The VM boot fails with:

2016-09-15 10:55:39.975+0000: starting up
LC_ALL=C PATH=/usr/local/sbin:/usr/local/bin:/usr/bin:/usr/sbin:/sbin:/bin QEMU_AUDIO_DRV=none /usr/bin/qemu-system-x86_64 -name instance-00000001 -S -machine pc-i440fx-vivid,accel=kvm,usb=off -m 64 -realtime mlock=off -smp 1,sockets=1,cores=1,threads=1 -uuid 2dddaaee-ff93-4520-8fe0-6adedf713f02 -smbios type=1,manufacturer=OpenStack Foundation,product=OpenStack Nova,version=13.1.1,serial=a7d1fe7b-b18b-4259-bfc2-b054a5fcd761,uuid=2dddaaee-ff93-4520-8fe0-6adedf713f02,family=Virtual Machine -no-user-config -nodefaults -chardev socket,id=charmonitor,path=/var/lib/libvirt/qemu/instance-00000001.monitor,server,nowait -mon chardev=charmonitor,id=monitor,mode=control -rtc base=utc,driftfix=slew -global kvm-pit.lost_tick_policy=discard -no-hpet -no-shutdown -boot strict=on -device piix3-usb-uhci,id=usb,bus=pci.0,addr=0x1.0x2 -drive file=/dev/disk/by-path/ip-10.109.3.3:3260-iscsi-iqn.2010-10.org.openstack:volume-c8c53351-8d4f-4ccf-9fe7-9bd51fa46076-lun-1,if=none,id=drive-virtio-disk0,format=raw,serial=c8c53351-8d4f-4ccf-9fe7-9bd51fa46076,cache=none,aio=native -device virtio-blk-pci,scsi=off,bus=pci.0,addr=0x4,drive=drive-virtio-disk0,id=virtio-disk0,bootindex=1 -drive file=/var/lib/nova/instances/2dddaaee-ff93-4520-8fe0-6adedf713f02/disk.config,if=none,id=drive-virtio-disk25,format=raw,cache=directsync -device virtio-blk-pci,scsi=off,bus=pci.0,addr=0x5,drive=drive-virtio-disk25,id=virtio-disk25 -netdev tap,fd=26,id=hostnet0,vhost=on,vhostfd=27 -device virtio-net-pci,netdev=hostnet0,id=net0,mac=fa:16:3e:5b:be:ba,bus=pci.0,addr=0x3 -chardev file,id=charserial0,path=/var/lib/nova/instances/2dddaaee-ff93-4520-8fe0-6adedf713f02/console.log -device isa-serial,chardev=charserial0,id=serial0 -chardev pty,id=charserial1 -device isa-serial,chardev=charserial1,id=serial1 -device usb-tablet,id=input0 -vnc 0.0.0.0:0 -k en-us -device cirrus-vga,id=video0,bus=pci.0,addr=0x2 -device virtio-balloon-pci,id=balloon0,bus=pci.0,addr=0x6 -msg timestamp=on

Domain id=2 is tainted: high-privileges
char device redirected to /dev/pts/11 (label charserial1)
kvm version too old
failed to initialize KVM: Inappropriate ioctl for device
2016-09-15 10:55:40.181+0000: shutting down

Looks like it's just a poor error reporting from qemu: it just can not start a KVM VM.

This happens because kvm module is not loaded, but nova-compute is configured to use it:

root@node-7:~# grep virt_type /etc/nova/nova-compute.conf 
virt_type=kvm
root@node-7:~# lsmod | grep kvm
root@node-7:~# grep vmx /proc/cpuinfo 
root@node-7:~# grep svm /proc/cpuinfo
root@node-7:~# 

^ nor can it be loaded, because the host does not support virtualization extensions.

If you try to start a KVM VM manually, you'll see the very same error:

root@node-7:~# qemu-system-x86_64 -enable-kvm -m 512 -hda trusty-server-cloudimg-amd64-disk1.img -machine pc-1.0,accel=kvm,usb=off  -rtc base=utc -serial mon:stdio -vga none -nographic
kvm version too old
failed to initialize KVM: Inappropriate ioctl for device

While TCG (software emulation) acceleration works as expected:

root@node-7:~# qemu-system-x86_64 -m 512 -hda trusty-server-cloudimg-amd64-disk1.img -machine pc-1.0,accel=tcg,usb=off  -rtc base=utc -serial mon:stdio -vga none -nographic
[    0.000000] Initializing cgroup subsys cpuset
[    0.000000] Initializing cgroup subsys cpu
[    0.000000] Initializing cgroup subsys cpuacct
[    0.000000] Linux version 3.13.0-95-generic (buildd@lgw01-58) (gcc version 4.8.4 (Ubuntu 4.8.4-2ubuntu1~14.04.3) ) #142-Ubuntu SMP Fri Aug 12 17:00:09 UTC 2016 (Ubuntu 3.13.0-95.142-generic 3.13.11-ckt39)
[    0.000000] Command line: BOOT_IMAGE=/boot/vmlinuz-3.13.0-95-generic root=LABEL=cloudimg-rootfs ro console=tty1 console=ttyS0
[    0.000000] KERNEL supported cpus:
[    0.000000]   Intel GenuineIntel
[    0.000000]   AMD AuthenticAMD
[    0.000000]   Centaur CentaurHauls
[    0.000000] e820: BIOS-provided physical RAM map:
[    0.000000] BIOS-e820: [mem 0x0000000000000000-0x000000000009fbff] usable
[    0.000000] BIOS-e820: [mem 0x000000000009fc00-0x000000000009ffff] reserved
[    0.000000] BIOS-e820: [mem 0x00000000000f0000-0x00000000000fffff] reserved


The bottom line is:

- nova works correctly

- please check you deployment configuration: you ask Fuel to configure Nova to use KVM, but your hosts *do not* support virtualization extensions