this investor risk thing more so than big 4. Though the graph shows thet are pretty much up there …

      • Michel Syna Rahme 5 years ago

        Yea, it’s a tricky one. Perhaps I’ll wait the little while longer needed for security within the clean energy sector in Australia to emerge and switch to either one of the big banks that divest from coal and take the initiative to focus and capitalise on the opportunities this transition offers to them and their shareholders.

    • nakedChimp 5 years ago

      Bendigo Bank? but I have no idea what they do with the money.. their slogan is ‘for the community’, so they support there.. but no idea where they are in that graph up there..

      PS: got my normal account with them.. FX rates and transactions to other countries suck as they’re not a major bank though.

  5. john 5 years ago

    This project at least will produce coal with a better outcome co2 wise, than the present coal being used.
    I can not work out how this can be delivered to the end user to compete with the $36-$54 tonne price, the figures do not make sense to me.
    Break even is going to be in the $100 range.

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