Australia’s Budget Bailout
Wednesday, 3 April 2013
Gualfin, Argentina – Melbourne, Australia
By Dan Denning

• Prepare to have your retirement account raided
• The US turning Argentine...
• Plus, Addison Wiggin on Tobin’s q and what it means for the Dow-gold ratio...

From Dan Denning in St Kilda:

--How much will this deficit numbskullery by the Australian government cost investors? That’s the question we left off with in yesterday’s Daily Reckoning. Today we provide the answer: about 30%, give or take.

--What’s happening in Australia to retirement savers is not much different from what just happened in Cyprus. In Cyprus, savers were forced to pay for the mistakes of bankers. Here, the savers will pay for the mistakes of the politicians. But before we soil you and ourselves with political talk, let’s turn to the energy market.

--It’s easy to waste energy getting wound up about politicians, thieves, cheats, and hypocrites. But there’s nothing new under the sun when it comes to powerful people using the authority of the State or Crown to steal other people’s money. In the meantime, the real world rolls on, and to roll, it needs energy. Enter Australian liquefied natural gas (LNG).

--BHP Billiton, ExxonMobil, and Shell are all in the news recently with long-term off-shore LNG plans. Such is life for an energy major. When you are continuously selling your most valuable asset, you have to continuously replace it. Major energy companies are on a never-ending search for long-lived energy assets they can recover and produce economically, even when underlying oil and gas prices are variable.

--It’s not an easy task. But what’s amazing is how much money the oil and gas majors can spend finding and producing energy...while still making money! Take the idea of floating liquid natural gas (FLNG). We first heard of the idea in 2011 at the Offshore Technology Conference in Houston, Texas. It sounded absurd. Why?

--Imagine building a ship 500 metres long and 75 metres wide and crewing it with over 200 people. You park it off-shore over 12 sub-sea gas wells. You drill for the gas and when you find it, you liquefy it off-shore. That means cooling it to -162 degrees Celsius and shrinking the volume of the gas by 600 times to turn it into a liquid. From the off-shore platform, the LNG is loaded directly into custom tankers and shipped to the buyer in Tokyo, Shanghai, or Korea.

--It all seems incredibly challenging, from a technical perspective, and also risky. What about typhoons? What about rough seas? What about the Deepwater Horizon accident?

--Yet in May of 2011, the board of Royal Dutch Shell made the decision to go ahead with its Prelude FLNG project in the Browse Basin. The facility, when finished, will be six times larger than the world’s largest air-craft carrier. It will contain enough steel to build five Sydney Harbour Bridges. And there it will sit for 25 years, producing 3.6 million tonnes of LNG per year, as well as condensate (‘wet’ gasses like butane and methane).

Off-shore Oil and Gas Basins of Northwest Australia

Source: Geoscience Australia

--Since the Prelude project is actually off and running, it’s less of a shock that BHP and ExxonMobil are proceeding with their own FLNG project in the Carnarvon Basin. The firms are 50/50 partners in the Scarborough gas field. The FLNG project aims to produce seven million tonnes of LNG per year for 35 years, or about 10 trillion cubic feet of gas over the lifetime of the asset.

--Like Shell’s Prelude project, the Scarborough project won’t require pipelines or extensive on-shore development costs. And both projects are essentially technology solutions to energy problems. As better technology increases the recoverability of oil and gas, projects like this move from science-fiction fantasy to reality. Probably.

--We say probably because costs on existing Aussie LNG projects, both on-shore and off-shore, are already blowing out. Aussie companies running LNG projects already have too much debt and face higher costs and lower gas prices in the immediate future, said ratings agency Fitch in January. Fitch reckons executing these projects on-time and on-budget will be nearly impossible.

--It could have a point. With over $180 billion in money committed to LNG projects and over 60 million tonnes per annum in capacity already under construction, there is a huge demand for engineering and construction resources. Just this week the first four LNG modules for the Curtis Island LNG terminal in Gladstone arrived.

--On the bright side, no one has any doubts about LNG demand in the long-term. This is why LNG projects in Queensland are going ahead at the same time FLNG plans proceed in Western Australia. In fact Shell wants to introduce LNG-powered trucks to Australian mines, according The Australian. It sees mining fleets as a new source of demand for LNG and plans to build LNG service stations between Melbourne and Sydney for freight trucks.

--LNG probably doesn’t need a transportation fuel market to supplement current demand. But it wouldn’t hurt. And the energy markets are always evolving. While the majors look for upstream assets off-shore, we continue to keep our eye on the Cooper Basin. In a much shorter time-frame, we’ll know crucial information about the viability of an Australian shale-gas industry.

--Between now and the announcement we’re waiting for, we may have to survive more blustering from North Korea. Seriously, what is going on there? The North Koreans have announced they’ll restart their nuclear reactor at Yongbyon. The plant there, capable of generating weapons-grade plutonium, was shut down in 2007 as part of deal where the country received economic aid in exchange for disarming.

--Are the latest actions the sign of a regime on its deathbed, desperate to bluster its way to a deal which ensures its own continuation before it collapses? Are the Chinese using North Korea as a proxy to show that the US is both incapable and not interested in protecting its allies in the region? Or is Kim Jong-un just bat$%@! crazy like his father before him? Stay tuned.

--Speaking of US imperial weakness, Ronald Reagan’s former budget director has set the internet alight with an article in the New York Times titled Sundown in America. David Stockman would know a thing or two about the danger of running budget deficits, having presided over a few of his own. But he pulls no punches in his latest blast at America’s feckless fiscal leaders:

--Stockman goes on to argue that the Fed has created another enormous bubble and that when this one bursts, there won’t be a bailout. Instead, the government will have to turn to other sources to pay for its deficits and spending. And where do you think it will turn? It will turn wherever the money is, whether it’s in pension funds or bank accounts.

--Do you think what happened in Cyprus can’t happen in America and wouldn’t ever happen in Australia? The fundamental issues are the same: governments borrow and spend, taking ‘revenues’ for granted. When ‘revenues’ fall due to lower economic growth (which is not responsive to lower interest rates), the spending remains. You have a deficit.

--Australia has a budget deficit now. One way the current government wants to reduce that deficit is to change the tax rules on what it calls high-income savers. This amounts to a ‘budget bailout’ by raiding the retirement accounts of self-funded retirees. That’s not much different than what happened in Cyprus, where lifetime savings were given a ‘haircut’ of 40% in the cause of ‘saving’ the financial system.

--Here in Australia, last year’s budget stipulated that if you earn over $300,000 and plan on funding your own retirement, your contributions to your own retirement will be taxed at 30% now instead of 15%. The government is also considering taxing the earnings on your retirement savings at twice the current rate, from 15% to 30%.

--All this is done in the name of ‘sustainability.’ But that word is a polite mask for theft. That is, for the government to keep spending your money on the people and things it prefers, it must either take more of your money or cut spending. Guess what it’s going to do?

--It will eliminate ‘concessions,’ or the amount of your own money it allows you to keep. Using the word ‘concessions’ to describe the tax rate on self-funded retirees is also a transparent attempt to turn the tables on savers. A ‘concession’ is something that someone gives to you. As such, it can be taken away. Using the word ‘concession’ implies both generosity to begin with and the moral authority to change the rules for ‘the greater good’.

--What is wrong with this picture? Do the clowns in Canberra really think you can use words like ‘sustainability’ and ‘concessions’ and ‘fabulously wealthy’ to disguise simple greed and arrogance? This isn’t just class warfare. It’s war on common sense and economic liberty. But beware a sneak attack from an unexpected quarter! More on that tomorrow.

Regards,

Dan Denning
for The Daily Reckoning Australia